Bankruptcy Prevention

Most small businesses can not afford to file for Chapter 11 Bankruptcy protection. The process and costs for filing a Chapter 11 Plan include:

Counsel for the Chapter 11 Debtor.

Counsel for the Secured Creditor paid by the Debtor.

Counsel for the Unsecured Creditor’s Committee (if an Unsecured Creditor’s Committee is approved by the Court) paid for by the Debtor.

All cost for the legal expense of the attorneys above.

Cost for a Turnaround/Workout consultant (the process is foreign to most company management. The Turnaround Consultant coordinates generating the required information for the company to the company’s bankruptcy attorney for filing with the Court).
All of the above professionals will require an up-front retainer to be paid by the Debtor.

Chapter 11 Bankruptcy is an adversarial process which permits creditors’ objection to proposals by the debtor. These objections to proposals filed by the debtor are arbitrated by the Bankruptcy Court in accordance with the Chapter 11 Code. The process takes a minimum of 90-120 days for a prepackaged Chapter 11 Plan. To be successful, the prepackaged Chapter 11 Plan has to be circulated to the creditors and negotiated before the Bankruptcy is filed. Every filing with the Bankruptcy Court has to be noticed to the Creditors by giving them 20-days notice of a hearing by the Court.

Often, smaller companies do not have their accounting records in order and up to date. The Chapter 11 Code requires filing a Statement of Financial Affairs within 15 days of filing Chapter 11. If the financial statements are not current, the information will have to be filed incomplete and amended when completed. If the financial records are not current, the Company will lose creditability with its creditors and they may not be willing to accept proposals made by the Company to the Court.

The Secured Creditors, who have a lien on inventory and accounts receivable, have to agree to allow the Company continued use of their cash collateral to operate the Company during the Bankruptcy proceeding. Therefore before the Chapter 11 filling, the Company has to meet with the Secured Creditor or Creditors and negotiate a Cash Collateral agreement and budget, which will be presented to and approved by the Court at the first day hearing by the Court. If the Company cannot obtain a Cash Collateral agreement with its Secured Creditors, the Court will have a hearing and the Company and the Secured Creditor present their arguments to the Court for use of Cash Collateral by the Company. If the Company’s financial records are not current and accurate, the Secured Creditor will use the deficiency in financial statements in their objection for use of their collateral by the Company. If the Court rules that the Company cannot use Cash Collateral of the Creditors, the Court can convert the Chapter 11 to Chapter 7 Liquidation.

Chapter 11 Bankruptcy code provides for the Secured Creditors to be paid 100 percent, plus interest before the Unsecured Creditors receive any proceeds from the liquidation of assets of the Debtor. Most often, the secured loan was made on a desktop appraisal. The desktop appraisal will be woefully inadequate when compared to the orderly liquidation value of the collateral. The value of assets used by an ongoing business employing these assets to generate revenue is significantly less when the assets are sold at auction.

Recovery of the full value of the Secured Loan is especially important to the business owners if they have personally guaranteed the loan. Often, business owners sign personal guarantees to obtain suppliers credit. These personal guarantee amounts will still be in place after the inventory and other assets are liquidated for the benefit of the Secured Creditor.

Alternative Process to Chapter 11

Most competent Bankruptcy Attorneys will recommend that the Debtor try to workout payment agreements with their Secured and Unsecured Creditors without filing Chapter 11. If these payment agreements cannot be negotiated, then Chapter 11 or 7 is an option. Hiring Wayne Fuquay & Associates (WFA) to guide the Debtor through the process of resolution of these debts should happen early in the process.

WFA will conduct an assessment of the viability of the business to determine if the core business will generate enough value for the various stakeholders (owners, Secured and Unsecured Creditors) to justify continued operation of the business while alternatives are investigated. Typically, the core business should generate enough revenue to attract a strategic buyer.

Strategic buyers should be interested in increasing market share, increasing capacity or eliminating a competitor. The goal is to pay off the Secured Creditor or have the strategic buyer assume the debt while maintaining the jobs for the employees.

The business assessment will generate the following:

· Short sales prospectus defining top customers’ sales annually

· 12-week cash flow projection

· Pro Forma P & L projection-based on current sales trends and anticipated changes in the market

· Breakeven calculation of existing business

· Altman Z-Score: A Predictor for Bankruptcy

· List of possible strategic buyers of the core business

Bankruptcy Estate Management

Served as Chief Restructuring Officer of a steel service and steel manufacturing company with sales of $45 million. The Company was guided through the bankruptcy filing process to plan confirmation in five months. The process included objections to use of cash collateral by the asset based lender, which the Court denied and allowed the Company full use of cash collateral to continue operations. The debtor maintained collateral value throughout the bankruptcy by shipping $1.1million to $1.4 million of products per month and by selling one of the operating divisions. The result of the Confirmed Plan allowed secured creditors to be paid in full with a small recovery for the unsecured creditors.

Served as Chapter 11 Bankruptcy Trustee of a real estate development company with 1100 contracts for deed on lots for residential property and assets of $6.1 million. The estate had environmental claims accruing at $25,000 per day and totaling $38 million due to an unapproved waste water treatment facility and the improper closing of a landfill on the property of the estate. The 1100 contract for deeds were being challenged by the State Consumer Protection Agency for noncompliance with the States’ Truth in Lending statutes. Through mediation with the various creditors, a Plan for Reorganization was proposed to and approved by the Court settling the environmental claims by building a waste water treatment plant and converting the contracts of deed to notes and deeds of trust. A portion of the assets of the estate were placed in a liquidating trust to settle a wrongful death claim and other unsecured claims.

Served as Chapter 11 Bankruptcy Trustee of a manufacturer of land leveling and road construction equipment which had been in bankruptcy for three years with sales of $8.9 million and adjusted assets of $3.4 million. Identified $3.2 million of obsolete inventory and uncollectible receivables, cleaned-up the environmental exposures, documented financial irregularities, obtained judgments of $1.4 million against former management and recovered fraudulently conveyed assets of the estate. The company was returned to profitability, and the assets were sold to a strategic buyer who continues to operate the company.

Served as Consultant and Liquidating Plan Agent of a $23 million contract machine shop and gas equipment leasing company in bankruptcy. Liquidated the Company’s gas equipment leasing division outside of bankruptcy and negotiated settlement of $110 thousand of unsecured debt for $30 thousand. Qualified an auction company to sell the personal property of the debtor and sold the real property of the debtor on a “where-is, as-is basis”.

Engaged as a Consultant and Financial Advisor to the Chief Executive Officer and Board of Directors of an E&P company which was in default of $100 million bond offering payment. Aided the company with the pre bankruptcy planning, bankruptcy filings, cash collateral order, analysis of the PV 10 write down of long lived assets, assessment of current production and AFE programs and cash flows to support production. Identified numerous financial irregularities and preferences for the Board.