Corporate Bankruptcy A to Z
Corporate Bankruptcy A to Z
Who Should File? - Short
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Topics:
- Recognizing when bankruptcy is best
- Personal guarantees & significance
- Assets vs. liabilities
- Key professionals needed
- What about the employees
Guest: Tom A. Colvin — MCR Capital Advisors
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You are listening to Corporate Bankruptcy A to Z, a podcast that gives you the ins and outs of corporate bankruptcy. This is an abbreviated release of episode 2, where we will cover how to recognize when bankruptcy may be the right option. We'll discuss the impact of personal guarantees, how lawsuits affect the decision to file, the role of assets versus liabilities, and the professionals involved in the process. If you are new to the show or want to hear the full conversation about this topic and more, we invite you to check out our full bankruptcy series found below in the show feed. There you will find an unedited version of each episode where we dig deeper and answer more questions. Corporate Bankruptcy A to Z is hosted by Neil Goldstein, a chief restructuring officer with over 30 years experience. He is joined by co-host and legal expert Steve Raven of Sol Ewing, a bankruptcy attorney with over 40 years in the field. If you are dealing with a situation now and need guidance, you can reach out to them directly. Call Neil at 940-808-9451 and Steve at 973-286-6713.
SPEAKER_03For this episode, we have a special guest. Tom Colvin of MCR Capital Advisors is joining us.
SPEAKER_01Thank you, Neil. It's a pleasure to be here and share ideas that may be helpful to consider prior to being faced with an important decision to file or not to file.
SPEAKER_03You have probably seen many companies in trouble. When your job is to help them to become solvent, what is the first thing you do?
SPEAKER_01Well, it's true. I've seen quite a number of companies in trouble, and that's kind of the core focus of why MCR Capital Advisors exists. And the first thing that I think about is I wish I had met you six to twelve months earlier so that we could have been more proactive at putting a plan together to keep you out of trouble. However, the first thing I technically do when I get in there is I ask for financial statements.
SPEAKER_03How important are the company's profits and losses when considering a filing, Tom?
SPEAKER_01I I would say they're very important. I think the number one goal of every entity or 99.99% of every business is to be profitable. And the PL results set the expectation of what the entity is actually doing or should be doing in terms of the products and services it sells. When you look at profit and loss statements and you see that they aren't painting a very rosy picture, it is certainly a litmus test of do I need to get new leadership? Do I need to pursue more operationally efficient operations? Do I really need to reorganize or do I need to close my doors?
SPEAKER_03So, how do the following play into the consideration to file? Let's begin with personal guarantees.
SPEAKER_01My first observation when I come in prior to someone filing is I hope you don't have any personal guarantees. Even if you are a corporate entity, oftentimes owners can still be held accountable above and beyond their corporate protection if they've signed a personal guarantee on a note.
SPEAKER_02Let me chime in, Tom. That is a fact that the personal guarantee is just that, and the purpose that uh lenders or creditors uh require a personal guarantee is exactly uh in the event if the corporation has an issue, a financial issue. Number one, the individual, the guarantor, uh has an incentive to pay. And number two, if they don't pay, they can be pursued in any court or any process.
SPEAKER_03So the owners are not going to benefit from a bankruptcy when referring to their personal guarantees, it sounds like. So, Tom, what do you what do you say to the client about personal guarantees?
SPEAKER_01I would say that in and of itself, it is a data point that is uh similar to what Steve just mentioned. It it would be something I would first put in the box of let's try about 17 other things before we file for bankruptcy if you have a personal guarantee. I think there are other things that are of equal or more importance in a collective sense uh prior to a specific decision to file or not to file.
SPEAKER_03Do you ask the client about lawsuits, Tom, prior to um any consideration for filing?
SPEAKER_01Uh absolutely. It could be a lawsuit relative to collections, it could be a lawsuit over multiple things for which companies get sued. All of those things I think are important as our personal guarantees, if we just spoke.
SPEAKER_03Steve, what happens to the lawsuits that exist at the time the company is uh filing?
SPEAKER_02Well, Tom mentioned the automatic stay, which means that uh any efforts of collection by any creditor, uh whether it's a lawsuit, a collection letter, or a phone call, are automatically stayed, and stay means stop. So all actions when a company files bankruptcy, all collection actions are stopped.
SPEAKER_03Part of my job as a CRO chief restructuring officer is to make the calls to the companies that have lawsuits against my client. And you can almost feel the air going out of their balloon when they have this automatic stay prevent them from proceeding. How does the bank debt come into play when you're talking to a client about a possible bankruptcy filing?
SPEAKER_01I think the real first key piece is whether whether the bank has a priority position in the pecking order as a secured lien holder or whether they're subordinated in some way as a junior debt or some other uh vehicle financing, etc.
SPEAKER_03Some companies have more assets than liabilities, but their cash flow is not sufficient to pay bills. Would they be a candidate for filing?
SPEAKER_01My answer would be perhaps. I would want to evaluate whether there's this working capital line of credit, but I would also want to understand why the executive team is allowing that environment to occur. Aren't there operational changes we can make without filing to match up our receivable inventory conversion to cash so that I can cover payroll and cover my vendor uh payments?
SPEAKER_03So it sounds like a combination of lawyers, accountants, consultant, and others are really the key features that would help in this process. Can you guys comment?
SPEAKER_01From a consultant perspective, our rate sheet or our price point might be a little less than the attorney or the tax professional. But the answer is yes. I think the value of getting a professional to help you is the quick analysis, emphasis on quick, in handling the complexity that Steve just uh elaborated.
SPEAKER_02But one thing you mentioned, Neil, you said lawyers, accountants, and consultants. I would probably suggest that the turnaround consultant or financial advisor would be a good start as opposed to the attorney, etc. The consultant will know when it's time to call the attorney.
SPEAKER_03It seems the company's lender usually plays an important role in whether a company remains solvent. Can you elaborate a bit on what the client should be communicating with uh to the bank?
SPEAKER_01It's all about putting together a plan with success metrics that demonstrate to the bank that I am a good quality citizen and I'm going to over time pay you back regardless of how hard you hit me in the head with a hammer. I think a bank would rather work with you than foreclose on your assets, uh, especially depending on the type of assets you have, because the bank's not going to know what to do with garage condominiums or a fleet of uh leased vehicles or any of those things. They don't have the expertise to manage those. And so their preference would be, in my experience, is to work with uh the company to try to resolve their uh issues.
SPEAKER_03The impact of a filing on a company must be a traumatic experience on employees, vendors, and creditors. How do employees react when they learn their company is filing for a bankruptcy?
SPEAKER_01Basically, how do I get paid? Can I get my products back? You can't do that because my contract says that you can't do that without doing X. The vendors are often unsecured creditors anyway, which means they're kind of well, they're obviously behind secured creditors.
SPEAKER_03Steve, legally, what happens when employees are owed money when a company files?
SPEAKER_02Well, one of the considerations uh that employees have, of course, is uh will they be out of a job? Which is the typical thought when their employer files chapter 11. And oftentimes the chapter 11 is filed, and the employees didn't even know it was coming and they heard about it, quote unquote, on the street. But in the raw law of the bankruptcy code is that employees have a priority up to about something like $13,000 in pre-bankruptcy wages. So at the end of the day, if other things happen, like the bank gets paid, then the employees are first in line. And it's called a priority wage claim. But even more than that is the employees' concern over whether or not they will lose their job or have a job in the future.
SPEAKER_03But just for the record, um, the company in Chapter 11 continues in business and the employees could keep their jobs, correct?
SPEAKER_02Absolutely. That's one of the benefits of a Chapter 11 versus uh Chapter 7, which is that the company remains operating in the Chapter 11 process.
SPEAKER_00Do you have a question about bankruptcy? Why not ask the experts? Emails for Neil and Steve can be found in the show notes below, and remember, the first call is always free. Call Neil at 940-808-9451 and Steve at 973-286-6713. You can also find more resources on our websites. Go to corporate bankruptcy a to Z.com or elementary business.com. You can also find links to those in the show notes down below. Corporate Bankruptcy A to Z podcast and YouTube channel are produced by me, Sir Isaac Smith. Be sure you subscribe and share the episode, and we will see you next time.