Bankruptcy Filing Set New Record in Calendar Year 2002
August 15, 2003
The Administrative Office of the U.S. Courts reported that a new record high in bankruptcy filings was established for the 2002 calendar year. There were a total of 1,577,651 petitions filed during the 12-month period ending December 31, 2002, an increase of 5.7% from the previous year, when 1,492,129 petitions were filed. The previous record for filings in any 12-month period was recorded in the Judiciary's fiscal year 2002 (October 1, 2001-September 30, 2002) when 1,547,669 filings were reported.
Preventing a Haven for Wrongdoers
August 15, 2003
The current economic downturn has resulted in a huge number of bankruptcy filings by publicly traded companies. During 2001, for example, a record 257 publicly traded companies filed for bankruptcy. The telecommunications sector was particularly hard hit, as 14% of those bankruptcies were filed by publicly traded telecom companies.
Answering to the Regulators
August 15, 2003
Insurance companies, like any other segment of today's fragile economy, have shareholders, creditors, insureds, and regulators to whom they are answerable. They are hardly immune from the ups and downs of so-called new economy companies, nor the more time-tested old economy companies. As such, what is the likely result from a jurisdictional and regulatory standpoint of an insurance company seeking relief by the filing of a bankruptcy proceeding?
Don't Pay Twice for Your Equity!
August 15, 2003
In certain cases, a company may seek to exchange its outstanding debt for equity while also extinguishing (or 'squeezing-out') the interests of some or all of its prior shareholders. The need to reduce or eliminate shareholders typically stems from perfectly valid business reasons, including a desire to avoid becoming a reporting company under federal securities laws, to limit ongoing obligations to many small shareholders or to change the equity sponsor. In addition, the parties may seek to effect the transaction 'out-of-court' due to a perception (or the reality) that bankruptcy proceedings would take longer or damage the business.
Don't Pay Old Equity That Is Truly 'Under Water'!
August 15, 2003
As discussed last month, the law clearly shows that parties structuring cash-out mergers with distressed debtors must focus on two things: 1) timing the debt-for-equity exchange (and the resultant debt cancellation) so not to occur prior to the merger's effective time, and 2) demonstrating that the debtor was at 'the brink of bankruptcy' at the merger's effective time. A clear record should be built and maintained on these points, and the structure should accommodate the technical legal requirements.
Exceptions to Dischargeability
August 15, 2003
For many years, financial or securities executives knew that if they had not committed a fraud or had not been fined by the Securities and Exchange Commission (SEC), they could get a discharge in bankruptcy by filing for Chapter 7 or 11. Negligently committing a securities violation would not preclude a bankruptcy discharge for the civil liability flowing therefrom.
Standing on the Edge
August 15, 2003
The fact pattern is all too common: A company with an extremely over-leveraged balance sheet is hemorrhaging cash and may already be in disrepute with its trade creditors (of whom there may be thousands). The business is beyond repair. A bank group that has liens on nearly all of the company's assets wants to use Chapter 11 to liquidate those assets to recover as much as it can. The liquidation may be piecemeal (as is common with failed retailers) or it may be as a going concern (as is more common in the industrial sector), but either way the debtors are heading toward a Chapter 11 liquidation.
How to Defend Officers and Directors in a Management-Hostile Environment
August 14, 2003
As noted last month in Part One of this article, it is less common, but not unheard of, for the debtor itself to directly provide funds to defend and indemnify its D&Os, in addition to, or in lieu of, maintaining D&O insurance or to address a situation where the D&O has refused coverage (which is <i>not</i> that uncommon of an development).
