In the City
Self-help
Tony Rudd
Another practical aspect of the Ameri- can way of bankruptcy has come to my notice recently which seems once again to show that their way of going about these matters has a good deal to commend it. The great benefit which their system bestows is that it gives companies in difficulties a method by which they can reorganise their debts and re-schedule them without at the same time running the risk of being tipped into bankruptcy by some creditor (he may be large or small) who decides not to go along with some scheme and instead upsets the apple cart by going for liquidation. The so-called 'Chapter 11' proceedings in America mean that the court provides a legal umbrella under which the reorganisa- tion can take place (that is, if a majority of the creditors agree) without any risk of accident.
Now anybody who has lived and worked in America for any period will know that among the most privileged and well-paid of the professions are lawyers and especially corporate lawyers who specialise in Chapter 11 proceedings. They come from well organised and well heeled partnerships, glowing with professional competence, health and wealth. And the reason is sim- ple. The fees can be huge. Doubtless they earn them and do a good job, but still the sheer sums involved can be staggering.
For this reason it is not at all uncommon in the US to come across what one might call a voluntary Chapter 11. A very good thing it is too. Having seen a few examples recently, it might be best to make an amalgam of them for the purpose of illus- tration. Imagine an electronics company with $2 million of common shares issued, $5 million of loan capital in some form or another (but not due, shall we say, for some five or more years) and finally another $5 million owing to trade creditors. The com- pany has an excellent product. But it has also had a very difficult time during the last five, years. The product, though excellent, has been shouldered aside in the markets by one or two very large corporations. As a result the company has had to sell to the big corporations, who have taken a turn and on-sold the product. Now our small com- pany has managed to file a suit under the anti-trust legislation which looks as though it is going to succeed. And they have got a new and better product which is doing well. Meanwhile, the big corporations have become scared of the legal risks involved in possible violations of anti-trust legislation. So things are looking fine for the small company with just one exception: they are going bust. Furthermore, if put into li- quidation there would be no assets available to pay off any of the creditors and nothing
Spectator 29 May 1982 left for the shareholders. Because it's in that position, its Dun and Bradstreet rating is zero, so it can't raise any further debt. Nor can it raise any further capital to ex- ploit its products. It's stuck.
After this point it has the choice. It can go into Chapter 11, and organise a scheme under the court's jurisdiction and try to thrive in the 'after-life' thus provided. But the legal fees, let alone the other costs in- volved, could eat up several hundreds of thousands of dollars and Chapter I1 pro- ceedings, although they have their points, are not exactly going to bestow a new creditworthiness on the organisation. In these circumstances the better plan is to See whether the creditors might not accept a kind of voluntary Chapter 11 without hay' ing to go through the court. What is needed to make this possible is, of course, money. If the small company in our example can raise $1 to 2 million dollars on the basis that it could get the creditors to agree to a scheme under which they would all accept part payment in return for the claims, then the company could go forward without debt. At this point it is a matter of bargaining. The company goes to the i creditors and says, 'Take $2 million in return for your claims [we are including the five-year debt here] or alternatively we will go the Chapter route. If we do the fat" ter, you are going to be worse off, firs; because of the cost of the fees and second because of the damage to the credit; worthiness of the operation subsequently' What can make such an approach attrac- tive is, if the company concerned can show that at the same time it is raising sufficient funds to build up some equity and thereby to give a reasonable opportunity for the whole thing to come to fruition. If the creditors, particularly the trade creditors can see that the company is going to retrial° in business and do well, then at least they have a good chance of winning back what they have lost out of future orders.
Whether or not the company in our aginary example pulls this off is very much a matter of credibility. It probably needs,81 new management to do it. The old one be the lot who lost the money in the 611.1 place. Although it may be shown that .1` wasn't entirely their fault, what with the hi g corporations coming against the anti-trust rules, they were the ones who weren't gnat: enough. Somebody new can put a more CP couraging face on the prospect. There are plenty of examples of this sat of thing occurring in the US, where the, re are entrepreneurs who specialise in mall money out of these situations. It is, in land of unlimited opportunity, nerfee,1;,. respectable both to be in a situation of at' ficulty and to be involved with a business which is trying to get out of difficultiesi Here, of course, few cases of this sort Fc past the banks. Those that do can Pr°v,,I remarkable opportunities for investors. Ftt,, they are few and far between. And that 0.0' pity, because if any country needed td cosset its small entrepreneurially-base businesses, it is the United Kingdom.
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