• Hampered exclusivity. Participants in large, complex bankruptcy cases will feel the sting of an amendment to Section 1121 of the code. The provision deals with a debtor’s exclusive right to propose a reorganization plan. Historically, debtors could avoid draconian creditor proposals by requesting extensions of the period in which it had the exclusive right to file a plan. In that way, the bankrupt company could work out more favorable terms for itself. Now any interested party can file a reorganization plan 18 months after a debtor files for bankruptcy, effectively weakening companies’ ability to delay reorganization, according to Schneider.
The change to the exclusivity rules will likely attract distressed-debt buyers to bankrupt companies. “There’s a lot of money chasing default debt as a way of taking control of a company,” notes the attorney. The consequence of such a provision may once again be to promote asset sell-offs rather than rebuilding the company, he notes.
• Capped retention pay. Another amendment, to Section 503(c) of the code, puts a severe limit on retention pay and bonuses for executives — in essence, denying most pay incentives. It was typical to offer key executives or new ones a financial inducement to stay on through a bankruptcy, notes Lenhart. But that carrot is gone.
While Lenhart agrees that the change will stop bonus payouts to executives that mismanage bankrupt companies, he points out that the law hobbles the ability of companies to retain good managers needed to reorganize the business.
• Investment banks invited. Investment bankers should be happy with Section 101(14). That provision waives the “disinterested party” rule, which originally guarded against potential conflicts of interest among bankruptcy advisors. Previously, investment banks that underwrote securities — and thus had a vested interest in a company — were banned from acting as a restructuring advisor. The ban, says Schneider, gave rise to boutique advisory firms.
The new law invites investment banks back to the restructuring table, enabling them to compete head-to-head with boutique firms that dole out advice to insolvent companies.
• Short shrift for small businesses. Small businesses — companies identified as having less than $2 million in secured and unsecured debt — get a break under the new law. The new rules aim to speed up the processing of cases by consolidating filing procedures for smaller filers. For instance, small businesses can file a combined plan and disclosure statement and ask for combined approval from the courts, a two-step process for larger companies.
The amendments to the code also give small businesses an extra 20 days—a total of 180 days—within which to do their newly consolidated filing. That’s still a considerably shorter amount of time than the 18 months bigger companies were given under the changes.
Like big companies, small businesses lose their previous right to unlimited extensions under the new law. Unlike the case for bigger companies, however, if a smaller company’s reorganization plan (submitted by either the debtor or an interested party) isn’t handed down within 300 days of filing for Chapter 11, the business will lose its bankruptcy protection.
What’s more, small businesses are now responsible for filing more financial information then they had in the past, says Schneider. The list of new items includes profitability statements; projected and actual cash receipts and disbursements; attestation of the debtor’s compliance with the bankruptcy code; and reports on whether taxes and other administrative costs were paid on time and, if not, a statement of how the company plans to remedy the situation.
The new reporting requirements seem so onerous that it may be worth incurring more than $2 million worth of debt just to avoid being classified as a small business, one lawyer joked.