Instability and Bankruptcy of a Counterparty Company: Exposing the Risks in 2016
Global economic turmoil and an environment of increasing interest rates in the U.S. could increase the likelihood of bankruptcy filings. Insolvency can have profound effects for both debtors and counterparties doing business with the company. Recovering funds from a debtor under bankruptcy protection is difficult for creditors who have been unable to collect monies owed. However, prior to a bankruptcy, when a company is in distress, creditors can adopt certain strategies to minimize the negative impact of a bankruptcy filing. Generally, upon the filing of a bankruptcy petition by a debtor, an automatic stay arises on property of the estate. In certain instances - forward contracts, master netting agreements, and swap agreements - the Bankruptcy Code allows parties to terminate and liquidate rights and to foreclose on collateral, but prompt evaluation of qualification is critical. While it can be difficult for creditors to recover funds in bankruptcy, there are still ways they can minimize the impact and maximize recoveries. An understanding of the Bankruptcy Code is critical.
It is in the best interest of counterparties to understand the risks faced by companies with declining credit worthiness prior to their filing for bankruptcy. In these challenging times, all companies should assess and try to mitigate counterparty risks. It is prudent for every business to know the financial status of its counterparties, customers, suppliers, and vendors. It is also essential to analyze and amend business terms, consider termination or review renewal of expiring contracts, analyze aging accounts receivable, reduce preference exposure, determine and improve available rights and remedies, and understand and protect their rights under bankruptcy.
In this two-hour, LIVE Webcast, a panel of distinguished professionals and thought leaders assembled by The Knowledge Group will help creditors understand the important aspects of this significant topic. Speakers will review and discuss Instability and Bankruptcy of a Counterparty Company: Exposing the Risks in 2016. The panel of speakers also will offer best practices in developing and implementing an effective program to mitigate credit risks, reduce counterparty bankruptcy exposure, and to recover funds.
Key topics include:
- Key provisions of the Bankruptcy Code
- Creditors’ Rights
- Types of Claims
- Recovery Options
- Involuntary Bankruptcy Petitions – Pros, Cons and Risks
- Safe Harbor Provisions
- The Automatic Stay
- Executory Contracts
- Preferential and Fraudulent Transfers
- Development and Implementation of Effective CMS
- Compliance and Litigation Risks
- Best Practices
Pepper Hamilton LLP
Getzler Henrich & Associates LLC
- Creditors need to be circumspect in their dealings with financially troubled entities, including those entities who end up filing for bankruptcy. Doing so properly is a process that commences when an account debtor’s financial difficulties become apparent. This process will continue if the entity has to file for bankruptcy or be placed into an involuntary bankruptcy proceeding.
- The first step in dealing with a financially troubled entity is ascertaining whether and to what extent the entity is having financial problems. Typically, especially with larger accounts, financial distress of a counterparty is often accompanied by certain “warning signs” such as, among other things:
- (a) late payments and growing account receivable balances (as well as credit limit issues)
- (b) contractual defaults
- (c) credit score changes
- (d) deteriorating financial performance, as reflected in cash flow and balance sheet statements.
- Once it is determined that the counterparty is in financial distress, certain steps can and should be taken to try to manage that risk. Those steps include:
- (a) managing credit limits and payment periods
- (b) obtaining security (collateral or a letter of credit) with respect to new or existing debt
- (c) determining whether existing contracts should be terminated or amended
- (d) obtaining more detailed and timely financial reporting.
- In managing risk and dealing with a financially troubled counterparty, a creditor should consider, among other things, potential bankruptcy issues such as potential preference exposure, whether the parties have an ongoing “executory” contract or “safe harbor” contract that may be subject to special protections in bankruptcy. Setoff and recoupment rights should also be managed and considered if the parties have mutual accounts or have to deal with account balance credit issues (such credits arising from returns or damaged product).
- If a creditor decides that its relationship with the debtor is irretrievably broken, it can take several steps to try to increase its collection rights and limit further credit risk, including:
- (a) terminating its contract and utilizing rights under the Uniform Commercial Code to reclaim product or stop product in transit
- (b) sue to collect amounts due the creditor
- (c) consider the filing of a possible involuntary bankruptcy petition.
- The filing of an involuntary bankruptcy petition is generally to be considered only when the parties’ relationship has reached a point of no return and filing the petition is deemed to be truly necessary to prevent fraud, wrongdoing, or the piece meal disposition of assets by other creditors, or to preserve bankruptcy law suits that may be brought for the benefit of all creditors, such as preference or fraudulent transfer actions. Also, it is not always easy to obtain the requisite types and number of creditors needed to join an involuntary petition (such creditors must have pristine claims) or show that the debtor should be placed into such a proceeding.
- Once a voluntary bankruptcy case has been filed (or an involuntary bankruptcy petition has been granted), the creditor will immediately need to assess its position. In doing so, it should first determine if this is a Chapter 7 liquidation proceeding (which means, in most cases, that the debtor will no longer conduct business) or is a Chapter 11 reorganization where the entity continues operations and is run by a debtor-in-possession. Even Chapter 11 cases differ in their purpose – some Chapter 11 cases will involve a sale of some or all of the company’s business as a going concern, while others a true reorganization where the business is restructured and emerges as a reorganized entity pursuant to a confirmed Chapter 11 plan.
- Once the bankruptcy is filed, the playing field changes dramatically. An automatic stay is imposed by Section 362 of the Bankruptcy Code, which prevents most creditors from continuing collection efforts during the bankruptcy case without first obtaining express permission to do so from the bankruptcy court. Also, in most Chapter 11 cases, a creditor will have to assess the impact of “First Day Motions” filed by most debtors, which can include proposed financing and may include authority to pay certain pre-bankruptcy claims including claims of vendors with pre-bankruptcy liens or vendors who are deemed to be “critical” to the debtor’s business. Although such motions typically appear, on the surface, to provide nothing but benefit to the creditor, such programs often require certain commitments from the creditor which may create additional credit risk (or other risk) for the creditor.
- Another issue facing a creditor in a Chapter 11 case is whether it should seek a seat on an official committee of unsecured creditors that is formed in the bankruptcy case. Although sitting on the committee involves a time commitment from a creditor, it provides a unique vantage point for the creditor to view and understand the debtor’s business and also allows the creditor to influence important decisions that impact all creditors.
- Once a bankruptcy case is filed a creditor generally needs to assert its claims through the bankruptcy court, typically in the form of a proof of claim. Creditors, however, need to understand whether certain portions of their claim are entitled to a higher payment priority. For example, vendors who delivery goods to a debtor in the 20-days prior to the bankruptcy filing may be entitled to an administrative priority claim under section 503(b)(9) of the Bankruptcy Code. This is an extremely valuable right as valid administrative claims must be paid in full in order for the debtor to confirm a Chapter 11 plan.
- Creditors must also be aware of whether they are providing credit to a debtor under an ongoing “executory” contract. Executory contracts are ongoing agreements and a creditor must generally perform under these contracts until the debtor (or trustee) determines whether it wishes to accept (assume) or disavow (reject) such agreements on a go forward basis. The quid pro quo, however, is that if a contract is assumed, a debtor must “cure” all amounts owed under the contract, including pre-bankruptcy amounts that might otherwise not be paid. In addition, assumption of a contract generally insulates the creditor from preference exposure which, standing alone, can be a very substantial benefit.
- Creditors must also be involved in the Chapter 11 plan confirmation process to determine whether they can take any action in connection with that process to improve or secure their rights with respect to their claims or executory contracts.
- Finally, in Chapter 7 cases and many Chapter 11 cases, creditors may have to deal with the possibility of facing a preference, fraudulent transfer or other “avoidance” action. Preference actions are particularly difficult because, in most cases, these actions are to recover lawful and otherwise proper payments on account of the creditor’s legitimate claims that were made within 90 days before the bankruptcy filing. Creditors should not wait until a plan is confirmed to begin their preference and avoidance planning. Rather, creditors should be planning from the moment an entity is in distress to determine if it can structure or handle its dealings with the debtor in a way that will reduce or eliminate avoidance claim exposure.
Who Should Attend:
- Bankruptcy Lawyers
- Banking and Finance Lawyers
- Finance Executive & Director
- Related Finance Executives
- Bankruptcy Professionals
- Debtors and Creditors
- Chief Financial Officers
- Other related/interested Professionals
Henry Jaffe is a partner in the Corporate Restructuring and Bankruptcy Practice Group of Pepper Hamilton LLP, resident in the Wilmington office.
Mr. Jaffe represents various types of clients in bankruptcy and insolvency representations, including debtors, trustees, creditors’ committees, as well as secured, unsecured and administrative claimants. He has assisted creditors on a wide variety of issues including complex executory contracts and leases and has advised clients on credit risk, performance and collection issues associated with counterparty insolvency and bankruptcy matters. Mr. Jaffe has vast experience in prosecuting and defending preference, fraudulent transfer and other bankruptcy avoidance actions. Mr. Jaffe has also been counsel for receivers in federal and state receivership actions.
Henry Jaffe is a partner in the Corporate Restructuring and Bankruptcy Practice Group of Pepper Hamilton LLP, resident in the Wilmington …
Mark Podgainy is a Managing Director in the New York office of Getzler Henrich & Associates.; he has more than 20 years of experience working with healthy, underperforming and distressed middle market businesses, both as an advisor and as a member of the management team. He has worked with companies in situations ranging from healthy to bankruptcy, where he has provided operations restructuring, business plan analysis, performance improvement, cash and vendor management, bankruptcy consulting and interim management services. He has also worked with law firms on forensic and litigation support assignments in bankruptcy cases. His clients have included business owners, boards of directors, private equity firms, lenders, creditors’ committees and law firms, and he has worked primarily in the consumer products, building products, food, hospitality, retail, apparel and textile, and real estate sectors.
Mark has extensive experience in bankruptcy, having been an advisor to debtors, creditors’ committees, secured lenders, plan administrators and litigation trustees. He has successfully guided a number of companies through the bankruptcy process in a variety of court districts throughout the country, including National Envelope Corporation, Moonlight Basin, Diamond Glass, Marcal, Eateries, High Voltage Engineering, ConnectEDU, Twin Rinks at Eisenhower, and Omni Facility Services, among many others. His creditor advisory work has included bankruptcy cases such as Philadelphia Orchestra, Binder & Binder, Wagstaff Minnesota, Roadhouse Grill, Cross Media Marketing, Knitworks Productions, Orion Telecommunications, Provell, Pennsylvania Fashions, and Starter Corporation, among others.
Mark Podgainy is a Managing Director in the New York office of Getzler Henrich & Associates.; he has more than …
Edward Phillips is a Partner in the firm’s Bankruptcy and Restructuring Group. He has nearly 30 years of finding solutions to problems in bankruptcy, restructuring, liquidation, accounting and forensic accounting matters. Ed has represented a variety of parties and functioned in a number of roles in bankruptcy proceedings, out-of-court restructurings, forensic accounting engagements and post-confirmation engagements.
Ed has worked with numerous debtors, creditors’ committees and secured lenders. He has been retained as a Chief Restructuring Officer. Additionally, he has acted as a disbursing agent, plan administrator and liquidating trustee for post-confirmation committees. He has been an elected Chapter 7 Trustee. He has been appointed as a receiver in the Delaware Chancery Court, a Permanent Receiver in the United States District Court for the Middle District of Pennsylvania, and a Liquidating Trustee in the United States District Court for the Eastern District of Pennsylvania. He has provided acquisition due diligence services to buyers of distressed assets. He routinely consults with and advises clients involved in avoidance actions such as preferences and fraudulent transfers. He has served as an expert in evaluating avoidance actions and other financial matters in dispute.
Edward Phillips is a Partner in the firm’s Bankruptcy and Restructuring Group. He has nearly 30 years of finding solutions …
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About Pepper Hamilton LLP
Pepper Hamilton LLP is a multi-practice law firm with more than 500 lawyers nationally. The firm provides corporate, litigation and regulatory legal services to leading businesses, governmental entities, nonprofit organizations and individuals throughout the nation and the world.
Pepper’s Corporate Restructuring and Bankruptcy Group is an integrated network of more than 35 professionals and support personnel who focus exclusively on all aspects of reorganizations, bankruptcies, restructurings, workouts and buyouts. Our team is national in focus, appearing regularly in bankruptcy courts throughout the country. We are experienced in insolvency matters involving a wide range of industries, with particularly notable experience in the food, asbestos, energy, construction, manufacturing, health care and automotive industries. Our clients include large national and international public and privately held corporations, as well as governmental entities, small businesses and individuals.
About Getzler Henrich & Associates LLC
Getzler Henrich & Associates LLC, founded in 1968, is one of the nation's oldest and most respected names in middle market corporate restructurings and operations improvement and has successfully worked with over a thousand companies throughout the world to achieve sustainable growth and profitability.
Long respected for its results-oriented approach, Getzler Henrich deploys rapid, pragmatic decision making and metrics-driven implementation services for its clients. With years of experience in executive-level positions at major corporations, and a broad range of advisory expertise, Getzler Henrich professionals have consistently and successfully guided companies through crises and growth phases. Working with a wide range of companies, including publicly-held firms, private corporations, and family-owned businesses, Getzler Henrich’s expertise spans more than fifty industry sectors, from ‘new economy’ technology and service firms to ‘old economy’ manufacturing and distribution businesses.
For more information on Getzler Henrich’s expertise, please visit www.getzlerhenrich.com.
About EisnerAmper LLP
EisnerAmper LLP is a leading full-service accounting, tax and advisory firm, and among the largest in the United States. We provide audit, accounting, and tax services, as well as corporate finance, internal audit and risk management, bankruptcy and restructuring, litigation consulting, forensic accounting, and other professional advisory services to a broad range of clients across many industries. We work with closely held businesses, public companies, high net worth individuals, and Fortune 500 companies. With offices in New York, New Jersey, Pennsylvania, California and the Cayman Islands, and as an independent member of PKF International, EisnerAmper serves clients worldwide.