Liquidating chapter 11
There is no question that many insolvency professionals are busier now than at any time during the last eight years."Shakeouts" are going on in a number of industries. And bankruptcy lawyers are a "hot" hire once again.But there is reason to doubt that increased business insolvencies will produce the bankruptcy boom some commentators are predicting.For example, when it comes to the liquidation of small and mid-sized companies in a number of jurisdictions, it has become far more likely that the assets of those companies will be sold in state receivership court than in federal bankruptcy court.Indeed, insolvency professionals have already seen something of a receivership renaissance nationwide.This column will discuss some of the reasons that smaller liquidating companies, needing protection from their creditors, are choosing a state, rather than a federal, remedy.The impression is widespread that federal bankruptcy court has been less effective in recent years as a tool for maximizing net-asset values, particularly when it comes to situations requiring the expeditious sale of a small business as a going concern.
While there are no doubt valid reasons for close scrutiny of asset sales in chapter 11, some companies simply cannot afford the high transaction costs and delays associated with a bankruptcy sale process.Often, these companies will be closely held businesses whose assets are subject to a general business security interest in favor of an asset-based lender.The business is losing money, it has already been refinanced and the lender of last-resort has had enough. However, the business might be sold for enough to pay the lender in full and even to generate a dividend for unsecured creditors, if transaction costs can be kept to a minimum.In such instances, state receivership may provide a cost-effective alternative to bankruptcy.