Viewpoint: Restructuring Professionals Must Take Leadership Role
Originally published in the Daily Bankruptcy Review, June, 04, 2013.
I am often asked whether bankruptcy is a good alternative for a distressed middle-market company. “It depends” is my usual answer. On what does it depend? My answer: a good business plan for how a Chapter 11 filing will resolve the company’s issues. Creating and implementing a good business plan is the key to the success of any enterprise. So, somewhere along the way, something has happened to a company that has found itself in financial and/or operational distress. I want to suggest that restructuring professionals have a great responsibility to be leaders who guide distressed companies through restructurings and turnarounds.
My topic is borne of my experiences and those of others, where companies are led by managers who fail to plan prudently for extracting their companies out of trouble. I’ve heard owners suggest that bankruptcy is the last resort if everything else fails, but they do no planning for how bankruptcy is going to help.In a case filed recently, In re Highway Technologies, Inc., et al., (Chapter 11 Case No. 13-11326, Delaware), it appears that some contingency planning was lacking since the company shut down without notice on May 17 and filed Chapter 11 on May 22 with the intention to sell its now dormant company and/or assets. I’m not involved in this case currently and I don’t want to make judgments based on the pleadings, but here is what appears to have happened. If true, this is a very unfortunate situation that appears to have been avoidable.
Highway Technologies was a 30-year-old company providing temporary and permanent roadway traffic management and safety services such as guardrails, barrier walls and signage and traffic control services for special events. Just prior to filing Chapter 11, the company employed about 825 employees in 32 locations in 13 states. The company’s management worked on a turnaround plan for a few years and apparently retained an interim management team to do so. At a couple of points they attempted to sell the business, most recently in the weeks prior to shutting down. After all of this effort, the result was a hard shutdown, with no notice, and a complete termination of the business. Customers were left wondering how to meet their needs, employees wondered about their pay and benefits (it appears that all health insurance plans were terminated two days after the shutdown). It seems as though with all the energy, time and money spent trying turnaround solutions, the turnaround team should have done a better job of planning for a shutdown to avoid this type of nose-first crash landing.
With adequate planning, bankruptcy is a very useful tool. With all that happened in the Highway Technologies case, the bankruptcy professionals will still attempt a sale to maximize values, but this is just an emergency patch. In operating company situations, bankruptcy must be used skillfully, or it becomes a very expensive and complex trap from which unprepared businesses will not emerge. There are many stories about how ineffective the U.S. bankruptcy system is, and the critics of the bankruptcy system are not all wrong. I think what is missed is the cause of the inefficiencies. I think the cause is continued bad management and poor decision-making on the part of ineffective management, rather than simply an ineffective or inefficient bankruptcy system.
I start with the basic premise that some businesses have good underlying fundamentals, and some do not. Those with poor business fundamentals, let’s say a business with no real market for its products, or a business whose products cannot be sold at a sufficiently high price to provide for net profit, will fail irrespective of the talents of the management team. These businesses are candidates for liquidation, and often that liquidation can occur outside of bankruptcy. When bankruptcy is called for, a Chapter 7 process will suffice. But Chapter 7 liquidations are not the focus of the criticism of the bankruptcy process.
For businesses with good fundamentals, but some type of unfortunate circumstances that have put it in crisis, the key to a successful recovery is to focus on the business plan, and then to figure out whether bankruptcy will help implement the business plan. I think that often, too little thought is given to the underlying business plan. Instead of working on the business plan, many managers will plow ahead with one strategy and when it fails, will simply file bankruptcy in a defensive, freefall manner. Once in bankruptcy, many other processes begin to take place, and it can be difficult for management to address the new burden of bankruptcy and attend to business operations.
I think more emphasis should be placed on pre-bankruptcy planning. All restructuring advisers should emphasize that bankruptcy is a strategic tool used to implement a well thought-out business plan. In fact, with sufficient planning, a deliberate decision can be made whether to implement the restructuring out of court rather than in court. There are situations where the only solution is a Chapter 11 filing, but the fundamental bankruptcy principles can be applied in or out of court.
When executed skillfully, bankruptcy can be a very effective and elegant solution. We all know about pre-packaged Chapter 11 filings and how effective they are. The Bankruptcy Code and Rules, together with case law, provide the means to relatively cost-effective and time-efficient bankruptcy processes. Unfortunately, we all know examples of really bad cases that languish and end badly. These cases cast the whole system in a bad light, and it is not only unfortunate, but unwarranted. These bad examples should be used for nothing other than examples of what not to do in bankruptcy. They should not be an indictment of the system. The importance of skillful restructuring professionals has never been greater. We in the restructuring profession need to assert greater influence in the matters we work in order to not lose control over the entire system.