Counseling the Failing Business
| Publication year | 1973 |
| Pages | 1 |
Dolores Blanke Kopel, Denver, is a partner in the Denver firm of Kopel and Kopel.
Experience shows that the facts usually narrow the alternatives for the failing business very quickly to one: to file bankruptcy. Therefore, this article concentrates on bankruptcy.
Out-of-Court Plans
A composition or extension administered outside the jurisdiction of any court is a theoretical option. In a composition, the creditors agree to accept less than 100 cents on the dollar as payment in full. In an extension, the creditors agree to accept payment over an extended period of time. A combined plan for payment of less than the total amount due over an extended period of time is also possible.
The primary defect in these plans is that all creditors must accept the plan. If even one creditor decides to pursue his remedies, the plan will fail. A second related defect is that there is no protection from any court that will allow the business to continue unhampered by repossessions and garnishments.
The burden of attempting to formulate a plan acceptable to all creditors falls on the attorney, and constructing a proposal that will be acceptable to all creditors, secured and unsecured, large and small, and to the taxing authorities is extremely difficult.
Chapter XI
A composition or extension plan or a combination of both is also available under Chapter XI of the Bankruptcy Act. One requirement for confirmation is that a majority of creditors in number and amount must accept the plan.[1] If that occurs, then the other creditors are bound by the plan, whether they like it or not.[2] Another advantage to being within the jurisdiction of the Bankruptcy Court is that the Court may enjoin all creditors from taking any action against the debtor's property.[3]
There are two basic stumbling blocks to launching a successful plan under Chapter XI. One is that the Court may remove the debtor from possession, control, and operation of the business and appoint a receiver.[4] The other is that the Court may require the debtor to furnish bond to protect creditors against losses that may be incurred by operation of the business while the action is pending.[5] Obtaining a bond for a failing business is difficult.
The job of "selling" a Chapter XI plan to the creditors and the Court falls to the attorney. Before advising a client to embark upon a Chapter XI, be ready to respond fully to three questions: Is there any reason to believe that the business will be profitable in the future, despite the fact that it has failed in the past? Does it's present difficulty arise out of poor management or out of some circumstance beyond the control of management? Bad weather, for example, may wipe out the most efficient operator if the business is heavily dependent on weather conditions. Are there lenders who can be persuaded to invest in the business of this point? In order to avoid a shutdown, the business usually needs not only an extension of time unhampered by aggressive creditor action, but also new capital. Persuading lenders to put money into a failing business is difficult.
Ultimately, the most practical advice for the failing business may be to liquidate by filing a petition in bankruptcy.
Filing Bankruptcy
Once bankruptcy has been decided upon, the business entity must be analyzed to decide who (or what) should file.
If the business is operated as a sole proprietorship, the caption should read "John Smith, doing business as The Corner Market." John Smith individually will be the bankrupt. His individual assets and liabilities, as well as his business assets and liabilities, will be subject to the jurisdiction of the Bankruptcy Court.
If the business is a corporation, the caption should read "The Corner Market, Inc., a Colorado corporation." There must be a corporate resolution authorizing the filing of the bankruptcy, and it must be attached to the bankruptcy petition. The bankruptcy schedules will usually be signed by the president, although another corporate officer could sign if so authorized by the Board of Directors.
Section 5 of the Bankruptcy Act...
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