June 20, 2019

Chapter 11 Bankruptcy for a Healthy Turnaround

Yesterday General Motors  announced second-quarter profits that exceeded expectations and came as G.M. was putting the finishing touches on an initial public stock offering. This is good news from a company forced into Chapter 11 bankruptcy a little more than a year ago.

According to Dow Jones Daily Bankruptcy Review, “After recent years of financial distress and bankruptcy filings, U.S.-based automotive suppliers are not only doing better, but they are profitable, their stocks are surging, they are hiring and they are putting the finishing touches on restructurings.”

As my law partner, Heather Culp, wrote in her blog last month, Chapter 11 is a vehicle through which debtors can reject or cancel certain leases, contracts, and other debt obligations, and get breathing room to obtain new financing, sell property, or otherwise arrange to repay creditors. You need not be a giant international corporation to file a Chapter 11 bankruptcy petition.

As someone with over 30 years of dealing with financially troubled businesses , I believe G.M.’s experience brings lessons to other businesses struggling to make a profit.

Chapter 11 lessons learned

First, to stay out or get out of financial trouble, you must have a PLAN.  If you’re running your business by taking every day as it comes instead of following a strategic path that includes financial goals, you’re headed for hard times. General Motors was forced into its plan, but  executed it well.

Second, for whatever the reason a business stumbles, the first step to a turnaround  is working with professionals who can help you determine whether a reorganization would enable the business it to thrive, and whether the business can afford a Chapter 11 case.  This is a time for candor and clear thinking, not wishful thinking.

Third, sometimes, as with G.M., the management team that brought the company to the brink of failure must be replaced or  the reorganization  plan will fail. If a company is owned and managed by people who are kicking and screaming to keep  doing business as usual, it’s a doomed enterprise.  Chapter 11 is designed to buy time to do things differently.

We have significant experience in representing debtors and creditors in Chapter 11 cases and I have been appointed a Chapter 11 trustee in numerous bankruptcy cases, both large and small.