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Changes to corporate bankruptcy laws take effect October 17

Just as the rules for personal bankruptcies are changing, corporate bankruptcies will have new regulations effective October 17. On the national scene, it is felt that these changes may prompt ailing companies to rush to the courthouse in search of easier treatment. Two airlines, Delta and Northwest, have warned of the possible need for Chapter 11 protection as some other airlines have done.

In Jackson, business consultant J.C. Burns, who was a banker for 25 years, says most of the talk he’s heard is in the credit community. “Bankers have tried to get relief on this for years. It’s an offshoot of those efforts,” he said. “As in any situation, there are two sides. There have been real needs for tightening these regulations but also the financial institutions need to tighten the issuance of credit cards. We don’t need as much credit as we can get.”

Burns, who does business and economic development consulting, says he has no expertise to advise on bankruptcies but thinks those companies who are contemplating filing will consider doing so soon.

Attorney Jeff Rawlings of Madison doesn’t think there will be a rush of filings on September 30. “I don’t know that these changes will affect corporations much or any,” he said. “Companies will not just decide to file because of the changes. I don’t know of any corporations in Mississippi who will rush to file but as gas prices rise some businesses may be forced to consider it.”

As the former chairman of the Mississippi Bankruptcy Conference, Rawlings says consumers might want to consider filing before the new laws go into effect. “With those changes creditors get more money in the end and that could make some people too poor to file,” he said. “No one wins in that case.”

A practicing attorney for 22 years, he says these changes have been going along for quite some time. “The revisions have been in the works for about 10 years. President Clinton vetoed them, then September 11 happened and it was taken off the front burner for a while,” he said.

He is not aware of the Bar Association’s backing of these changes and says the Mississippi Bankruptcy Conference did not take a stand on the matter.

Federal bankruptcy laws govern how companies go out of business or recover from crippling debt. A bankrupt company might use Chapter 11 of the Bankruptcy Code to reorganize its business and try to become profitable again. Management continues to run the day-to-day business operations, but a bankruptcy court must approve all significant business decisions.

The main changes in the law include:

• Management exclusivity. Companies entering Chapter 11 will have just 18 months during which management alone can present a plan for operating a reorganized company. Now, judges can extend exclusivity almost indefinitely, blocking creditors and outside investors from presenting alternative plans to the court.

• Retention bonuses. Without evidence of actual job offers, companies won’t be allowed to pay officers bonuses to keep them from resigning.

• Store closings. As a protection for landlords, companies will have just 210 days (about seven months) to decide which leased locations to keep open or close. Now, a bankruptcy judge can repeatedly extend the deadline.

• Utility deposits. Utilities will be allowed to charge companies big security deposits while they’re in Chapter 11.

According to the U.S. Securities and Exchange Commission, assets in bankruptcies are divided the following way:

1. Secured creditors — often a bank, are paid first.

2. Unsecured creditors — such as banks, suppliers and bondholders have the next claim.

3. Stockholders — owners of the company have the last claim on assets and may not receive anything if the secured and unsecured creditors’ claims are not fully repaid.

The investors who take the least risk are paid first. Secured creditors take less risk because the credit they extend is usually backed by collateral such as a mortgage or other assets of the company. They know they will get paid first if the company declares bankruptcy.

“Investors in publicly-held corporations will still be the last on the totem pole to be paid,” Rawlings said, “but that’s the risk they take. That doesn’t change.”

He said he thinks the change in the law regarding management exclusivity might be a good thing, prompting tighter deadlines and possibly sparking outside financial interest in restructured companies.

Contact MBJ contributing Lynn Lofton at mbj@msbusiness.com.

About Lynn Lofton

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