Exclusive Q&A on Bankruptcy & Restructuring with Richard H. Golubow

Have there been any recent regulatory changes or interesting developments?
 
In December 2014, the American Bankruptcy Institute’s (ABI) Commission, comprised of several prominent insolvency and restructuring professionals in the United States, released a 400-page report with proposed reforms to Chapter 11 and related statutory provisions. The recommendations in the report are intended to modernise Chapter 11 business reorganisation by providing a more balanced approach to reorganisation of business debtors with the attendant preservation and expansion of jobs and realising maximised asset values for all creditors and stakeholders. Unlike Congress, the ABI Commission has no legislative or regulatory authority to amend the Bankruptcy Code. Only time will tell what, if any, action will be taken by Congress in response to the report.  In Baker Botts, L.L.P. v. ASARCO, L.L.C., the Supreme Court held that bankruptcy judges do not have discretion to award compensation for defense of a fee application. This decision will likely result in an increase in oppositions to fee applications because of the potential to minimize fee awards without additional cost to the debtor’s estate.  This will place a significant burden on professionals of having to expend in some cases substantial resources in defending their fee applications.
 
Can you talk us through the current bankruptcy & restructuring landscape in your jurisdiction?
 
There has been a decrease in corporate bankruptcies filed in the US over the past 12 months. Nationwide, corporate bankruptcies continued a downward trend in the first six months of 2015 with approximately 19 percent fewer corporate bankruptcy filings than the first six months of 2014. Not only are corporate bankruptcy filings down, but small businesses continue to dominate the bankruptcy count, with nearly 76 percent of corporate bankruptcies filed in Q1 and Q2 2015 by companies with $2.5m or less in gross sales. Bucking the downward trend are publicly traded corporate bankruptcies. The number of Chapter 11 filings by public companies hit its highest midyear level since 2011.
 
Are there any key trends or interesting strategies currently being implemented?
 
One key trend involves bondholder rights and recoveries. Specifically, recent Trust Indenture Act opinions from the Southern District of New York analysing the terms of indentures and inter-creditor agreements to determine the rights of secured lenders and bondholders vis-à-vis each other and the bankruptcy estate may lead to increased litigation and incentivising minority bondholders to challenge out-of-court restructurings, making it more difficult for debtors to engage in out-of-court restructurings. The impact of the Trust Indenture Act on a company’s ability to consummate an out-of-court restructuring has also been disputed. To address these issues, companies are interacting with stakeholders early, before there is a crisis and when the debtor company still maintains leverage in order to generate support for its restructuring plan.
 
Which industries offer the best restructuring opportunities for investors and advisors?
 
Declining oil prices have already led to a number of bankruptcy filings for energy and natural resource companies.  Continued volatility in oil prices has frustrated the ability of companies to proactively raise new capital to address liquidity issues.  Brick and mortar retailers continue to struggle and are vulnerable and losing the battle against online retailers as consumers realise that the items they seek are less expensive and more easily accessible online.
 
What are the main challenges facing businesses in the current economic climate?
 
There is a never ending list of uncertainty.  Uncertainty in the global economy, uncertainty in the credit markets, uncertainty in how new regulations will affect business, and uncertainty about how new technology will affect the business.  Uncertainty leads to a short-term focus and a failure to strategically plan several years into the future can lead to destruction.
 
How would you assist a company on the verge of declaring bankruptcy?
 
When a company is experiencing financial distress it is critically important to learn about and understand the company’s business and to effectively provide customized, innovative, responsive and cost-effective legal solutions.   Immediate attention must be devoted to identify the causes of financial distress.  Financial distress is commonly caused by overleverage, decreased sales, increase operating expenses, macro-economic forces, inability to obtain financing, poor management, litigation and/or an adverse judgment.  Once the cause of financial distress is identified it is important to identify a turnaround strategy to resolve the financial distress.   Common strategies include reduction of overhead, refinancing, raising equity, pursuing a joint venture, merger or a sale or orderly liquidation. 
Great emphasis must be placed on proactively counseling a company to identify the best strategic option to implement the turnaround strategy.  In many instances it is advisable for the company to retain a financial advisor, turnaround professional and/or investment banker to independently determine whether there is a viable core business to reorganize. 
 
What measures can lenders take to protect themselves from doubtful debt?
 
Lenders must take proactive protection measures in advance of lending.  For example, in addition to assessing credit risk according to underwriting guidelines, lenders should obtain security interests with the company pledging all or substantially all assets of the borrower to secure repayment.  The security interests granted pursuant to promissory notes and security agreements should contain detailed financial covenants and frequent financial reporting requirements. Their purpose is to help the lender ensure that the risk attached to the loan does not unexpectedly deteriorate prior to maturity. From the borrower company's point of view covenants often appear to be an obstacle at the time of negotiating a loan and burdensome restriction during its term.  Proponents of the use of covenants, emphasizing the early warning function of covenants, take the case further by arguing that well-designed covenants provide not only timely performance indicators but also open up lines of communication between borrower and lender.   In addition, lenders to small and medium size businesses will typically obtain personal guarantees from the borrower’s principals guaranteeing payment on the loan in the event the business does not pay.  While a personal guarantee is typically an unsecured promise to pay and not tied to a specific asset, a lender can also request that the guarantor pledge personal assets as security for repayment.
 
Can you detail the different debt restructuring options and processes?
 
Business owners often assume that bankruptcy is the only option for reorganization or orderly liquidation of a distressed company.  There are many advantages to a bankruptcy: the process is orderly and reasonably predictable; the bankruptcy court has broad powers; and all creditors are forced to participate and are bound by orders of a bankruptcy court.  However, there are several disadvantages to a bankruptcy: bankruptcy tends to be expensive; often prohibitively so in smaller, less complex cases; and can drag on for a long time.  There are several viable alternatives to bankruptcy that, depending on the situation, may reduce if not eliminate some of the disadvantages of bankruptcy while realizing many of the benefits.  It is not that the desired results cannot be achieved through a bankruptcy, but rather the recognition that each business has its own circumstances and diverse set of tangible and intangible interests to protect that may make non-bankruptcy alternatives more appropriate for a particular situation.  For example, other options such as the use of out-of-court workouts and agreements, assignments for the benefit of creditors and state or federal court receiverships are alternatives that must be considered.

Richard H. Golubow is a founding member and the managing shareholder of Winthrop Couchot PC. Devoting his practice to the areas of financial restructuring, insolvency law, complex bankruptcy and business reorganisations, litigation, liquidations and acquisitions of distressed assets, Mr Golubow’s clients include debtors, creditors, creditor committees, bankruptcy trustees, assignees for the benefit of creditors, asset purchasers and receivers. He holds an ‘AV’ Preeminent Peer Rating, Martindale-Hubbell’s highest peer recognition, generated from evaluations by other members of the bar and the judiciary for legal ability and ethical standards.  He is also rated "superb" (10 out of 10) by the leading independent attorney rating service, AVVO, and has been selected by his peers as a Super Lawyer, representing the top 5% of practicing attorneys in Southern California based on peer recognition and professional achievement.  

Richard can be contact on +1 (949) 720 4135 or by email at rgolubow@winthropcouchot.com