Operational Initiatives

Bankruptcy provides the debtor with time to stabilize their operations while analyzing alternatives to restructure their balance sheet. Two beneficial elements of in-court operational restructurings are the ability to sell assets and assume or reject executory contracts. For many financially distressed companies, asset sales can be an effective way to increase liquidity and reduce leverage. A debtor will often divest an asset that is not performing well, not vital to the company's core business, worth more to a potential buyer or as a separate entity than as part of the debtor, or in order to raise funds for continuing operations. Section 363 of the bankruptcy code is an important provision for buyers and sellers that want sell assets in a financially distressed context. Among the important advantages to the buyer is the ability to purchase the asset "free and clear" of virtually all liens and claims, with little or no risk of the transaction being subsequently unwound. Section 363 can also provide a buyer with a visible time line and certainty (via an auction process approved by the court). For the seller, section 363 can provide certain tools to allow the debtor to maximize value for the bankruptcy estate (e.g., heavily negotiated auction terms and procedures, use of a "stalking horse" bid, minimum bid increments, etc.). The bankruptcy code also allows the debtor to examine its executory contracts (including leases, employment agreements, service contracts, and supply contracts) to determine whether any are disadvantageous. If so, the debtor has the ability to terminate the contract (for which the counter-party would derive an unsecured pre-petition claim against the company) or to renegotiate the contract on a basis that would produce a similar economic result. This ability to assume or reject executory contracts is an important tool to a debtor initiating operational restructuring. After the debtor's day-to-day operations are stabilized, the next goal of the reorganization process is to develop a new business plan or strategy for the firm.