In this two-part series, CSC Global Financial Markets Chief Risk Officer Alan Halpern provides an overview of the four stages of a corporate bankruptcy in the United States and how trust and corporate service providers can help facilitate each stage of this process.
Stage One: Filing Decision
It may be due to an economic crisis such as the current COVID-19 pandemic, general cyclical economic conditions, or even circumstances unique to a particular company or industry. Regardless, when a company is suddenly in a cash crunch, and it may have to default on upcoming creditor payments, crucial decisions will need to be made quickly.
The company will undoubtedly do everything possible to avoid bankruptcy by exploring a workout with creditors, raising capital through new loans, or by offering debt or equity to investors. A qualified escrow agent may be needed to receive and hold deposits for such an offering. If, however, restructuring is not possible outside of a court setting, a company may need to file for bankruptcy.
In certain industries (commercial real estate financing transactions or asset-backed securitizations where companies have established bankruptcy-remote entities (BREs) to borrow funds), the independent director of the BREs would typically be required to consent to a bankruptcy decision and may also have to consider the interests of creditors. Because this decision requires complex analysis, it’s crucial to select a sophisticated approved professional provider of independent director services when the BRE is being formed.
Stage Two: File Preparation and Filing
Once the decision to file for bankruptcy has been made, the company will prepare a petition by listing all of its assets, debt, income, and expenses. Based on the information uncovered, the company will need to determine, in consultation with professional advisors, which type of bankruptcy is in the best interest of its shareholders and creditors, Chapter 7 or Chapter 11.
Chapter 11 is a reorganization to keep the company operating, while Chapter 7 is the end of the road, requiring the company to cease operations and liquidate its assets. During this preparation time, the company may have principal and interest payments due on outstanding loans. Generally, missing such a payment will trigger an event of default, which may require an indenture trustee or collateral agent to take action.
Indenture trustees and collateral agents are often provided by corporate trust departments of large banks whose affiliates may also want to participate in the refinancing or act as creditors on various levels of company debt. In such a case, a conflict of interest may arise, which would require the bank indenture trustee or agent to resign, leading to the appointment of an independent successor indenture trustee or agent. Once the company files a petition in federal bankruptcy court, the court will issue an automatic stay which prevents creditors from taking any further action to collect on their debts. The U.S. Trustee appointed by the court may then form creditors’ committees for unsecured creditors to oversee the activities of the company during the bankruptcy. The successor indenture trustee often has a pivotal role on a creditors’ committee.
We’ll continue this discussion in part two, where Alan will discuss the confirmation and what happens next.
CSC Global Financial Markets – Bankruptcy Services
CSC Global Financial Markets (GFM) is a leading provider of trust and corporate services for every stage of the corporate life cycle, including bankruptcy. CSC is recognized by rating agencies and lenders as one of the only approved providers of professional independent director services in the United States. CSC also offers liquidating or litigation trustee services as a fiduciary. Through our wholly owned affiliate and regulated trust company, Delaware Trust Company, which, as a nonlending institution, is free of conflicts of interests, we offer a full range of bankruptcy-related services including successor indenture trustee, Delaware statutory trustee for liquidating or litigation trusts, administrative and collateral agent, escrow agent for subscription offerings and Section 363 asset sales, and disbursing agent for liquidations or litigation.