Stabilizing the Business after Filing for Bankruptcy

We already know that bankruptcy proceedings can be of two types, viz Chapter 7 and Chapter 11. In the case of Chapter 11 bankruptcy, the business is not immediately liquidated. Instead, it is given one last lease of life, one last opportunity to get it right.

However, getting it right can become extremely difficult for many reasons. Firstly, once a business files for Chapter 11 bankruptcy protection, all their actions are closely monitored by the court. This means that corporations have to face even more challenges.

Firstly, they need to spend a lot of time and money to ensure compliance with the rulings of the bankruptcy court. The bankruptcy court has the right to demand information about the business, and the business is obliged to provide this information in a timely manner.

Secondly, stabilizing a business undergoing a bankruptcy is somewhat impossible. This is because when a company files for bankruptcy, this information becomes public. All stakeholders are then aware that the company can go into liquidation at any time. Hence, they do not extend liberal terms as they would extend to normal business.

Stabilizing the operations of a business-facing bankruptcy is obviously challenging. However, there are certain steps that a business can take. Some of these steps have been mentioned in this article.

Deciding Whether the Business can be Revived

The first step in turning around a bankrupt business is deciding whether the business has a viable core. A viable business has a certain competitive advantage. In many cases, companies go bankrupt because they stop focusing on businesses where they have a competitive edge and start extending their brands and business to other segments.

In order to stabilize the operations, the management needs to split the business into two parts i.e., the viable core and the non-essential businesses. The management has to realize that the only way they can get out of bankruptcy is if their core business starts generating enough cash flow in order to allow them to do so. Hence, two different sets of policies need to be introduced.

On the one hand, the company has to cut any non-essential costs. This could mean that a lot of employees will leave them and also that their suppliers might not offer liberal terms to them.

At the same time, on the other hand, the other division must be nurtured back into existence. The payables related to this department must be paid on priority. The customers related to this department should be cultivated so as to turn them into regular buyers. Also, there should be some amount of budget allocated for product development in these departments.

In essence, the company has to split into two. One part of the company needs to continue working as a successful business, whereas the other needs to go into conservation mode in order to save every additional penny.

Ordinary Course of Business

Bankruptcy laws allow businesses to function normally. The idea is that the court only needs to be concerned about the liquidation of the firm. The court does not need to get involved in the day to day operation. Hence, if a firm is selling products in the wholesale or retail market, it need not receive any permissions from the court. The idea is to keep the process smooth and without any encumbrances.

On the other hand, if a business tries to sell its equipment in the market, then it needs to inform the bankruptcy court since it is liquidating its business. Some companies try to blur the line between operations and liquidation. This is often done by undertaking cash management activities that appear like the normal course of business but are actually intended to drain the cash out of the company.

Establishing Trade Credit

In order to stabilize the operations of a firm, its credit to cash cycle needs to be re-established. However, that becomes a problem for firms that have already filed for bankruptcy. Creditors become wary of the fact that the business could go under any time. As a result, the creditors often ask to be paid cash on delivery. In some cases, they even ask for cash before loading the goods themselves so that they are not forced to pay for the shipping expense in case the company goes bankrupt.

However, businesses cannot operate like this for long. As a result, arranging DIP financing, which allows the resumption of the normal trade cycle is of paramount importance to the firm.

Convincing Customers to Buy Products

Customers are unwilling to buy products from a bankrupt company. This is more so the case when the product being sold are of a durable nature. Customers are wary that they will not receive after-sales service from a bankrupt company. However, in order to stabilize the business of the firm, the sales must resume. Only after the sales resume as normal can other expenses be brought to a normal level.

In such cases, companies often tie-up with third parties who guarantee service even if the company goes bankrupt. Such third party companies may be the firm’s competitors, and the firm might only be strengthening them under such arrangements. However, it is necessary for the survival of the firm in the short run.

The bottom line is that stabilizing the operations of a bankrupt firm is quite challenging. Many tasks need to be performed to ensure the stability of the firm in different departments.

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