By A. Thomas DeWoskin
Part 3 of a 5-part series: Options for Small Business Owners in Financial Distress
In the first two parts of this five-part series on options for small business owners in financial distress, I suggested some ideas for improving your business operations and the availability of cash so that your small business would have a better chance of surviving the pandemic and other economic surprises of the recent year. In this Part 3, I suggest some ideas on using non-bankruptcy options in an effort to restructure your debts. We will discuss several bankruptcy options in Part 4.
Non-Bankruptcy Options for Restructuring Your Debt
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Informal Workouts
If your business has 1) maintained good relationships with its creditors, especially its primary lenders, and 2) doesn’t have too many creditors, it may be able to work itself out of its financial troubles. Secured creditors, of course, must be treated with full respect for their security interests in the business assets. Unsecured suppliers of critical goods and services also must be treated with care, as their cooperation may be needed at some point in the future.
It is often useful to obtain an appraisal of your business assets, both real and personal, from well-respected appraisers experienced in their fields. The appraisal should value the assets at three levels: forced liquidation value, orderly liquidation value, and fair market value. These values will enable you to intelligently discuss the likelihood of collection in different situations.
Another useful action would be to hire a consultant. Sometimes business owners cannot see opportunities for improvement which are right in front of them simply because they think that the current practice works well. The consultant can help you review your company’s operating procedures, cash flow procedures, and pricing structure to look for opportunities to increase profitability.
The consultant also could prepare projections of future profitability for your business based upon the opportunities which are discovered. Armed with the collateral valuations and projections, you can show your creditors how you intend to solve your company’s problems. That is much more effective than simply asking for more time or engaging in stalling tactics.
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Statutory Remedies
Assignments for the Benefit of Creditors (“ABC”)
An ABC involves the assignment, or transfer, of all of an individual’s or company’s assets to a third-party assignee, often in lieu of a formal Chapter 7 bankruptcy liquidation. The assignee acts as a fiduciary who is empowered to sell the debtor’s assets and distribute the proceeds to the assignor’s creditors pursuant to priorities established by state law.
Most ABCs are made pursuant to Missouri statutes. Unfortunately, those statutes were written in 1909 and have not been meaningfully revised since 1939. As a result, the ABC remedy has rarely been used in recent years, especially after the more recent U.S. Bankruptcy Code and Missouri Commercial Receivership Act have been enacted.
A proposed replacement for the old statutes has been drafted. Unfortunately, the proposal has been languishing in the state legislature since 2018. Perhaps it will be considered in 2021.
Creditors need not agree to the assignment, and there is no automatic stay prohibiting collection actions against the debtor as the statues currently are written. There currently is no provision for the discharge of the debtor’s obligations.
Additionally, creditors who do not accept the outcome of the assignment may force the debtor into bankruptcy within 120 days after the assignee was appointed or took possession.
Although Missouri’s ABC statues are still used upon occasion, the 1978 enactment of the Bankruptcy Code greatly increased the number of situations where a formal bankruptcy filing would be more favorable to either debtors or creditors, or both. This includes the automatic stay, the ability to avoid and recover preferences and fraudulent conveyances for the benefit of creditors, the ability to discharge most debts, and many other specific powers and duties.
Missouri Receiverships
A receivership, which appears facially similar to an ABC, is actually much more effective because it is a court proceeding and the receiver, unlike an assignee, is under the control of (and is responsible only to) the appointing judge. The court generally enters a lengthy order appointing the receiver, which sets out the powers and duties of all parties. As with an ABC, the purpose of the receivership is to prevent the deterioration of the debtor’s business and prepare it for liquidation.
Prior to 2016, the entire statutory guidance on Missouri receiverships was contained in only one sentence! Obviously, the lack of a more detailed statutory framework for a receiver to follow has been the cause of problems in many receiverships. Due process, for instance, was a problem. A creditor’s attorney could approach the presiding judge ex parte, explain the necessity of filing a receivership immediately, and present the judge with a draconian proposed order which often ran roughshod over the debtor’s rights.
The lack of a controlling statue has led to inconsistent appointment orders because each was unique. There was no standard list of each entity’s powers and duties. This was especially problematic if there was real estate to be sold. Title companies were extremely concerned about insuring a transaction if there was no statute granting the judge power to approve a sale proposed by the receiver.
Additionally, there was no consistent reporting or distribution process. In some receiverships, there was no allowance for the recognition of priority claims which generally would be paid before the general claims. There was no standard mechanism for disposing of funds which could not be distributed and other similar problems.
In the mid-2010s, a more comprehensive replacement of the current statute was drafted. Unlike the ABC replacement, this new statute was passed and became effective in August 2016 as the Missouri Commercial Receivership Act (MCRA).
Although MCRA provides that the prior receivership statutes and judicial precedent remain effective, it also addressed many of their deficiencies. It provides specific enumerated grounds for the appointment of a receiver. Notice to the debtor is now required before a receiver can be appointed, which creates a more level playing field. This provides the parties with time to negotiate a solution, and the debtor an opportunity to limit the receiver’s powers, file a bankruptcy, or take some other action.
MCRA provides a limited automatic stay and specifically grants the receiver powers of sale, authority to exercise certain ‘strongarm’ powers, ability to assume or reject executory contracts, and authority to seek the recovery of fraudulent conveyances under the Missouri Uniform Fraudulent Transfers Act. Notably, it does not grant the receiver authority to recover preferential transfers.
Now that we’ve looked at non-bankruptcy options, in Part 4 we will look at pros and cons of different types of bankruptcy.
This post is part of a series discussing options for small business owners in financial distress. In the next post, we’ll discuss various bankruptcy options.
Here are the other posts in this series:
Posted by Attorney A. Thomas DeWoskin. DeWoskin practices in the areas of bankruptcy, creditor’s rights, and commercial law. He represents creditors, as well as business debtors, and individuals with difficult or unusual financial situations. DeWoskin served as a bankruptcy trustee in the Eastern District of Missouri for more than 35 years.
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03/10/21 2:34 PM
Filed under Bankruptcy, Business Law, COVID-19, Emerging Business, Manufacturing and Distribution, Restaurants & Entertainment | Comments Off on Non-Bankruptcy Ideas for Helping Your Troubled Small Business
