Your company has debt it cannot manage and there is no reasonable prospect that revenues are going to increase sufficiently to turn the tide. What do you do? There is the possibility that you could restructure your debts to make them manageable. Subchapter Five Chapter 11’s were designed for the small business, but cannot always serve to restructure finances toward a viable future. There are circumstances where the cost, complication and time investment required to do a Chapter 11, even a Subchapter Five “simplified” Chapter 11, may not make sense.
Consider the company that has significant debts, and insufficient revenue to sustain even its basic expenses. While the business model may not be working given the current circumstances, the company has valuable assets that you would like to salvage. These could include its Internet presence, its customer base, some revenue stream, and possibly even intangible assets like branding and name recognition. All of these might have sustainable value if the business could only operate under a clean slate; a “do over” if you will. Subchapter V is probably not the right medicine here.
Instead, salvation can sometimes be accomplished through an orderly wind down of operations and the liquidation of assets to a third party owned by the same or similar management. This can be done, but is fraught with risks and must be done carefully. The process begins with valuation.
This valuation is best delegated to an independent third party, with adequate credentials that will hold up under scrutiny; they must be a party able to provide a truly objective determination of the asset values. This can be a forensic business analyst, business broker or, if the equipment is in a specialized industry, an expert in the resale market for assets of this particular industry. Valuation is necessary because there must be an arm’s-length transfer of the assets from old entity to new entity. Establishing the arm’s-length nature of the transaction is particularly important when the principals of the new entity are the same or similar to the defunct company.
Furthermore, the transition must be documented as if the seller and buyer were unrelated. There must be a comprehensive Asset Purchase Agreement. The terms of the buyout can involve a lump sum payout, or a term payout, but if the deal is to be structured as a term payout, and were this truly an arm’s-length transaction , the seller would probably want some collateral to assure payment. It would therefore be prudent to structure a payout deal such that there is some form of security interest granted to the selling (here, the defunct) entity.
Everything of value that changes hands should do so under proper documentation. For example the ownership of URLs (web addresses) should be changed of record. Vehicle titles should be changed. New bank accounts should be established. Accounts receivable must be addressed: customers should be notified that a new party has acquired the accounts.
If papered properly, and proper value changes hands, creditors of the defunct entity can be notified that the resources to pay their balances will be limited. Counsel can negotiate reduced payouts because a solid, bona fide transfer has taken place.
There are several other issues that should be considered, and you should be employing counsel who has demonstrable experience in wind down, wind up, liquidation and transfer scenarios.
Call now for a consultation to discuss your options.
Julianne Frank, Esq.