Maximize Bankruptcy Proceeds: Evaluate the Liquidation Analysis Before Approving a Reorganization Plan

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By Anthony R. Calascibetta, CPA, CTP

One of the requirements before a debtor can emerge from Chapter 11 bankruptcy is that it file a plan of reorganization and provide it and a disclosure statement to each creditor. These documents include many sections containing historical and prospective information. The most potentially enlightening of these for a creditor and its counsel is the liquidation analysis.

This section is meant to support the debtor’s assertion that it would be in the “best interests” of the creditors to approve the plan rather than forcing it to sell all its assets and distribute the proceeds. But, armed with some basic knowledge of the debtor’s business, assets and industry, a creditor might be able to determine whether the monetary return would be greater if the company were liquidated.

Seek and You May Find

When receiving a plan of reorganization and a disclosure statement, both the creditor and counsel usually search for the estimated payout. This information is in a summary section, if the court requested it, or in the “Treatment Under the Plan” section. (Beware: The legalese of the latter section can be rather dense.) But most plans do not provide for a 100% recovery to all creditors, so it’s prudent for each creditor to look beyond just the proposed payout under the reorganization plan.

A good place to start is the liquidation analysis. It should identify each asset the debtor owns and the estimated realization of that asset on sale or liquidation. The analysis should also disclose the methodology used to arrive at the liquidation amount. Particularly with larger creditors, the value of these assets (generally inventories, accounts receivable and fixed assets) can be evaluated for reasonableness based on knowledge of the debtor and the industry.

Value the Intangible Assets

This valuation is critical. The liquidation analysis generally does not provide for a sales value of the goodwill and other in-place values. But creditors in the industry might have the best insight into ways to generate cash from the sale of the operations, with or without the current or fixed assets.

Here are important questions to consider about the value of intangible assets:

  • Is there a competitor that might want to acquire the patents, trademarks or customer list?
  • Is there a supplier that might want to acquire one or more of the operating facilities as a going concern, separate from the entire company?
  • Can a division be spun off as an operating unit that would generate a value higher than the liquidation value methodology used by the debtor?
  • Can the sum of the parts, if separated, generate more value than what is proposed as a liquidation of the whole?

Search for the Bankruptcy’s Potential Causes

Creditors and their counsel should also consider the economic conditions and identify reasons for the debtor’s financial distress:

  • Was the bankruptcy caused by a short-term market effect?
  • Was it due to present management’s shortcomings?
  • Are there profitable operations that were taken into bankruptcy by a losing operation(s)?
  • Are there products in development that might have value in the future?

By using the remedies of the bankruptcy laws, some financial flotsam and jetsam may be salvageable. Then, selling or liquidating the healthy pieces may result in more to the creditors than reorganizing the whole.

Nothing To Lose, Everything To Gain

Accepting a proposed settlement without first evaluating the liquidation analysis is like buying a home without first having it inspected. A deeper analysis may reveal more than was immediately apparent. The liquidation analysis is your guide to whether the deal is as good as it looks on the surface. If there may be a better way, then a call to the creditors’ committee members or their counsel could lead to a sweeter deal or settlement. Please let us know if we can assist you in this area.

Sidebar: What About an Involuntary Bankruptcy Petition?

Filing an involuntary bankruptcy petition against a debtor can be an effective tool for protecting your claim against the debtor. Forcing a debtor into involuntary bankruptcy may allow an unsecured creditor to reduce or eliminate any inappropriate debtor behavior and protect assets for all creditors.

You need to gather sufficient information about the debtor’s situation and the rules surrounding involuntary bankruptcy petitions. Otherwise, you may find you’ve opened a Pandora’s box of unexpected costs and legal liabilities.

Anthony R. Calascibetta, CPA, CTP, is a Partner in the Corporate Recovery & Litigation Support Services Groups at WISS & Company, LLP. Mr. Calascibetta can be reached at 973-994-9400 or acalas@wiss.com.

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