Insights

09/01/2014

Sometimes an end is a new beginning

Traditionally, the estate administrator’s main duty has been to liquidate the machinery of the estate as quickly as possible. But there are alternative possibilities. Instead of seeing the bankruptcy estate as a pile of assets left behind by a company that has gone through financial hardship, smart thinking says you should see this as an opportunity to start a new business.

At its best, bankruptcy means a fresh start for a successor company without burdens of the bankrupt one. At the same time, it also allows the estate administrator to take into account the broader interests of the different stakeholder groups.

While this sounds enticing, there are important factors to keep in mind.

It is one of the most important tasks of the estate administrator to realise the assets belonging to the bankruptcy estate. The administrator has to strive to sell the assets promptly and in a cost-effective way.

The sales method you choose needs to reflect the best possible price. It is often advisable to try to sell the business in its entirety or as an operational unit of the debtor company to a successor company.

Greater sales price is possible

In general, selling an operational unit is almost always a better option than selling assets separately.

The sales price of an operational unit is usually higher because some of the assets are of substantial value to a successor company but would be of very little or without any value to an outsider when sold separately. Assets of this kind are various intangibles and items with utility value related to land, buildings and fixed assets.

In addition, selling a bankruptcy estate to a successor company saves costs.

Usually you can achieve a substantially higher overall sales price when selling the bankruptcy estate as an operational unit, even though the maintenance costs are the same when selling assets separately.

The sale of assets (such as manufacturing plant) of a bankruptcy estate to a successor company naturally has considerable beneficial impacts on society and stakeholder groups beyond just the creditors in bankruptcy.

When a new company is born from the ruins of bankruptcy, it usually has a positive impact on local employment and other companies, such as former investors, subcontractors, suppliers and distributors of the bankrupt company. Ongoing revenue from a company also increases the tax base, which has a ripple effect across society.

Sometimes, the former employees can keep their jobs and the business remains in its old location.

Challenges when selling an operational unit

Selling the assets of a bankruptcy estate as an operational unit is a challenging task. This complicated process requires mastering the daily operations of the entity and understanding both the business drivers and the legal issues that will allow it to continue well into the future.

Especially in bankruptcies of medium-sized and large companies, the estate administrator and the entire bankruptcy administration have to face and resolve complex issues dealing with the management of business operations.

By being realistic and proactive and by efficiently relaying information to the creditors, the estate administrator and the bankruptcy administration can avoid possible pitfalls that typically plague the sale of an operational unit.

The successful sale of an operational unit requires co-operation with major creditors who effectively have the supreme decision-making power in bankruptcy proceedings. Often, the estate administrator can also draw on the solid business and financial know-how of the major creditors.

A win-win for creditors and society

The successful sale of the business or an operational unit requires that the estate administrator actively pursues selling the operational unit, which is facilitated by the administrator contacting potential purchasers immediately after the declaration of bankruptcy.

Ideally, this should be done on the first day of the bankruptcy proceedings. Unfortunately, the debtor company and its business operations depreciate in value throughout the process.

It is desirable that the preparations for finding a successor have been started even prior to the declaration of bankruptcy. In such cases, there is a known purchaser upon declaration. It is possible to carry out a sale of an operational unit within weeks from the declaration of bankruptcy, but this requires timely actions from the estate administrator and carrying through the actions that have been commenced prior to the bankruptcy.

Sometimes it may be economically justified for the bankruptcy administration to continue business operations in order to sell the business or an operational unit. It is often reasonable to continue operations until the end of the terms of notice to the employees.

When considering continuing business operations for a longer period, the estate administrator and creditors must be very cautious and ground their decisions on detailed calculations.

In order to find a potential purchaser and to obtain a decent sale price, it is essential for the bankruptcy estate to ascertain that all necessary documents (for example, environmental licences) are valid and in force.

This means that several factors have to come together seamlessly.

When done correctly, selling the business or operational unit as a whole offers a win-win to both the creditors and society-at-large.