Whether they are small retail stores or major publicly traded corporations, businesses will face more restrictions when the new bankruptcy...
Whether they are small retail stores or major publicly traded corporations, businesses will face more restrictions when the new bankruptcy law goes into effect Oct. 17.
The tougher law was one factor that analysts said Delta Air Lines and Northwest Airlines considered before filing for Chapter 11 protection from their creditors a month before the law’s effective date.
Business bankruptcies have been falling in recent years amid an improving economy, and dropped in 2004 to their lowest level in more than two decades. Corporate filings are on track to decline again for the year as a whole, according to figures from the American Bankruptcy Institute (ABI).
Still, the companies that seek protection as of Oct. 17 will have a rougher time in reorganization, something many still hope to avoid.
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“I think there will be an increase in bankruptcy filings in advance of the deadline,” said Samuel Gerdano, executive director of the ABI. “Some might be advised that it’s better to deal with the devil they know than risk the uncertainty that comes with the new law.”
One of the biggest changes in the business provisions of the law is a new limit on what’s known as the exclusivity period, the 18-month span during which a company in Chapter 11 has the sole right to propose a reorganization plan. Under the old law, companies could have unlimited extensions of the exclusivity period; they lose that right under the new law.
The new law also gives a creditor who provides services to a company within the 20 days preceding a Chapter 11 petition the right to full payment for the services. Under the current law, those creditors may get only a fraction of what they are owed.
There also will be restrictions on severance payouts to executives of companies in bankruptcy. Severance for executives now can be any reasonable amount. Under the new law, it is limited to 10 times the average given to nonmanagement employees in the calendar year paid.
Martin Bienenstock, a bankruptcy expert in New York, said this provision will probably lead troubled companies to restructure their executive compensation packages. “You’ll see things like signing bonuses and other substitutes for severance,” he said.
The new law also limits to 210 days from the bankruptcy filing date the time in which a debtor has to assume or reject leases unless a landlord agrees to an extension. Currently, the court can grant unlimited extensions.
The restriction involving assumption or rejection of leases is of particular relevance to airlines and retailers.
Bienenstock said 210 days, or seven months, might not be enough time for creditor committees in bankruptcy cases involving hundreds of leases to form an opinion about whether the company should reorganize or liquidate.
As a result, companies may be under more pressure to make quick decisions about which leases they want to keep and possibly sell and which leases they may want to reject.
That increases the likelihood that landlords can take back their leases, Bienenstock said.
“It’s Christmas for landlords with the lease amendment to the expense of every other party in the case,” he said.
Experts say that although the new law will affect businesses, it was implemented more as a reaction to the number of individuals filing for bankruptcy.