Bankruptcy often isn't the safe haven troubled companies seek

December 04, 1991|By Blair S. Walker

The economic downturn is forcing scores of companies to seek safe haven within the U.S. Bankruptcy Code.

But most financial reorganization plans that are filed by bankrupt companies never gain the approval of the firm's creditors, bankruptcy experts say.

Only 17 percent of Chapter 11 bankruptcy filings wind up being approved, according to data from the Administrative Office of the United States Courts.

A spokesman for the agency, Edward Flynn, said that the data came from 2,400 Chapter 11 cases filed before 1987 and are the most recent figures available.

Samuel J. Gerdano, executive director of the American Bankruptcy Institute, cautioned that the low approval rate for bankruptcies can be misleading.

In some instances, the troubled company and its creditors work out an agreement to pay off the firm's debts. As a result, the approval of a formal plan becomes unnecessary, Mr. Gerdano said.

"Some cases are not really legitimate candidates for reorganization, and those cases are going to get converted to Chapter 7 [liquidation bankruptcy], and maybe that's where they should have been all along," Mr. Gerdano said. "But the law permits people to try to restructure under Chapter 11."

Some Chapter 11 filings don't get approved because they're essentially last-ditch stall tactics on a troubled company's part, said Christopher Beard, publisher of Turnarounds & Workouts, a newsletter published in Chevy Chase.

"The reorganization plan is sort of a new game plan for the business," Mr. Beard said. "In most cases, they're not really going to have a new idea, and the banks and the other creditors are not really interested in underwriting the restructuring."

Naturally, the last thing an ailing company needs is to have its reorganization plan shot down, James P. Koch, a Baltimore bankruptcy attorney, said.

"If it's not possible to get a reorganization plan confirmed, the court can put the Chapter 11 company into liquidation," Mr. Koch said.

"Or it could simply dismiss a case outright -- that's sort of like being thrown back to the wolves," he added. "If your case is thrown out of court, you're no longer under the protection of the court. All your creditors can come at you."

There are at least two things a company should do to avoid additional trouble after a Chapter 11 filing, Mr. Koch said:

* When contemplating financial transactions that are outside the normal scope of business, get advance approval from creditors and from the bankruptcy court.

* File operating reports in a timely manner. The usual requirement is once a month.

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