How to Make a Good Impression in Bankruptcy Court

By Ken A Rosen

In the wake of the COVID-19 pandemic, many companies find themselves navigating the complexities of Chapter 11 bankruptcy to either achieve an orderly liquidation or secure the necessary time for restructuring and recovery. As a seasoned restructuring professional, the crucial task at the outset is to present the debtor's financial information to the bankruptcy court in a manner that not only creates a favorable first impression but also provides an accurate representation of the company's current state and future prospects.

Understanding the Precipitating Factors:

At the inception of a bankruptcy case, stakeholders, especially the bankruptcy judge, seek insight into the factors that led to the filing. Whether it be declining demand for outdated products, adverse legal judgments, excessive leverage from prior acquisitions, or industry overbuild, the answers influence the court's initial impressions and subsequent decisions on matters such as expedited relief requests and foreclosure authorizations.

Cash Flow: The Heart of Chapter 11 Cases:

In the realm of Chapter 11 cases, cash flow takes center stage. Monthly reporting to the United States Trustee is mandatory, with a focus on whether the debtor is burning cash. Lenders are particularly concerned about this, as negative cash flow may necessitate additional capital infusion. Therefore, presenting a comprehensive cash-flow statement is paramount, providing a clear view of operational stability.

Detailed Financial Reporting: Beyond the Basics:

While the court may only require a monthly cash-flow statement, adopting the best practice involves presenting a statement that distinguishes items related to Chapter 11 proceedings and nonrecurring items. This approach prevents the exaggeration of negative cash flow or the masking of positive cash flow, providing a more nuanced understanding of the financial landscape.

The Three-Column Presentation:

To offer a comprehensive perspective, the initial financial presentation to the court should adopt a three-column format. Column one represents actual results, column two details adjustments to eliminate the effects of extraordinary items, and column three showcases restated financial results—offering a clear picture of the debtor's core business performance absent the challenges that led to bankruptcy.

Providing a Bridge to Success:

Debtors seeking Chapter 11 relief often require time to implement solutions, negotiate with creditors, and prove viability. The three-column presentation serves as a bridge for the court, enabling a clearer understanding of the debtor's results from ongoing operations, absent extraordinary events, and normalized results during bankruptcy. The debtor's financial adviser plays a crucial role in adequately explaining the bases for adjustments, ensuring a transparent and accurate portrayal.

In the complex landscape of Chapter 11 reorganizations, the initial financial presentation to the bankruptcy court is a pivotal moment. Crafting a detailed and transparent portrayal of the debtor's financial position sets the stage for successful restructuring efforts. By adopting a three-column approach and providing a bridge to normalized results, debtors can enhance their chances of gaining the court's confidence and securing the time needed for a meaningful recovery.