suj-pandya

[suj-pandya]

Business Bankruptcy Filings Up

In a July 2023 press release published by the American Bankruptcy Institute (the “ABI”), and as widely confirmed by published media reports, the total number of new commercial bankruptcy filings substantially increased during the first half of calendar 2023. More specifically, as compared to the first six months of calendar 2022, the total number of such filings during the first half of 2023 was up 18 percent. Further, at least seven companies filed mega chapter 11 proceedings in a two-day period during May 2023, a number not recorded since the global financial crisis in 2008.

Subchapter V filings also increased by a little over 50 percent using the same time comparison. Subchapter V proceedings within chapter 11 typically involve small businesses that experience financial, operational, or other distress. Those companies must make an election inside chapter 11 to be treated as a small-business debtor. The total amount of their liabilities also must not exceed a specific dollar threshold.

Broad based macroeconomic conditions in 2023 may have contributed to the rise in commercial bankruptcy filings. Those conditions include an environment of increased inflation, as measured by various economic indexes. They also include rising interest rates, as targeted by the Board of Governors of the Federal Reserve System. As a result of both, companies almost certainly have faced increased borrowing costs and accompanying financial distress. Other factors contributing to increased bankruptcies may include financial instability resulting from several high-profile bank failures starting in March 2023.

In a chapter 11 bankruptcy reorganization, management continues to operate the debtor-company's business and manage its properties. Management may continue to undertake business operations in the ordinary course of business, usually with blanket approval from the Bankruptcy Court. Business operations or activities that the debtor seeks to conduct outside the ordinary course of business almost always require pre-approval of the Bankruptcy Court. That includes matters such as obtaining new financing, selling assets, and assuming or rejecting certain types of contracts and leases.

Unlike a chapter 7 liquidation, chapter 11 allows the debtor to attempt to reorganize its business, operations, and affairs. In a chapter 7, on the other hand, the debtor usually ceases operations and initiates a court-supervised liquidation process under which it sells its real estate, personal property, intellectual property, and all other assets to satisfy claims against the debtor’s estate.

A debtor initiates a bankruptcy proceeding by filing a voluntary petition for relief under title 11. In that case, its creditors do not take direct action to effectuate the bankruptcy filing. In an involuntary bankruptcy proceeding, on the other hand, a specific number of creditors of the pre-bankruptcy company can effectively place it into bankruptcy, subject to Bankruptcy Court approval.

Legal and other types of professionals may help companies experiencing financial distress determine whether to utilize the bankruptcy process to reduce liabilities, eliminate operational or other inefficiencies, and take other actions to emerge from bankruptcy and return to normal-course operations. They may instead advise the company to liquidate its assets. Those professionals include attorneys, investment bankers, and financial advisors. The company often starts working with those professionals well in advance of a potential in-court restructuring or liquidation.

Note that the ABI is comprised of industry professionals from multiple restructuring and related fields who provide practitioners, the public, and government with bankruptcy-related data and general information.