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Week of 26 Sept 11: Bankruptcy!

With the bankruptcy of another major paper company in the United States, it is probably timely that we go over some of the matters you as an employee or a vendor need to know.  Over the years, I find most do not know anything about such matters, or, if they do, their information is incorrect.  What I will share with you here generally applies in the United States.

A bit of history, and this is how I remember it, so it may not be quite correct.  Up until the late 1970’s, bankruptcy was considered taboo, even for corporations.  As the airlines were deregulated and able to compete freely, trouble cropped up in that industry.  Braniff International Airways pioneered what was called the “pre-packaged” bankruptcy.  The idea was the company came to bankruptcy court with a plan, not as a “train wreck.”  The plan was to reorganize the company and supposedly put it back on a sound financial footing.   Sometimes it worked, sometimes it did not.  Importantly, it has become an accepted way of running a business and is used freely, even by companies that probably should be trying something else first.

How do you know if a paper company is about to go into bankruptcy?  A very early signal is to take our test on symptoms your mill may be going out of business.  You can take it here.  Another is to look at your company’s financial balance sheet.  Calculate the “Quick Ratio”—this is Current Assets divided by Current Liabilities.  If this gets anywhere close to being 1:1 (I like to see it at least 1.25:1 myself), the company is running low on cash.  If it falls below 1:1, say, 0.9:1, the company is in technical bankruptcy, meaning it has not filed, but it does not have enough cash to meet its day-to-day obligations.

When a company files for bankruptcy, it is important to understand the priority of claims against the company’s assets.  By definition, the company does not have enough assets to cover its liabilities, so the order of priority is extremely important.  If the company is liquidated, the normal order is secured creditors are paid first.  Secured creditors are those that hold mortgages or other legal claims against real assets such as plant and equipment, inventory and so forth.  If cash is not available to pay them off and relieve their security, they may seize the assets and sell them for whatever they can get.  Next come employee salaries and unfunded pension liabilities.  Finally come unsecured vendors and so forth.  Vendors usually are left without compensation, but even more on them in a few lines.

The company may go to the bankruptcy court with a prepackaged deal, and as I have said before, this has become so common that no one even calls them “prepackaged” any longer.  In this case, they will come with a lender who offers “DIP” or “Debtor-In-Possession” Financing.  This means this new lender is going to offer cash to keep the business going in the future in exchange for the bankruptcy court putting them first in line to collect if the company eventually liquidates.  This DIP financing has nothing to do with what has happened in the past.  In other words, this money will not be used to honor pre-bankruptcy invoices--these are usually worthless and uncollectable.

If you are an employee and there is DIP financing in place, your job may go on as it has and you will not notice any significant changes.  However, I am not going to give you direct advice, but suggest your future career prospects with this company may be such that it is time to dust off the old resume.  One particular matter is important for you to know, however.  If you have a company credit card, there is a balance on it, and the company liquidates, you may be personally liable for any outstanding charges on the company credit card carrying your name.  It was reported a few Enron employees, left out in the cold, thought they would go out and run up big bills on the company credit cards they held.  They ended up being personally liable for these.  In the fine print on any company credit card you hold, it most likely says if the credit card company cannot collect from the company, they have a right to collect from you.  You signed this when you accepted the credit card and most likely did not bother to read the fine print.

As a vendor, you are even in worse shape.  Not only will you not get paid for any outstanding invoices, you may even have to refund money to the bankruptcy court.  Any payments you received from the bankrupt company (usually) ninety days before they filed are called “preference payments” and if the bankruptcy trustee can prove you were paid out of order, in other words, preferentially, during that time frame, you will be ordered to refund those payments.  This will certainly happen if the company was slow paying wages to employees while they paid you to keep raw materials moving.  You will refund so that employees can be paid.  The only saving grace is if the company is attempting to continue to run and needs your product in order to do so, you may be able to negotiate something favorable about the old invoices outstanding.  But keep in mind, any such negotiations need to be sanctioned in writing by the bankruptcy court.  Believing your local purchasing agent or payments person is no longer valid—they have no authority unless it is specifically granted by the court.

One more thing—sometimes companies set up individual locations or business units as their own corporations, wholly owned by a parent.  This is to protect the parent from any legal or financial problems within the subsidiary.  In this case, the subsidiary can be bankrupted, leaving the parent intact, unharmed and untouchable.  Occasionally,  lawyers can find ways to “pierce the corporate veil” and reach up into the parent for financial relief, but those situations are rare.

Who runs a bankruptcy?  A court appointed trustee, randomly selected by the bankruptcy court from a qualified pool of lawyers.  This trustee is monitored by the court and must come to the court for approval on most matters.  How is the trustee paid?  They get a percentage of all  assets found and monetized, so they are very, very motivated.

Disclosure—I am not a lawyer and what I have said here is not to be taken as legal advice.  If you have any legal questions, consult your own counsel.  I am merely sharing experiences I have had as I have worked in our industry as a specialized consultant working with banks for the last twenty years.

For our quiz this week, again, you may wish to take our test pertaining to symptoms your company may be in danger of going out of business.  You may take it here.

For safety this week, a bankruptcy raises your stress level.  When you are at a higher stress level, you tend to be less safe.  If your facility is in bankruptcy, be extra careful and cognizant of these conditions.

We have a special request.  We are looking for old Nip Impressions columns from 2001 until 2006. Some of you have already sent us a few, and we thank you. If you have any of these in your archives, please email them to  The Paperitalo team would be very grateful.

Be safe and we will talk next week.

A Consultant Connection Member at your service: Is it really slime? Does something smell funny? Developing a product new antimicrobial properties? Independent Biocide Consulting & Audits. Solving problems. Saving money. International Microbial Associates Linda Robertson

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