Though the bankruptcy bill is oriented toward the consumer, it also has several provisions and changes that affect the corporate bankruptcy process, according to Craig S. Dean, principal at Highland Park, Ill.-based turnaround and crisis management firm AEG Partners LLC.

Dean said the most significant outcome from these changes is the amount of time companies have within the bankruptcy process. The bill aims to accelerate the process so companies don't have to languish there.

"The biggest issue is to plan ahead of time, understand why you are using Chapter 11 to accomplish that, and what it should look like when you emerge. What's the end game?"

He outlined some of the major changes for a business filing bankruptcy:

Stricter exclusivity period. The exclusivity period during bankruptcy is the time in which a borrower plans and proposes a restructuring plan.

Dean said this change is important because nobody else can propose an alternative or competing plan, "making it cleaner on what the impact will be on bankers, trade creditors, bond holders, employees; You don't have many competing interests coming in with plans that benefits them."

Under the former exclusivity period, bankruptcy court would easily grant extensions. Under the new bill, bankruptcy court does not have the discretion to grant extensions, so there is a firm commitment to 18 months. As a result, once the exclusivity period is over, the borrower is going to work a lot more aggressively to come up with a good plan that gets buy-in from constituents. 

Fewer extensions to reject or assume leases. Previously, companies were given 60-plus days to evaluate their leases, and it was often extended several times. Now it is 120 days with one 90-day extension.

This change, said Dean, will force companies to make the decision much more quickly, which in some cases will be easy. However, until you really know your restructure plan it's difficult to make those decisions about whether to retain or reject a lease.

"There is lots of pressure on the borrower to come up with answers when they don't even know what it's going to look like," Dean explained. "They may [assume leases that] they might not end up wanting." The consequence: a two-year administrative claim against the estate if the assumed leases are later rejected. 

Stricter guidelines for KERPs. Key employee retention plans -- stay-bonus plans for management -- are common in Chapter 11. The new law says a company can't offer a KERP unless they have an actual offer from another employer at the same or higher wage, effectively making KERP plans difficult to put in place. What has not changed is that the company still must demonstrate that the employee is a critical asset.

According to Dean, "creditors and banks don't like KERPs because they feel they are rewarding the management that had created the problems; but there are legitimate people [entitled] to the bonus." Dean said this provision is good for turnaround firms because it forces turnover and a clean slate when the firm takes over the company's management team.

He added: "Regardless of the changes, the best advice is to use Chapter 11 as a tool and method to get the balance sheet under control, to get the company some breathing room to be sold or restructured so it can operate in a properly capitalized environment."

For more information: www.aegpartners.com

-- Niquette M. Kelcher