PBJ How Oregon Works: Navigating Business Disruption in an Uncertain Economy

Corporate and bankruptcy attorneys Oren Haker and Daniel Kubitz contributed an article to Portland Business Journal’s 2020 How Oregon Works series titled “Navigating business disruption in an uncertain economy,” published August 31, 2020. (Subscription required.) In the article, the authors discuss two gating items necessary to ensure that a company whose business operations are disrupted by the pandemic avoids a legal process that impairs recoveries for its creditors and shareholders and stymies its ability to reorganize.

The first factor is that a “distressed company must acknowledge cash flow issues promptly to its critical business partners and engage with critical business partners in a collaborative manner.”

The second is that business partners be aware of the limitations of aggressive enforcement action against the distressed company.

The article also addresses how to approach the process of formulating a global solution to a distressed company. The first step in addressing a business disruption requires understanding a company’s commercial rights and obligations in relation to its business partners’ rights and obligations, including: (1) how the risks of a company’s failure to meet obligations is apportioned among business partners, and (2) what rights and remedies business partners have available to them in the event of a default or breach of a commercial contract by the distressed company.

The authors note that to preserve a value-producing commercial relationships over the long term, critical suppliers to a distressed business will often be willing to stretch out payment terms or commercial customers may agree to pay in advance for goods in an effort to maintain the liquidity of a distressed company. On the distressed company side, balancing the interests of captive equity with the interests of captive debt is critical and ongoing through a workout process.

As a last resort, chapter 11 is an option for a distressed company, but the authors stress that it is “a shield to reorganize, not a sword to litigate.”

They conclude: “Often, the shadow of chapter 11 sufficiently motivates business partners to reach a consensual, out-of-court resolution with a distressed company, but that is not always the case. Business partners should, however, analyze their rights and remedies under the Bankruptcy Code, because if a distressed company is unable to drive a consensual, out-of-court reorganization, it most certainly will be considering whether to file for chapter 11 protection.”