Running the company inside the case
In a business bankruptcy under Chapter 11, management typically stays in control and the company continues trading. Ordinary-course activities, like paying current suppliers and employees, can usually continue, but actions outside the ordinary course often require court approval. Using cash that serves as a lender's collateral generally needs either the lender's consent or a court order. The company typically opens new bank accounts and keeps pre-filing debts separate from new obligations. Compensation paid to owners and other insiders is typically disclosed and can be questioned by creditors. Owners who are used to deciding everything themselves need to adjust to that structure.
Reports and oversight
The Office of the United States Trustee monitors the case and requires regular operating reports showing income, expenses, and cash balances. Insurance, tax filings, and payroll obligations must be kept current, and fees owed to the government in a traditional case are calculated on disbursements. Professionals hired by the company, including lawyers and accountants, need court approval and their fees are reviewed. Prepare to organize books at a level of detail that many small companies have not maintained before. Lapses in reporting are a common basis for creditors to seek conversion or dismissal.
Where the owners end up
Whether owners keep their equity depends on the plan and on creditor treatment. In a traditional Chapter 11 case, owners generally cannot retain equity over the objection of an unpaid class unless certain conditions are met, which can include contributing new value. Subchapter V, available to qualifying smaller businesses, follows a different rule that often lets owners keep the business if the plan commits disposable income. Personal guarantees remain a separate issue that needs its own strategy. Owners should also expect creditors to ask detailed questions about the business plan, sometimes through formal examinations under oath. We start by mapping the company's cash, secured debt, and owner exposure so the case can be planned around them.
