Who decides and how
A corporate bankruptcy filing generally must be authorized according to the company's governing documents, usually by a board resolution. Directors should make that decision on an informed basis, with financial information and advice from counsel and advisors. Once a company is insolvent, decisions tend to be examined with creditors' interests in mind, and whether that reaches a company that is only close to insolvency depends on the state of incorporation. Board minutes that show the alternatives considered and the reasons for the decision are valuable later. A corporation must appear in bankruptcy court through counsel rather than through an officer.
Insurance, employees, and obligations
Directors and officers insurance should be reviewed before filing, since policy terms, notice requirements, and coverage for claims brought by a trustee vary widely. Unpaid wages and benefits receive some priority in bankruptcy, but the company's ability to pay them depends on court approval and available cash. Layoffs connected to a closing may trigger federal or New York advance notice laws. Unpaid payroll taxes can become a personal liability for responsible officers. Retention and bonus arrangements for insiders are restricted in bankruptcy, so officers who stay through the case should review their compensation terms with counsel. Gather the governing documents, insurance policies, employee obligations, and tax records before the filing decision.
Shareholders and the path forward
Shareholders generally stand behind creditors in priority, and in many corporate cases their interests are reduced or eliminated. That does not mean the company disappears, since a reorganization or sale can preserve the business under new ownership. We help boards evaluate whether to file, under which chapter, and how to structure the process to preserve value. We also address officer and director exposure, including potential claims by a trustee or creditors' committee. Directors sometimes ask whether to resign before a filing, and that choice has consequences of its own that are better discussed than made in haste. The first meeting often focuses on what the board needs to know before it votes.
