When the financial condition changes the board's job
Corporate insolvency is a financial condition rather than a court filing, and whether a company has reached it can depend on how its assets are valued. Once a company is insolvent, decisions about who gets paid, whether to keep operating, and how to sell assets tend to be reviewed with creditors' interests in mind. How far that shift goes depends on the law of the state where the company was formed, and Delaware and New York do not answer every question the same way. Directors are usually well served by documenting the information they relied on and the alternatives they considered. Independent advice on major transactions in this period is common for the same reason.
Exits that do not run through bankruptcy court
Many insolvent companies wind down without filing a bankruptcy case. A secured lender may enforce against its collateral through a commercial sale under the Uniform Commercial Code, sometimes with the company's cooperation. New York also recognizes a general assignment for the benefit of creditors, in which an assignee takes the assets and liquidates them under state court supervision, and a court-appointed receiver is another possibility in some disputes. A negotiated workout with major creditors can keep the business running if enough of them agree. These routes generally lack the automatic stay that comes with a bankruptcy filing, although a court overseeing a receivership can sometimes restrain creditor actions.
Choosing the way out
The choice depends on what is left: whether there is a going concern worth selling, whether the secured lender is owed more than the assets are worth, and whether claims against insiders or third parties need a neutral party to pursue them. Bankruptcy often makes sense when creditors are racing to levy or when a sale needs to pass free of liens and claims, while a quieter state-law route may cost less when the creditor group is small and cooperative. Notice duties to employees under federal and New York plant-closing laws can apply to a shutdown and should be checked early. In a first meeting we look at the balance sheet, the secured debt, and the people who will be asking questions after the company closes.
