USA Trends and Developments Contributed by: Harold D. Israel, Levenfeld Pearlstein
11 filings include Jackson Hospital and Clinic, citing “significant financial pressures”, and Prospect Medi - cal Holdings, a for-profit health system seeking to sell or close 10 of its 16 hospitals. Proposed changes to Medicare and Medicaid will potentially undermine the finances of hospitals, nursing homes and community health centres. Restructuring options When businesses face financial distress, understand - ing the available remedies and knowing when to use each one can mean the difference between survival and liquidation. The key is matching the remedy to the company’s specific circumstances, timeline and objectives. Forbearance and workout: the negotiated solution In this process, a company negotiates with its secured creditors as a first step in resolving its financial difficul - ties. This usually involves secured creditors providing a company with time to: • return to compliance with their loan documents; • find a new lender; or • sell its assets to repay its loans. While the company usually pays fees to obtain this time, it has the advantage of giving the company flex - ibility to address its problems without involving a court or other third party. Chapter 11 bankruptcy: the comprehensive solution Chapter 11 bankruptcy remains the most powerful and flexible tool for companies in financial distress. It provides an automatic stay that stops all collection actions and allows companies to reject burdensome contracts and leases, and assume and assign valu - able contracts and leases. It also gives management breathing room to develop a plan of reorganisation or sell substantially all of its assets. Chapter 11 works best for companies that have viable business or prod - uct but are weighed down by liquidity issues, exces - sive debt, inability to timely pay debts, litigation costs or unfavourable contracts. Chapter 11 is, however, a public process that often generates negative publicity and is expensive, as there are various reporting requirements, fees and expenses
associated with the process that are not applicable to the bankruptcy alternatives described below. Chapter 11 also involves judicial and governmental oversight as well as the fees (paid by the company) associated with a committee appointed to represent unsecured creditors. This process does, however, offer unique advantages that are not available through other remedies. Companies can force creditors to accept reduced payments, eliminate entire classes of debt and emerge with clean balance sheets. Assignment for the benefit of creditors (ABC): the faster, cheaper alternative An assignment for the benefit of creditors offers many of the benefits of bankruptcy but typically moves much faster, with less publicity and with lower costs. In an ABC, the company assigns all of its assets to a neutral third party (the assignee) who sells the assets and distributes the proceeds to creditors according to legal priorities. The reporting requirements, fees and expenses are significantly less burdensome than Chapter 11, and there is no governmental oversight and little creditor participation. In some states, there is judicial involvement, and in others no court is involved. An ABC works particularly well for companies with assets that are less than the value of the amount of secured debt and the parties desire to sell such assets quickly. The main limitation of an ABC is that it does not pro - vide the same comprehensive legal protections as bankruptcy, including a court order approving the sale of assets. Also, an assignee cannot use a secured creditor’s collateral without such creditor’s consent and may need to negotiate with the company’s land - lord to have access to the company’s premises. An ABC also does not stop ongoing litigation and does not allow for the assumption and assignment of con - tracts. Receivership: when outside control is necessary Receivership involves a court appointing a neutral third party to take control of the company’s operations and assets. This remedy is typically used when there are disputes among stakeholders, concerns about management’s ability to act in the best interests of
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