When to Hire a Corporate Bankruptcy Lawyer

As a corporate bankruptcy lawyer with over 7 years of experience advising businesses on financial restructuring and insolvency matters, I have seen companies struggle with the decision of when it’s time to seek legal counsel on bankruptcy. Bankruptcy is often seen as a last resort, something to be avoided at all costs due to the stigma and perception of failure attached to it.

However, the reality is that seeking expert legal advice early on can actually help turn a distressed company around. An experienced bankruptcy lawyer can assess the full range of options available and help executives make informed decisions on the best path forward to preserve value for stakeholders. Here are my insights on the key signals that indicate it may be time to hire a corporate bankruptcy legal advisor.

Persistent Cash Flow Issues

As a corporate advisor, the most common trigger I see is when a company faces persistent cash flow issues and is unable to pay its debts as they come due. The causes can vary – a downturn in the business cycle, loss of a major customer, supply chain disruptions etc. But the net effect is the same – core operations are starved of working capital needed to keep the lights on.

Technical insolvency is never a good position to be in. With extensive experience structuring complex debtor-in-possession financings, an expert bankruptcy lawyer can help negotiate breathing room with creditors and explore options to inject emergency liquidity back into the business. The earlier we get involved, the more tools we have at our disposal to stabilize the situation.

Defaulting on Debt Obligations

A missed interest payment or covenant violation may seem minor initially. But these can quickly snowball into full defaults and lead to adverse creditor actions. Lenders may call loans and tighten or sweep cash balances. Less patient trade creditors may refuse to ship goods unless paid cash-on-delivery. And in extreme cases, secured lenders can enforce their collateral rights and sweep company accounts or assets.

An experienced bankruptcy lawyer can put a halt to creditor collection efforts and buy critical time through tools like forbearance agreements, waiver amendments, or filing for bankruptcy protection. We can also advise the board on director fiduciary duties in the ‘zone of insolvency’ and appropriate governance procedures when entering into significant transactions.

Key Executive Departures

The abrupt departure of a CEO, CFO or other senior executives may indicate trouble behind the scenes. While some turnover is normal, mass defections usually suggest there are financial problems or strategic issues plaguing the company.

As a restructuring advisor, key executive departures are usually a red flag prompting deeper investigation. This exodus of leadership talent can paralyze decision making right when strong guidance from the top is most needed. An independent bankruptcy lawyer can step in as a trusted advisor to guide the board through uncertainty. We can also work with management to explore retention programs critical for key personnel.

Shareholder Lawsuits

Shareholder lawsuits alleging fiduciary breaches or mismanagement are another strong bankruptcy warning sign. While sometimes frivolous, these suits indicate significant shareholder discontent with leadership decisions and financial performance. They also distract management attention and drain cash reserves with legal fees.

A skilled bankruptcy lawyer can help mitigate litigation risk and negotiate settlements where appropriate. We can advise directors on proper governance procedures and help create the documentation trail demonstrating good faith decision making even in difficult situations. The goal is to restore confidence and alignment between shareholders and management.

Inability to Raise New Capital

For high-growth companies, the inability to raise new capital from investors or lenders can severely limit growth prospects. Financial markets have a way of sensing distress and will shut their wallets if fundamentals are weak.

With extensive experience advising both debtors and creditors, bankruptcy lawyers have a unique vantage point into what proposals investors and lenders will accept. We can structure financing packages that have the best chance of attracting new capital into the business while appropriately balancing stakeholder interests through tools like debtor-in-possession financing, exit financing, credit bidding, and plans of reorganization.

The Decision is Never Easy

The decision to consult a corporate bankruptcy lawyer is never easy. Executives usually seek bankruptcy advice only when all other options have been exhausted and they have their backs against the wall. But by delaying too long, companies lose access to tools that could potentially turn things around.

As an experienced restructuring advisor, my role is to expand the range of possibilities and map out the pros and cons of each path forward. There are no guarantees in business or bankruptcy. But by planning and exploring options early, we can improve the chances of achieving the optimum outcome, whether that is a balance sheet restructuring, refinancing, asset sale, or orderly winddown.

Every situation is unique, but in my experience, these are the most critical triggers indicating that it may be time to hire an expert bankruptcy legal advisor. At the end of the day, directors and officers need to make decisions based on where they feel the company is heading and how much risk they deem acceptable. An independent expert advisor can provide the unbiased input needed to make an informed decision. Reach out for a free consultation to review your specific situation.