I have been expecting the United States economy to enter a recession for some time now. Maybe this is because I watch the same news cycle as everyone else, with all of its sensationalist, doom-and-gloom forecasts. Maybe it was my experience representing businesses that struggled during the 2018 recession triggered by a housing bubble that seems eerily familiar to some parts of today’s economy.
So far, my expectations have been happily mistaken. In the long run, though, it’s likely that there will be a contraction affecting businesses. When this happens, it is important for the business to have counsel like Underhill Law that is experienced in helping navigate the creditor collection process.
One obvious course of action for a distressed business is to file bankruptcy. There are some advantages to this approach. A bankruptcy can promise unique finality to the business debt by discharging or eliminating it and blocking creditors by federal law from aggressive private collection actions. The filing of a bankruptcy usually results in an immediate stay of all collections. This makes it very effective in emergency situations such as, for example, if a creditor has a judgment and is pursuing the debtor business’ customers directly with garnishments. A bankruptcy also consolidates what could be many different collection actions into a single dispute and provides other advantages.
But, bankruptcy has disadvantages, too. To begin with, it is not cheap. A Chapter 11 bankruptcy, the kind of reorganization many people think of when they think of a business bankruptcy, is likely going to cost tens of thousands of dollars at a minimum. Not many attorneys in Colorado will handle a Chapter 11 filing compared to more common and cheaper Chapter 7 or 13 cases, so there is less choice in who to hire. Bankruptcy also requires surrendering some level of control of the business to a third party trustee or committee. This can disrupt operations and interfere with the businesses’ own claims.
Bankruptcy also gives creditors potential arguments they might not otherwise have, such as arguments that it was unfair for the business to pay some creditors ahead of others. When a business files bankruptcy, the bankruptcy court is allowed to assess whether certain creditors were preferentially paid during the time period before filing. If so, and the creditor got paid more than they would have in the bankruptcy, it is possible for the bankruptcy court to second-guess the payment, demand the creditor repay the money, and then redistribute the same. Creditors get less say in the order they are paid outside of a bankruptcy, at least in Colorado.
Sometimes, therefore, a business may not want to or be able to seek refuge in bankruptcy. If that happens, it ends up having to manage its dissolution and collection by its creditors privately. This is no easy task, but Colorado law does provide for some guidance on how this process should work. In a perfect world, the business would adopt a formal plan of dissolution and appoint someone to handle the wind-up process. This would involve assessing the company’s assets and debts and then coming up with an orderly plan to liquidate the assets and pay creditors and owners to the extent possible. This can, but does not have to be, a receiver appointed by a Colorado court. That approach has some advantages in formality and immunity because the receiver can be an officer of the court, but it usually also comes with increased costs in the form of receivership expenses and reporting requirements.
Whether the liquidation agent is a receiver or someone else, the wind up process should rationally categorize creditors so that any liquidation proceeds are paid in a particular order. A company might consider breaking creditors into categories similar to the different rights the creditors have, however. Categories might include:
- (1) creditors with security interests in specific property;
- (2) tax debts or other debts to the government;
- (3) wages, payroll, worker’s compensation, or other payments protected by statute;
- (4) attorney or accountant’s fees necessary to manage the wind-up process;
- (5) creditors with personal guarantees;
- (6) vendors, insurance, or other operating expenses that must be paid to close out accounts receivables in progress;
- (7) unsecured general creditors; and so on. A company has more flexibility to define a creditor’s priority ahead of time by the United States Code, the categories and priority assigned in a private dissolution.
A company can also provide notice of the dissolution with the Colorado Secretary of State. While technically this means the company should only continue operating for the purpose of winding up its affairs, the mere dissolving of a company doesn’t automatically prevent creditors from suing or collecting on their debts. For that, the company should make sure to send notice to the creditors in compliance with the application Colorado statute, C.R.S. § 7-90-911. If proper notice is provided, then creditors normally only have two (2) years to pursue claims against the company.
This can be shorter than some other statutes of limitations like those for breach of contract or suit on an open account. To take advantage of this, however, the company needs to have a good handle on what creditors exist so that the necessary notice can be sent out.
The Key Differences
Doing a private dissolution instead of a bankruptcy is not just more complicated for the company in terms of managing the liquidation and creditor payments. It is also requires a business lawyer, like Underhill Law, that has experience in dealing with creditor disputes. Whereas a bankruptcy tends to funnel creditors into a few predictable arguments, private collections practice is only limited by the attorney’s creativity. This means corporate counsel needs to be ready to deal with aggressive creditors trying to attack the process or get more than their fair share of assets.
This is of course just a short discussion of the issues involved in corporate dissolution, but hopefully you get the point: bankruptcy is not the only way to resolve creditors in the case of a failing business.
We’re Here To Help
If your business finds itself unable to operate and needs help handling creditors outside of a bankruptcy, you are welcome to call Underhill Law, an experienced Denver business lawyer, to see if we can help you.