What Executives Should Expect in the First 30 Days of a Chapter 11 Case

The first month of a Chapter 11 case can be the most demanding phase. Company executives must secure access to cash, protect essential business relationships and establish the strategic direction of the case. Decisions made during the first 30 days can ultimately determine whether the company continues operating and regains its momentum or enters into financial decline.

Much of the work begins before the Chapter 11 petition is filed. Executives, with assistance from their bankruptcy counsel and financial advisers, need to identify immediate cashflow needs and anticipate concerns from lenders, employees, vendors and customers.

Once the petition is filed, the company typically lodges a series of first-day motions seeking permission to continue activities that are essential to its operations. These motions can relate to:

• Obtaining authority to use cash collateral — If a secured lender has an interest in the company’s cash, inventory proceeds or accounts receivable, those funds may be considered cash collateral. The company generally cannot use that money without the lender’s consent or the bankruptcy court’s approval. Executives may need to negotiate an agreement that permits necessary spending while providing the lender with reasonable protection.
• Securing DIP financing — When available cash will not support continued operations, the company may seek debtor-in-possession (DIP) financing with court approval. That can provide access to urgently needed funds before a final hearing is held. Executives should carefully evaluate the proposed interest rates, fees, liens, operating restrictions and deadlines.
• Obtaining authority to pay employees and critical vendors — This relates to wages, benefits and related obligations that accumulated before the filing. Executives should be ready to answer employee questions about payroll, benefits and job security. The company may also need to seek authority to pay claims held by critical vendors, but it generally must show that the vendor is essential and cannot be replaced without harming operations.
• Maintaining insurance and utilities — Leadership should confirm that essential insurance policies remain current and that the company can continue paying the premiums. The company must also address any adequate assurance requested by utility providers. A disruption in electricity, water, internet or another necessary service could bring operations to a standstill.

Another important priority is to establish a 13-week cash-flow budget. This should track expected weekly receipts and disbursements, including payroll, inventory, rent, taxes, professional fees and debt-related payments. It must be based on reliable operating information. Lenders, creditors and the court will use the budget to evaluate the company’s liquidity and capacity to emerge solvent from Chapter 11. 

The first 30 days are intense because the company is doing more than adjusting to its new operational realities. It is establishing the funding, stakeholder support and financial discipline needed for the restructuring to work. An experienced Chapter 11 attorney can help a debtor company use this period to stabilize the business and create a workable foundation for the future.

The Law Offices of Michael Jay Berger in Beverly Hills helps business owners throughout Southern California navigate the Chapter 11 bankruptcy process. Schedule your free initial consultation by calling 310-271-6223 or contact us online.