In a previous blog post, we discussed how Chapter 11 bankruptcy can ultimately benefit businesses that are struggling financially. While there's no doubt that, in many circumstances, Chapter 11 truly is the smartest and best option for some businesses, that's not to say that creditors will agree.
The purpose of Chapter 11 bankruptcy is to allow a business time to come up with a plan for how to improve its current and future financial outlook and viability. A major part of this process involves negotiating existing debts down or attempting to eliminate some debts altogether.
Unlike personal bankruptcies where unsecured creditors are essentially powerless with regard to the approval of or say in a bankruptcy proceeding, in Chapter 11 cases the largest unsecured creditors can play an integral role in shaping and approving a business' restructuring plan. Under certain circumstances, creditors in Chapter 11 cases may also choose to pursue legal action against a business and related individuals and entities.
Earlier this year, electronics retailer RadioShack filed for Chapter 11 bankruptcy protection. Soon thereafter, the company won court approval of its restructuring plan which included the purchase of the company by hedge fund Standard General LP, a deal which is at the center of a recent lawsuit which was filed by several of RadioShack's largest unsecured creditors.
In the lawsuit, the creditors blame the company's former CEO and board of directors for failing to take timely steps to avoid bankruptcy. The lawsuit also names as defendants Standard General, LP and one of its shareholders as well as Wells Fargo for their roles in what the plaintiffs charge was a rigged buyout deal.
For businesses that are dealing with unmanageable debts, it's important to consult with an attorney far in advance of any bankruptcy filing. Doing so can help ensure that a business is taking the appropriate steps to avoid possible future legal action by creditors.
Source: The Dallas Morning News, "Creditors sue former RadioShack stakeholders," Maria Halkias, Aug. 31, 2015