One Company Emerges From Bankruptcy

Having explored many of the options available to a company that is experiencing dire financial problems, including out-of-court workouts, hiring financial management companies, and even filing for various types of bankruptcy, I decided to take a look at one company that has gone through a bankruptcy and emerged from the proceedings.  I looked at several different companies, but decided to examine Delphi Corporation for this entry.  I chose it for several reasons, but the most important was that I was formerly a contract employee for them in the Dayton area.  I was able to watch as the company worked its way through the bankruptcy proceedings.  During this time, I found Delphi to be quite open about their progress through the bankruptcy proceedings, and also managed to continue to meet some of its responsibilities to its employees, retirees, and society at large.  Even though I was eventually laid off, the company itself did eventually emerge, trying its best to become a better company.

In a press release dated March 31, 2006, Delphi outlined its plan for emerging from its Chapter 11 bankruptcy proceedings (for the complete text of the press release, please go to: http://delphi.com/news/pressReleases/pressReleases_2006/pr75605-03312006/).  Delphi stated that it would continue negotiations with U.S. unions and with General Motors, from which it was spun off, which had as its goals to move the company towards consensual agreements that would give Delphi a competitive labor cost structure.  It also wanted to initiate a “dual track” Bankruptcy Court process with which it hoped to be able to reject both some collective bargaining agreements and some unprofitable contracts it had with General Motors in order to help it restore profitability.  Delphi looked to retain and grow what it had identified as its core businesses while selling off or winding down those businesses it had identified as non-core.  Core businesses Delphi has identified included the following automotive facilities in the U.S.:  Brookhaven, Mississippi; Clinton, Mississippi; Grand Rapids, Michigan; Kokomo, Indiana; Lockport, New York; Rochester, New York; Warren, Ohio; and Vandalia, Ohio.  At these facilities, Delphi stated that they want to improve productivity, restructure their product lines, and reduce and restructure the workforce.  To achieve these goals, Delphi stated it would allocate the necessary capitol and resources.  It also hopes to maintain its commitment to developing technology that would help keep it at the cutting edge.  Delphi would reduce its global salaried workforce by 25% through various means.  Finally, Delphi would try to retain its hourly and salaried defined benefit pension plans, but freeze them by the end of 2006.  It would also attempt to implement competitive benefit packages for its current workforce.  .

Delphi did spend four years in Chapter 11 protection, but eventually was successful in emerging from it in October 2009.  Even though it did try, Delphi was unable to meet all of its stated goals during its bankruptcy proceedings. In an article from the New York Times dated January 11, 2011, a new plan, approved by Delphi’s board, is outlined (the full text of this article can be found at http://topics.nytimes.com/top/news/business/companies/delphi-corporation/index.html).  In this new plan, Delphi’s debtor-in-possession lenders, who loaned $3.4 billion to keep Delphi operating during the bankruptcy, would take over most of Delphi’s assets.  The lenders would also forgive their loans in exchange for taking control of the company.  Delphi would still have pension obligations, some of which have been, or will be, transferred to G.M..  Also, General Motors, in the midst of its own reorganization, asked the federal government to allow it to use $2.8 billion in borrowed funds to assist Delphi.  In October 2009, G.M. stated it received $1.7 billion to buy an interest in a reorganized Delphi.  G.M., in addition to taking over some of the pensions from Delphi, also took over several of Delphi’s businesses, including the steering business.  .

However, not everyone connected to Delphi benefited from its emergence from bankruptcy and its deals with creditors and with General Motors.  In an article from the Detroit Bureau, what Delphi did with their pensions as part of its bankruptcy program, are examined (For the full text of this article, please visit http://www.thedetroitbureau.com/2011/06/former-car-czar-will-testify-about-abandoned-delphi-pensions/).  As part of the deal, the pension program run by Delphi was abandoned.  This pension program covered about 70,000 retirees; many of whom have lost as much as 65% of their benefits.  The Pension Benefit Guaranty Corporation, an agency formed to assume control of failed pension programs, will cover $6.1 billion of the $7 billion the program was underfunded by, making this the second largest failed pension program assumed by the company. 

Delphi has done what it has had to do in order to emerge from its Chapter 11 bankruptcy as a better, stronger company.  In my first post, I stated that a company’s first duty to itself is to make a profit.  Without this, it cannot do much else.  While Delphi has cut much of its workforce,  many of its U.S. facilities, and much of its pension obligations, it has still managed to continue to operate.  While it was in bankruptcy, Delphi met all of the Sarbanes-Oxley requirements, as well as meeting and maintaining ISO 9000 and ISO 14000 standards.  Also, as it emerges and works to become a profitable company, it also maintains many philanthropic, socially responsible programs.  For a complete list of these efforts and a description of them, please visit http://delphi.com/about/social/community.  It has also taken care of the facilities it has chosen to not keep.  In the Dayton area we have seen the sale of three former Delphi facilities and at least the maintenance of a fourth.  These facilities have not become eyesores, but are being turned in to (hopefully) viable new businesses.  While Delphi is not perfect, and it has been true to itself by trying to become a profitable company again at the expense of some communities, employees, and retirees, it has worked its way into becoming viable once again.

Business Bankruptcy Options

Sometimes, especially in this economy, there seems to be no choice for a business but to file for bankruptcy.  After it has explored all of its options, perhaps even trying a few, it reaches the sad conclusion that it has no other choice, then the company should look to filing for bankruptcy.  However, a company should educate itself about all aspects of business bankruptcy in order to make sure they are doing the best thing and are filing the right type.  They should contact an attorney so that all of the proceedings are conducted properly and nothing is left to chance.  Making the right choices about bankruptcy can have a positive impact on the future of the business, can help the business avoid other legal action, and assist it in emerging from bankruptcy reorganized and ready to be rebuilt.

            One article I found gives some good background information on bankruptcy.  The article, About Business Bankruptcy by William Pirraglia offers some basic information about business bankruptcy, and is a good starting point for gathering information.  Bankruptcy in the United States, which was meant to provide both businesses and individuals a fresh financial start, began in 1800, but has undergone several major changes over the years, with the version we use today being made law in 1898 with the Nelson Act.  There have been several more changes in this and the last century to finally arrive at what laws we have today.  Many people have the misconception that a business that files for bankruptcy will simply disappear, never to be seen or heard from again.  While this does happen to some companies, most will emerge from bankruptcy reorganized, and ready to do business again.  Filing for bankruptcy protection can allow a company to not only get a handle on its financial troubles, but it can then emerge as a better company than before.  The complete text of this article can be found at http://www.ehow.com/about_4568082_business-bankruptcy.html/.

            Another article I found, Small Business Matters:  Bankruptcy Options for the Small Business Owner by Jennifer D., gives more information about the types of bankruptcy available for businesses.  The first type is a Chapter 7, or liquidation, where all of a business’s assets are sold off and the proceeds distributed to its creditors.  This type basically ends the business; there is no provision for reorganization and is most appropriate for sole proprietorships and small businesses.  The next type is a Chapter 11, and is filed for when a business has a plan for future recovery.  It is a very complex process, and the business can expect to be watched very closely afterwards.  The third type is a Chapter 13, where the business files a repayment plan with the bankruptcy court.  From this type of bankruptcy, a company can emerge, and it also protects personal assets if they are tied into the business.  The final type of bankruptcy covered by the article is a Chapter 12, which is designed for use by family farmers.  In this type of filing, a business proposes a repayment plan to its creditors that covers three to five years.  The complete article can be found at http://community.sba.gov/community/blogs/community-blogs/small-business-matters/bankruptcy-options-small-business-owner/.

            As with anything, the more you know about something, the better off you will be.  By knowing what types of bankruptcy are available for businesses, you can make an informed decision that can have a positive impact on your future business activities.  Business bankruptcy does not have to mean the end of a business, it can be used to help the business emerge stronger than it was before.  Of course, an attorney should be retained by the business to advise it of its options and to correctly perform all of the tasks necessary to file.  Business bankruptcy does not have to be the end of the world, but the more that is known about it, the better off the business can be.

Debt Management Plans

A business should explore all of its options before considering and filing for bankruptcy, both for itself and as part of its social responsibility.  If a business can stay in business then it can continue to contribute to the economy, maintain at least some of its employees, continue to pay taxes, and possibly continue its social programs.  As I talked about in my last entry, one of the options available to a struggling business is an out-of court workout with a business’s creditors.  This option, if exercised properly, can really have a positive effect on the business, enabling it to turn around and become profitable.

             A web site I found that explores this option more in-depth is called Small Business Bankruptcy Information and can be found at http://smallbusinessbankruptcyinfo.com/.  This site provides some great information on the out-of-court workout option and reviews of several companies that a business can hire to provide a Business Debt Specialist that will help the business come up with a good plan.  The idea behind this option is for a business to negotiate with their creditors new and manageable terms so their debts can be paid and the business can continue.  If a business does declare bankruptcy, then everyone involved is negatively affected, from the business itself, its employees and society, and even its creditors.  By following this option though, everyone can benefit.  The process itself can be very complex, and a business must make sure it wants to succeed by working hard on its new business plan.  However, one pitfall with this option is the large number of companies that offer debt management services, many of which only seek to take advantage of a business in a dire financial state.  This website, therefore, provides a list and reviews of some of the best debt management companies available, all of which have a proven track record in working with business creditors to come up with a workable plan.  All of the companies reviewed on this site offer a free, no obligation consultation.  Each company also charges a fee for their services that are based on a percentage of what they save the business on its debts.

             A business can help itself out of its financial troubles by first finding a reputable debt management company such as the ones on the website and, by working closely with them, arrive at a workable plan to satisfy everyone and turn the business around.  Creditors are very likely to go along with one of these workout plans because they will receive money than they might if the business filed for bankruptcy protection.  These plans can also help to turn a business around and begin to show profits again.  By successfully starting and following a workout plan, a business can not only help itself and its employees, but also its creditors and society at large.  The business can continue its functions and end up better off than it was before.

Alternatives to Bankruptcy

If a business, especially one nearing bankruptcy, is concerned about its wider social responsibilities, are there any actions it can take and still serve its primary goal of making a profit?  The short answer is yes.  There are several options available to a business considering bankruptcy, the exercising of which may not only save the business and even help turn it to the red, but also allow it to continue to meet its obligations to its employees and responsibilities to the surrounding community and society at large.

             The article “Alternatives to Declaring Business Bankruptcy”, by Lei Lei Wang Ekvall and Evan D. Smiley, is an excerpt from their book “Bankruptcy for Businesses”, and offers up two alternatives businesses should explore before making the decision to enter bankruptcy proceedings.  The first alternative they offer is an out-of-court workout.  With this option, a business tries to alleviate their financial problems by working out an agreement with its creditors without using a court.  The agreement the business and its creditors arrive at is not limited by any statute or case law, it depends entirely on what the business can come up with and the willingness of the creditors to accept it.  This option can take the form of working out a solution directly with the creditors involved or finding another lender to finance the pay off of the original creditors.  In either case, a business should create a plan that shows it is able to continue to not only stay in business, but show a profit.  Towards this end, a business could look at hiring a financial/turnaround consultant who could provide invaluable assistance in turning the business around and making it profitable again.  Whatever the business decides, it should be prepared for negotiations with its creditors, and this will include opening up its books and keeping everything it does above board.  Its continued existence and ability to do business depends on these actions.

            The second alternative the article offers is more drastic than the first option, more like an actual bankruptcy, but with some important differences.  This option is referred to as assignment for the benefit of the creditors, which is a liquidation of a business’s assets under state, instead of federal, law.  With this option, a business is not seeking to restructure itself, but to sell, or liquidate, its assets, under state court supervision, in order to pay off its creditors.  If this option is chosen, an assignee, instead of a bankruptcy trustee, is selected to oversee the process, and this individual acts as a fiduciary to the creditors and not to the business.  This means that the assignee works to sell the business’s assets at the highest possible price in order to satisfy the creditors and not the business.  If there is any interest left after the liquidation that has not been used to pay the creditors and the fees involved with this process, then they are given back to the business.  This method does offer greater flexibility than a federal bankruptcy, but the business is still being forced to liquidate its assets in order to pay off its creditors and, consequently, go out of business.  Still, there may be something left over once creditor accounts are taken care of to help the business fulfill at least some of the responsibilities it has identified.  (The full article is available at:  http://www.entrepreneur.com/management/legalissues/legalcenter/article191794.html).

             A business owes it, not only to itself, but also to its employees and the community, to explore any option that may be available in order to avoid a bankruptcy.  By educating itself about these options, a business would have available a means by which it could turn itself around and become profitable again.  By fulfilling this obligation to itself, the business would then be better able to meet its goals of social responsibility.

Social Responsibility

What kind of responsibility, if any, does a company have to society at large in the current economic climate?  Does a company forced into bankruptcy proceedings have any responsibilities?  These are the kinds of questions I will explore in this blog.  I think that a company does have a responsibility to not only its employees, but also to the community where it is located and even to the environment.  Some of these are obvious, such as paying their employee’s wages, providing a clean, safe working environment, and having a positive impact on the surrounding communities.  However, beyond these responsibilities, it becomes less obvious, moving into a grey area that is more what is nice to do as opposed to what must be done.

In an article by Jack and Suzy Welch entitled “Corporate Social Responsibility in a Recession” these issues are explored.  The subtitle of the article, “Struggling companies have no choice but to recalibrate their philanthropy”, gives some clue as to the focus of the article.  Basically, a company, especially in rough economic times, has a responsibility to itself to make a profit.  That is the main reason they are in business in the first place.  In fact, the company cannot do anything else which may be considered socially responsible without first satisfying this requirement.  This may seem harsh, but the fact remains that a company not making a profit cannot in turn give money away.  A company that is showing a profit provides jobs, pays its taxes, and helps contribute to the economy at large.  This helps to satisfy at least some of the social responsibilities a company can be said to have, so just by staying profitable a company does contribute.  The article goes on to list some alternatives to continued social giving, such as reduced amounts for social programs or giving away to a smaller group of programs, all aimed at keeping a company in business and still satisfying its social goals.  (The full article can be read at: http://www.businessweek.com/magazine/content/09_22/b4133000801325.htm/)

What about businesses who are no longer profitable and are forced into bankruptcy proceedings?  Do they still have any kind of responsibility to society?  First, they have obligations to their creditors, then to their share holders, and finally to their employees.  These are legal issues and will be examined more closely later.  But what about to the rest of society?  I think they do.  If the company is forced to abandon its facilities, it should maintain it in some reasonable fashion, like making sure the grass and weeds are cut, the facility itself is not falling apart, and that it remains secure.  The abandoned facility should not be an eyesore in the community, and it should not present a safety hazard.  Doing these few things can prevent a community from suffering unduly from a company’s bankruptcy; the community is already going to suffer economic hardship due to loss of jobs and loss of taxes, so why should it also suffer further?

Businesses in these hard economic times, even those in the bankruptcy process, can still have a positive social impact.  It might not be as great as when times are better, but it can still be there.  Not only is this the right thing to do, but it helps to instill good will with the public and help to increase a company’s profits and ease of doing business.