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October 1, 2004

5 Min Read
Bankruptcy battles

Changing laws and perceptions are altering insolvencies on both sides of the Atlantic, but two constants remain: Rising interest rates put credit-dependent processors at risk, and forcing payment from a newly bankrupt customer still poses a variety of legal headaches.

As interest rates creep upwards, plastics processors face bankruptcy threats on two fronts: Their own revolving credit terms will become too punitive and, lacking cheap money, they''ll be unable to pay bills; or their customers'' credit terms will force bankruptcy on their end, potentially leaving processors in the lurch if they haven''t been paid for products delivered or services rendered.

Harmonization, new options in EU

In Europe, these potential scenarios are played out against recently enacted regulations that aim to harmonize disparate insolvency procedures, which vary from country to country, and also attempt to make reorganizations on the model of the U.S.''s Chapter 11 a more palatable option for distressed companies.

In May 2002, the EU enacted the European Regulation on Insolvency Proceedings, which was created to resolve differences in cross-border bankruptcies. Last September, the United Kingdom passed the Enterprise Act, which has granted investors and company management greater power to reorganize a company, instead of leaving the task primarily in the hands of creditors or banks, which were more likely to carve up the company.

According to a report in The National Law Journal, Britain''s action, and similar ones elsewhere in the EU, come as bankruptcies have increased in recent years, up 16% in Germany, 11% in France, and 7% in Britain in 2002.

Peter Declercq and Janet Bellwood of the law firm of Akin, Gump, Strauss, Hauer & Feld (London) say the laws are a start toward alleviating the situation in these early stages. "On a substantive law basis," Declercq says, "you still need to look at each individual jurisdiction, which makes it much more cumbersome than in the U.S. So although it''s a step in the right direction to try to harmonize the procedural aspects of cross-border insolvency, there''s quite a bit to go to get to a Europe where the insolvency laws are materially harmonized."

Bellwood points out, however, that the Enterprise Act, which aims to make it easier to obtain administration and therefore reorganize, has already proven effective according to statistics from the U.K. Dept. of Trade and Industry, which released data that showed formal liquidations are down 17% and restructurings are up 135% for Q2 2004.

"I think overall there''s a lot more being done informally to try to save businesses, as opposed to rushing off and signing liquidation proceedings," Bellwood says. "You can''t say to a company that liquidation is the natural course to take to bring things to an end."

Across the pond, meanwhile...

In the U.S., bankruptcies for public companies have been in decline since 2001, when a record 257 businesses filed, falling to 189 in 2002 and 133 in 2003, according to the Phoenix Forecast, produced by accounting firm PricewaterhouseCoopers LLP. For 2004, the firm is forecasting that 110 public companies will file, with metal, machinery, electronic product, and transportation equipment manufacturers facing heightened risk.

>From his Dallas office, Keith Miles Aurzada, also of Akin, Gump, Strauss, Hauer & Feld, has seen plenty of plastics processors under the financial gun.

"I think there''s going to be plenty more processor bankruptcies," Aurzada says, "especially as interest rates rise because a lot of people right now have survived based on the fact that they''re getting cheap money out there with revolving credit facilities, and if interest rates rise, that money isn''t going to be so cheap. It''s going to make it much more difficult to make vendor payments, much more difficult to buy supplies."

Protecting your assets

For companies on either side of the ocean whose own credit is fine, but whose customers are a risk to go under with outstanding tabs, there are some steps processors can take to protect themselves. In the U.S., Aurzada says processors should consider credit forms and strong contractual agreements.

The first step is to determine what goods were delivered in the 10 days before a customer filed for bankruptcy. These can be recovered with a written demand for reclamation. If bankrupt companies want to keep the delivered goods, suppliers can use an administrative claim to be paid in full before the customer reorganizes.

Another option, a lien, can give suppliers the ability to foreclose on a customer in order to force payment. For companies trying to reclaim goods in that 10-day window, they should file a proof-of-claim federal form that verifies the indebted amount.

In Europe, a center of main interest must be established, which can be tricky for multinational companies, but is being eased by the new law. Obviously payment up front would eliminate any problems, but short of that, processors can file for reservation of title, which allows a processor to withhold ownership of their product until payment. This is somewhat difficult within plastics however, since processors often only supply a component instead of an entire product.

"It''s a lot harder in the plastics industry where it''s a product that''s been incorporated, blended into something else," Bellwood says. "There have been cases in the U.K. to say, ''my product forms 60% of that new product, therefore I should get 60% of the value of the new product,'' but that''s very hard to establish."

Tony Deligio [email protected]

Contact information

Akin Gump Strauss Hauer & Feld  

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