In-House Legal Department's Role in Managing Bankruptcy Risks and Costs
In times of economic crisis, reducing your exposure to bankruptcies is critical to your business survival. It can be difficult to know where to begin, however, as bankruptcies pose risks that are often scattered and obscured throughout large organizations. Communication and collaboration between legal, finance, and operations functions is vital to mitigate risks and reduce costs because different functions possesses unique expertise, knowledge, and business intelligence. For instance, legal can enforce creditor rights in state court or bankruptcy proceedings, finance can manage customer credit exposure and collections, and operations can identify threats to the supply chain and enterprise infrastructure. Bringing these diverse teams together can be challenging, particularly if they have functioned independently in the past and lack the technological tools to share their knowledge and workflows.
Legal departments can provide valuable assistance to other departments and business units by acting proactively. For example, legal can negotiate debt settlements, issue demand letters, or take legal action earlier in the collection process than done traditionally. Legal can reduce credit exposure by assisting finance in making proper reclamation demands, stopping goods in transit to insolvent companies, and determining whether to continue doing business with companies operating under bankruptcy protection. After a bankruptcy filing, legal can help repossess collateral by obtaining relief from the automatic stay, file administrative claims, ensure that defaults are cured when leases and contracts are assumed or assigned, and assert “critical vendor” leverage, where possible. Legal can help reduce credit exposure prospectively by negotiating better payment terms when dealing with suppliers, customers, landlords, tenants or other contract counterparties, including requiring increased assurances of payment and performance or more stringent default or termination provisions. Finally, legal can make sure debt repayments from potentially insolvent customers are structured so as to preserve defenses to preference liability in case the customer eventually files for bankruptcy.
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