110,000 Travelers Stranded Abroad After Airline Declares Bankruptcy

Although other countries have attempted to emulate the American bankruptcy system, few can replicate it. Consider the recent bankruptcy of Britain’s Monarch Airlines. The company collapsed so suddenly and completely that 110,000 travelers were stranded abroad, and the government had to charter special flights to bring them home.

While it is possible that something like this could happen to an American company, it is rather unlikely. Even businesses that face a very bleak financial future can use our country’s bankruptcy system to wind down operations rather than halt them abruptly.

Under United States law, troubled businesses can also avoid shutting down by going into receivership. Receivership is a close cousin to bankruptcy in that it allows a troubled company to keep operating as it looks for a buyer or winds down operations. As a bonus, it is generally faster and cheaper than going through bankruptcy, while still offering the company an opportunity to get a business’s fiscal house in order.

Receiverships are not voluntary. Instead of a company filing for receivership, a creditor can ask the court to appoint a neutral third party called a receiver to take over a debtor’s company and keep it running long enough to pay off the creditor.  

Instead of liquidating all assets like would be done in a bankruptcy, a receiver can help a company seek buyers who are willing to pay top dollar for part or all of the business. The fact that a business in receivership is being overseen by a neutral third party also reassures those the troubled business is working with, so additional credit is often offered as deals are renegotiated.  

Receiverships are also a good option when a creditor suspects the debtor company is committing fraud, has breached their fiduciary duties, or is operating a Ponzi scheme. The receiver is a neutral third party, so they can step in and help victims of the debtor by keeping the business running or by preserving assets while a criminal or civil investigation is ongoing.

There are people that specialize in being receivers and helping turn companies around or wind them down. Our firm helps businesses find such people, and advises such people on legal issues in the companies they are overseeing. We also work with businesses who are in receivership.

Bankruptcy’s Ripple Effect

We often warn that one business filing for bankruptcy can spark a chain reaction. We are seeing this bear out in the Toys “R” Us bankruptcy. The entire toy industry is in a tight spot because of the retailer’s decision to file for bankruptcy.

According to the Washington Post, “Toys “R” Us owes $7.5 billion to a group that includes virtually every major toymaker in the country: Mattel (owed $136 million), Hasbro ($59 million), Spin Master ($33 million), Lego ($32 million), Radio Flyer ($12 million), Crayola ($2.6 million).”

These and other toymakers must now decide what their relationship with the last “big box” toy store will be like going forward. Some of the bigger companies are reducing the orders they will ship to Toys “R” Us or asking for cash on delivery. Others are optimistic that a restructuring will make the company stronger than ever and help it compete in the digital era. Some smaller companies have chosen to cut ties with the retailer. And everyone is looking ahead to the holiday season, when Toys “R” Us takes in 40% of its yearly profits.

What Toys “R” Us’s suppliers decide to do will have a huge impact on the company’s ability to make it through the Chapter 11 process successfully. If the suppliers ship less, or stop doing special products for the company, and then because of that Toys “R” Us has a bad holiday season, that is going to ripple back to the supplier. Each business is truly part of a chain that is only as strong as its weakest link.

Our firm helps all sorts of companies make difficult decisions about what to do when a supplier or customer’s financial difficulties are impacting their own balance sheet. Because corporate workouts have been one of our specialties for so long, we have seen it all. There is rarely a business situation that we have not helped a client deal with before. This allows us to give our clients legal advice that is informed by the real world, instead of a solution that will work “in theory.”

We work with our business clients on both short term and long term solutions to their problems because we understand that business is cyclical. Problems need fixed today, but if you don’t address the underlying causes of the problem, you are going to be dealing with the same issues in a few months.

If you are looking for an attorney to help you deal with the ripple effects of a bankruptcy in your industry, we are ready to help.