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Read MoreWhen a business faces insolvency, the path forward is rarely straightforward. Should the company file Chapter 11 in hopes of reorganizing? Should it liquidate under Chapter 7? Would an assignment for the benefit of creditors (ABC) or a court-appointed receivership make more sense?
These options dominate conversations around distressed businesses—but they are not the only choices.
For many companies, including those with private equity backing, an out-of-court winddown provides a compelling alternative. Done properly, it offers speed, discretion, control, and the potential for higher recoveries than formal bankruptcy proceedings. This article examines the reasons why out-of-court winddowns may be a preferred alternative over bankruptcy for private equity sponsors, lenders, and boards of directors.
Key Takeaways for Sponsors & Lenders
Why consider an out-of-court winddown?
- Preserve control.
- Maintain privacy and protect reputation.
- Deliver equal or better creditor recoveries compared to bankruptcy.
- Ensure faster resolutions with lower costs.
- Reduce personal liability risks through careful planning.
Bankruptcy is often described as a “glass box.” Once filed, the company’s financial state becomes public record. Creditors, competitors, suppliers, and the media gain immediate visibility into the extent of distress.
For stakeholders, this transparency has costs, especially as it pertains to reputational risk:
By contrast, an out-of-court winddown offers privacy. Creditors, vendors, and employees are engaged directly, but the process can remain outside the headlines. For many boards and sponsors, this discretion is as valuable as the financial outcomes.
Market volatility, rising interest rates, and tighter credit conditions have made refinancing or restructuring debt more difficult. Private equity firms, in particular, face mounting pressure to manage underperforming portfolio companies efficiently.
Out-of-court winddowns are gaining traction because they:
As economic conditions remain challenging, these practical benefits are likely to make out-of-court winddowns a viable consideration.
To understand why out-of-court solutions matter, it helps to compare them against traditional paths:
This comparison underscores why out-of-court approaches resonate with boards, lenders, and sponsors who value discretion and control.
Handled correctly, out-of-court winddowns can deliver superior results equal to bankruptcy. Key advantages include:
For landlords, vendors, and lenders—groups that often face capped or diluted claims in bankruptcy—the flexibility of an out-of-court solution can result in significantly higher recoveries in a quicker timeframe.
An out-of-court winddown is not an ad hoc exercise. Advisors typically follow a structured approach to maximize value and reduce risk.
1. Assessing Cash and Obligations
The first step is to understand available cash and, separately, outstanding liabilities. Advisors attempt to follow creditor priority rules where possible, but with flexibility to strike settlements.
2. Strategically Marshalling Assets
Assets must be identified, marshalled, valued, and liquidated strategically. This may include:
3. Negotiating Settlements
Advisors often present vendors with structured options:
4. Making Strategic Project Decisions
Companies must determine whether to complete or halt projects:
Out-of-court winddowns allow PE funds to manage portfolio exits discreetly, avoiding headlines that could complicate future fundraising.
Lenders often prefer out-of-court solutions that minimize administrative costs and deliver faster recoveries. When handled transparently, these processes can preserve collateral value more effectively than bankruptcy.
Retaining control over the winddown allows boards to retain control, manage reputational risk, and minimize personal liability.
Employees face uncertainty in any winddown, but transparent communication and timely payment of wages and benefits (and vacation and contractual severance) reduce the risk of litigation.
It is often possible to demonstrate superior and quicker recovery to vendors and landlords in an out-of-court process.
An out-of-court winddown requires careful legal navigation. Key considerations include:
Working closely with experienced advisors and legal counsel ensures that the process is both defensible and effective.
For boards and sponsors considering this path, several best practices stand out:
Why don’t more companies pursue out-of-court winddowns? In part, because it is uncharted territory that does not have established or uniform “rules.”
Restructuring advisors, by contrast, specialize in guiding companies through out-of-court options. They bring:
In short, the right advisor can mean the difference between a chaotic shutdown and a controlled, value-preserving winddown.
Out-of-court winddowns are not a cure-all. Some companies, particularly those with litigious creditor bases or highly complex debt structures, may still require court-supervised solutions.
But for many boards, lenders, and private equity sponsors, the out-of-court path offers an elegant alternative to the rigid, costly, and public nature of bankruptcy.
When facing the inevitability of closure, discretion, control, and efficiency matter. Out-of-court winddowns provide all three.
Consider engaging experienced advisors to evaluate whether this approach is right for your situation—and to guide the process toward a dignified, value-maximizing conclusion.
Michael E. Jacoby, CTP, is a Senior Managing Director and the Strategic Advisory Practice Lead at J.S. Held. He joined J.S. Held in October of 2023 as part of J.S. Held's acquisition of Phoenix Management Services. Michael is a skilled executive with extensive operating, turnaround, restructuring, and M&A experience. He has served in advisory capacities as well as an independent director, Chief Restructuring Officer (CRO), and interim manager for more than 400 Phoenix Management Services clients in various industries.
Michael has been instrumental in assisting numerous clients with their financing and divestiture needs. His areas of expertise include crisis management, business strategy, cash flow management, control, and forecasting, workflow and project management, business wind-downs, customer service improvement, inventory management, business and collateral valuations, and sales/marketing reinvigoration.
Michael can be reached at [email protected] or +1 610 888 9704.
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