Q&A: Catching a Break When You're Broke

Attorney Jeffrey Grody shares some of the wisdom he gives to small-business clients at the end of their financial rope -- tactics that can keep a floundering business out of bankruptcy court

This time last year, lawyer Jeffrey G. Grody of Day, Berry & Howard in Hartford, Conn., was working on a lot of financing contracts for startup companies and their investors. Now, with many of yesterday's startups floundering in the current slowdown, Grody spends much of his time advising companies facing insolvency. In an interview with BusinessWeek Online reporter Theresa Forsman, he discussed what these companies are up against and how they can help themselves.

Q: What's the difference between insolvency and bankruptcy?


When a company is unable to pay its bills, it's insolvent. Some survive. Some don't make it. But often the problems are worked out without the company ever going to bankruptcy court.

Q: There can't be an easy way to deal with insolvency.


Someone on the receiving end of phone calls from people demanding money is usually panicky and very unhappy. The last thing they are likely to perceive is that they can actually negotiate with these people. They are panicking that the creditors will throw them into bankruptcy. They'll never do that if you handle it properly.

Q: What's the proper way?


You need to deal with your creditors as a group and treat them the same. It's human nature to throw money at the creditors who are most aggressive, but you should treat them all equally. The basic message you need to get across to people is: If you work with us, we will pay you more than if you don't work with us.

Q: And how do you get that across?


There is an art to saying, "I can't meet my obligations to you. I'm very sorry, but here is why you'll be better off if you work with us." Renegotiating contracts with investors or with creditors is very painful. A lot of times, it's unsuccessful. Everyone needs to understand that the company will not survive unless one or more [of the parties involved] makes concessions. The ability to persuade rests on credibility, and troubled financial situations offer numerous opportunities to destroy credibility.

Q: Haven't you lost credibility if you can't pay your bills?


Insolvency isn't always management's fault. Often, it is. The first rule of survival for a company in financial distress is to retain control. Being in control means being the generator of solutions. This is a difficult role for most companies to play...because, generally, it is the company's inability to meet the expectations it created that caused the financial distress in the first place.

Q: It sounds as if the bottom line is: Be straight with people.


Obfuscation doesn't work well in the context of insolvency. The person who is taking calls from unpaid creditors is going through hell. He doesn't really have any good answers, so he makes a promise he can't keep, such as "I'll pay you next week." It makes the caller go away, but he has made a commitment he can't keep. Don't accept credit from people you won't be able to pay. Don't promise payment that you can't make. If you've given them three different dates on which you'll pay, and you miss them, they're going to be less likely to work with you. If people are suspicious, they tend to move toward unilateral, unhelpful actions. Those are the times when involuntary bankruptcies happen.

Q: "OK," [the executive says,] "I'm going to be credible." What's the best way to let people know?


Do a general mailing to all creditors. Tell them your situation. Explain that if they all attack you, they will get nothing. If they work with you, their chances are better. I counsel clients to be very, very, very careful about what they threaten to do. You never want to limit your flexibility by giving a threat. You are telling creditors to act in their own self-interest or they're going to lose.

Q: And negotiating with company management is in their self-interest?


If the company survives, they have a better chance of getting something. The essence of dealing with financially distressed situations is negotiating. And remember, those who are asked to make concessions are entitled to be unhappy about it. It is important to acknowledge this by appropriate behavior and by offering consideration in exchange for their give-ups.

Q: Consideration? If I'm insolvent, what consideration can I give them?


Often, all creditors can have is the increased prospect of getting something back if they work with you.

Q: What if the company doesn't have a prayer of paying anyone?


If the company doesn't have a prayer, the responsible thing to do is to sell the company or liquidate it. And it's better -- faster and cheaper -- to liquidate outside the auspices of the bankruptcy court.

Q: What if the person to whom you did not meet your obligation is a venture capitalist?


The lawyers who serve the VC community don't have the right instincts in insolvency situations. When things don't go according to the financial plan, the VCs either lose interest rapidly or behave in all the wrong ways. Often, they are on the board of directors and decide to run things. It's very dangerous for directors to start playing management roles because they've lost confidence in management. All kinds of trouble, including personal liability, can come from doing that. Also, typically a board of directors thinks of itself as having a fiduciary responsibility to shareholders. In insolvency, their first duty shifts to creditors.

Q: How's your business?


It's a lot busier than our clients would like. I'm happy to be busy, but I'm not happy for the clients who need this type of service. A year ago, there was essentially no insolvency counseling. Now, it's about a third of what I do.

Q: How much do you charge?


My fee is $350 an hour, but we make many different kinds of deals.

Q: If I can't meet my payroll, how can I afford you?


You can't. You've waited too long. A lot of companies die simply because they wait too long to recognize that they are in difficulty. Those who make a living working for companies that can't pay their bills know that you have to get retainers in advance. When the company realizes they are not going to get out of trouble without professional help, they will agree to hire the insolvency lawyer or other crisis specialist.

Edited by Robin J. Phillips

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