Moody's today released a report (subscription required) suggesting thatstrategic bankruptcies are on the rise.
According to the report, boards of companies facing a rash of lawsuits or serious pension underfunding are likely to opt for bankruptcy as soon as they near the dreaded "zone of insolvency," a favorite topic of Ron's.
Bankruptcy case law suggests that once in the zone, a board member's fiduciary duty shifts from protecting shareholders to protecting all stakeholders — including creditors. Since that's a scary and admittedly difficult task that exposes directors to serious personal liability, Moody's expects more directors will simply try to leap directly into "strategic bankruptcy." That way, any actions they take will have court blessing.
You could have some fun wondering what exactly directors' responsibilities are once they perceive that they are in the, um, zone immediately surrounding the zone of insolvency, but Moody's larger point is clear: "The current environment might suggest the potential for additional large corporate bankruptcies," in the words of managing director Michael Mulvaney. Moody's notes that Northwest Airlines, Delta Airlines, and Delphi all had plenty of cash on hand to continue operations for some time.
Recent amendments to the bankruptcy code could offset this trend, adds Moody's, but it appears to be preparing for an increase. |
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