In recent years, chief restructuring officers (CROs) have increasingly been assigned to assist companies struggling as a result of mistakes by company leaders. But with COVID-19 wreaking havoc around the globe, well-run organizations might soon be forced to work with a CRO.
Besieged by other worries, company leaders might not give that idea much thought. But given that CROs may develop the political power to cause the ouster of chief financial officers, and even chief executives, it’s time to brush up on what a CRO can and cannot do.
CROs are sometimes used as an alternative to a trustee in bankruptcy in a reorganization proceeding. Lenders, bondholders, and other parties in interest often want to bring in an outsider to take steps that are necessary but unpopular. And it’s definitely true that a CRO frees up managers to focus on fixing the business rather than on running the day-to-day Chapter 11 process.
But CROs can come with loyalty to lenders, who often recommend individual CROs and make the appointment of one a condition of cooperating toward a workout or restructuring. This can somewhat understandably lead to CROs feeling indebted to lenders, which means that the debtor’s CFO and other C-suite executives should make sure to have oversight powers.
After they’re appointed, CROs report to the board of directors, who determine the CRO’s powers and authority. As many potential CRO functions are normally performed by the CFO, the CEO, or both, the board and senior management should carefully circumscribe the scope of the CRO’s duties, which need not be delegated all at once. Duties can be added to the CRO’s portfolio at later dates as appropriate.
No information should flow from the CRO to the lender or other adversaries without the prior sign-off from management, which is typically the CFO and/or CEO.
Further, CRO retainer agreements should lay out the limits of the CRO’s authority. A generic retainer agreement can empower a CRO with an ever-expanding budget and an ever-expanding sphere of influence. The board should limit CRO actions that can be taken without CFO and/or CEO and/or board authorization. The executives who report to the CRO and the persons to whom the CRO reports should be well defined.
There may be an increase in claims against board members when a debtor is administratively insolvent, i.e., unable to pay debts in full that arise after the date of bankruptcy. That makes regular and detailed financial reporting critical for the board to avoid potential individual liability. The CRO must be directed to keep the CFO, CEO, and the board informed as to outstanding post-bankruptcy liabilities and the ability of the debtor to honor them. The board is entitled to rely on the CRO for comfort that the debtor does not unreasonably reach the point of administrative insolvency.
That said, lenders typically have clout over a debtor. A forbearance agreement and the lender’s willingness to provide continued funding may be tied to specific borrowing-base formulae and to covenant compliance. Boards and C-suite executives should also recognize the CRO’s motivation out of the loyalty noted above and the possibility of future referrals.
The debtor’s CFO is management’s and the board’s key interface with the CRO in assuring that the company has obtained the best deal with lenders. Lenders often request that the CRO be permitted to speak and to provide information to the lender outside the presence of management. The danger there is obvious. No information should flow from the CRO to the lender or other adversaries without the prior sign-off from management, which is typically the CFO and/or CEO. Despite the CRO’s expertise and diligence, the risk of errors, omissions, or incorrect assumptions on which the lender and others will rely is too great. At a minimum, disputes with the CRO should be noted.
Obviously, no company wants to be in the position where bringing in a CRO is even part of the discussion. But give the economic realities that many organizations now face, understanding how CROs work has never been more important.
Kenneth A. Rosen leads the bankruptcy, financial reorganization, and creditors’ rights department at Lowenstein Sandler LLP.
The views expressed herein are those of the author and are not necessarily shared by other persons at Lowenstein Sandler LP. Nothing contained herein is intended to be a complete statement of the applicable law. Every situation is unique. Legal interpretations may vary.