The Examiners: Increased Complexity Brings Increased Cost

Have Chapter 11 restructurings become so expensive that professionals are essentially pricing themselves out of business? 

There is no denying that large corporate Chapter 11s have become a costly undertaking, with the expense of enlisting restructuring professionals often representing a meaningful portion of the bill. However, that cost increase also correlates to a similar rise in the complexity of the restructuring process. As with any professional service, you get what you pay for, and it’s generally worth it to a debtor to pay a premium in order to achieve the best possible results. Conversely, it isn’t always necessary or worthwhile to seek the help of professionals at the highest end of the spectrum—in terms of both price and experience.

The American Bankruptcy Institute recently published a report that studied and proposed potential Chapter 11 reforms, including cutting the cost of Chapter 11 and making restructuring more accessible. As the ABI Commission recognized, today’s financial markets and corporate structures are extremely different than those existing in 1978, when Congress enacted the bankruptcy code. As such, it’s not surprising that in recent years, we have seen the most expensive bankruptcies in history.

The breadth and complexity of the largest restructurings today demands an extremely high level of expertise, whether occurring out-of-court or as a formal Chapter 11 proceeding. This reality will persist even if more stringent fee guidelines are enacted, or if the system is reformed with the goal of making the Chapter 11 process less expensive and more accessible generally. Capital structures, debt arrangements and financial markets are not going to simplify themselves based solely on the fact that the restructuring process could become less expensive as a result. Those driving factors are just a few of the many elements that underlie the increasing intricacy and resulting cost escalation of large-scale restructurings. Similarly, smaller-scale restructurings and less complicated cases are unlikely to (nor would it be necessary to) involve the most experienced restructuring professionals, and they therefore don’t account for bankruptcies that return multibillion- or even multimillion-dollar bills.

This isn’t to say that reforms to Chapter 11 are unnecessary. Part of the focus of the ABI Commission’s recommendations was to reduce barriers to entry and to create alternative restructuring schemes for small- and medium-sized enterprises to help facilitate their use of the Chapter 11 process. Any reforms that would make Chapter 11 more accessible for smaller businesses (where it is more likely that mounting costs could force companies to liquidation) would be a welcome reinforcement to the policy objectives of the bankruptcy process.

In truth, there is far more transparency and oversight regarding the cost of restructuring professionals than in other areas of the law, and there are multiple external factors that have caused the rising price of Chapter 11s. It’s important for practitioners, scholars and market participants to ensure that the bankruptcy system is functioning efficiently and that companies are not deterred from using Chapter 11.

Candidly, however, the cost of the process is unlikely to be a deterrent to those companies that would engage the most expensive advisers, as such prospective debtors understand the complexity of their own financial situations and, consequently, they (as well as their lenders) are willing to pay for services at the highest end of the spectrum.

Shaunna D. Jones is a partner at Willkie Farr & Gallagher’s business reorganization and restructuring practice. She is based in New York.