The Examiners: Pay Disclosures Keep Bankruptcy Transparent, Fair

When it comes to pre-bankruptcy insider pay, how much disclosure is enough?

The bankruptcy court is often referred to as a court of equities. In fact, frequently, if a judge’s ruling is delayed on a crucial decision, the warring sides may speculate that the bench actually prefers a settlement between the parties to a controversial ruling on a contentious issue. With this in mind, it is critical for the process to be as fair, balanced and transparent as possible.

The financial forms that all debtors are legally required to complete as part of a bankruptcy filing require the listing of payments of $600 or more to insiders by name, address and amount. Some take the position that specifying insiders by name and amount paid is contrary to the objective of bankruptcy. They may assert that the objective of bankruptcy is to achieve compromise and that such disclosure may inflame the situation and work against achieving that compromise. However, it is worth noting that the U.S. Securities and Exchange Commission requires highly compensated individuals at public companies to disclose total compensation by amount and type, as well as their pay ratios. If such a level of disclosure is considered appropriate for public companies, then it should be considered even more important in the case of a bankruptcy in which the estate is being divided among creditors.

When a company files bankruptcy, its financial affairs become public, and those affairs include its payments to insiders in the last 12 months. In an effort toward resolution, debtors should disclose all relevant information including amounts paid to insiders. If a company believes it has a compelling reason to avoid making these disclosures, it should seek judicial permission to circumvent doing so. Otherwise, to protect the integrity and transparency of the process, full disclosure by name and amount should be mandatory.

Lisa Donahue is global leader of the turnaround and restructuring services group at business-advisory firm AlixPartners LLP and is based in New York. Follow her on Twitter at @LisaJDonahue