The Examiners: What About CROs?

If you could make one change to the bankruptcy code, what would it be?

I’ve often wrestled with the fact that the bankruptcy code doesn’t include a provision for the retention of a chief restructuring officer, or CRO. Professionals, including financial advisers, are retained according to three sections of the code: 327, 328 and 330. The role of the CRO has become relatively well defined in practice; however, the bankruptcy code itself contains no references or provisions dealing with the retention of a CRO. As a result, the role of a CRO has been approved pursuant to a more informal protocol.

Chapter 11 restructurings have evolved into multifaceted endeavors spanning multiple stages and levels of expertise. The complex reorganization processes that take place today are vastly different than the approaches taken in 1978, when the bankruptcy code was made effective. This complexity has spurned many offspring, including the CRO. The CRO plays a pivotal part in the process, and I believe there is need to formally codify the position. Doing so will allow organizations to bring in highly specialized professionals in a consistent manner without potential conflict with other sections of the bankruptcy code and with stakeholders.

The CRO position was initially created during the early part of the last decade. The role provided the benefit of supplementing or replacing management. However, the CRO generally concentrates on aspects of the restructuring that are largely foreign to management. Typically, a CRO is appointed by a company’s board of directors at the time of bankruptcy, and the appointment is subject to approval by the bankruptcy court pursuant to its general powers under sections 363 and 105 of the bankruptcy code. Sometimes parties will object to the appointment of a CRO given the lack of specific legal authority. There are also potential conflicts if the individual served as a CRO before the company filed for bankruptcy. Codification would eliminate these issues and allow the professional to adequately serve the company.

The CRO role can generally be categorized into one of two types. One type is responsible for developing and implementing the restructuring strategy while working alongside existing management. Other CROs layer on the direct role of managing the business operations as well. In either case, the objective is to drive emergence from bankruptcy, consummate a sale or effectuate a liquidation. The CRO plays a key role in the Chapter 11 process. Codifying this position will simplify the process and benefit all parties in interest who are looking to achieve the best outcome.

Perry Mandarino is the U.S. Business Recovery Services leader for PricewaterhouseCoopers, based in New York. Follow him on Twitter at @Perrymandarino