Holding back bankruptcy: the very survival of a troubled company that is approaching—or in—bankruptcy can depend on how well HR gathers information, trims costs, retains key people and communicates with stakeholders - Cover Story

HR Magazine, May, 2003 by Robert J. Grossman

When That s Not Enough

If cost cuts and new business strategies fall to stabilize a company's finances, HR and other senior managers must move quickly to master the details of a bankruptcy filing, says Phillips of Integrated Health Services. "Our senior management team made it a priority to understand the rudiments of the process as we were getting ready to file. Then we put together an education packet and customized it for our vendors, our employees and residents."

"If you don't learn, you and your employees could pay the price," says Randazzo. 'We spent a lot of time talking to lawyers, educating ourselves on what Chapter 11 is about and what's likely to happen. We benchmarked, talking to HR people in other companies who had been through it."

Planning for a Chapter 11 filing is like preparing for a sneak attack. Before the rank-and-file hear the news, contingency plans should be in place. HR should examine unfunded liabilities such as vacation accruals, deferred compensation and bonuses. The goal is "to avoid puffing the worker in harm's way after filing." Randazzo says. The reason: After a filing, an employee who is still owed deferred compensation moves to the back of the line with other unsecured creditors. Before it filed in October 2001, Federal-Mogul canceled its deferred compensation plan and paid it out in advance.

When the day comes, lawyers for the company submit a petition to bankruptcy court, seeking approval for a "First Day Order" which can run 30 pages. It asks the court to authorize management to stay in charge as "debtor in possession" and to empower the company to honor commitments necessary to continue operating. For HR. those include salaries, benefits, severance pay and the like.

With the court's agreement, all other debts are suspended pending approval of a workout plan that must be blessed by the creditors and the court prior to emergence from bankruptcy. Creditors are divided into categories--secured creditors, who have first dibs on company assets, followed in priority by unsecured creditors. Secured creditors have a lien on property of the company as security for a debt. Unsecured creditors are owed money but have no liens on company property.

The trustee appoints creditor committees that have the right to sign off on all funding requests not in the ordinary course of business. "Bonus plans, salary increases, retention plans--first-you take them to management and your board of directors, then to the creditors. If they object, then [they go] to the judge. HR deals with making the company compensation case to the committees and in court," Randazzo says.

"You have to make sure you have a sound rationale for whatever you do because there's a lot of oversight," agrees Jerrold Glass, senior vice president for employee relations at US Airways in Arlington, Va. "Since all actions are public, you also have to satisfy the court of public opinion, which includes your own employees."

Filing for reorganization changes other rules, too. Potentially, it's open season on health plans, pensions and employment contracts. Now the company can revisit labor commitments and propose changes unilaterally. Subject to procedural rules requiring consultation and good-faith bargaining, any contracts--employment, union, pension-can be changed or voided. Unions that don't like what's happening have the right to strike. Conflicts or disagreements between the parties are resolved by the court.