Over the last year, the number of corporate bankruptcies has surged considerably due to financial turmoil and tight credit conditions. Among publicly traded companies, bankruptcy filings in the US increased by 74 percent in 2008 when compared with 2007, according to figures from BankruptcyData.com. Also, the total assets of the companies filing for bankruptcy rose dramatically, to a record $1.16 trillion from just $70.5bn in 2007. This increase can be partly attributed to the collapses of several financial institutions, including Lehman Brothers, which had $691bn in assets at the time of its downfall. The size of the companies filing for bankruptcy protection, combined with the recent changes enforced by Congress, are making bankruptcy and restructuring processes more complex. One result of this added complexity is that virtual data rooms (VDRs), already in frequent use in M&A transactions, are increasingly being utilised to facilitate bankruptcy and restructuring processes, allowing companies to host and manage thousands of documents online, in an electronic format.

In a bankruptcy or restructuring situation, companies must deal with complex procedures and deadlines as well as managing an abundance of documents that need to be reviewed by several parties, sometimes spread across the globe. “These might be the creditors, the committees, the banks, the advisers, bankruptcy attorneys, or court-appointed trustees – all of whom need to be informed in detail through those documents, while preserving the confidentiality of that information, because you are sharing the information outside the boundaries of your firm,” explains John Badger, the vice president of Marketing & Product Management at Pandesa Corporation. The workflow associated with that process can be a tremendous logistical challenge and often creates difficulties, especially in such a rapidly changing business environment. “Insufficient, incomplete and inaccurate records are a frequent problem for companies which have gotten into trouble, and just as frequently are one of the root causes of the difficulty. Without good and complete information it is hard to navigate a challenging environment,” asserts Anthony H. N. Schnelling, a managing director at Bridge Associates LLC. However, this can be mitigated by making use of VDRs. He continues, “VDRs provide a single location for housing information and making it readily accessible to selected users.”
 
With immediate, timely access to pertinent documentation, all parties can share critical information required for tight deadlines via a web access portal. Unlike a physical data room, it is generally the case that several people can simultaneously view documents in the VDR at any time of day, simply by using a login and password. In addition, VDRs allow for a more logical and efficient structuring of the documents gathered, thereby making the information more accessible.
 
Furthermore, most providers have concentrated on improving that accessibility of late, and now offer a range of electronic tools for use within the VDR, such as the ability to search by word and/or concept. “You need to be able to find things across the entire universe of your documents in a rapid and efficient manner, not only by searching document titles,” insists Paul F. Hartzell, senior vice president of DataSite at Merrill Corporation Ltd. “When was the last time you titled a document ‘Look in here for the problems’?” In addition, virtual collaboration between the different parties involved in the restructuring has been facilitated by improved editing and tracking tools.
 
The ability to undertake a full text search and to communicate easily with other parties can actively assist in speeding up the due diligence period, and consequently galvanises the whole bankruptcy process. In addition, a streamlined, well-organised environment enables the people involved to concentrate on restructuring the business, rather than wasting time in other areas. “Outsourcing the capture, hosting and management of the data to a VDR provider allows the professionals in a process to focus on case dynamics, as opposed to being burdened with the administrative nightmare of information gathering and presentment,” says Brandon Farley, managing director of Bowne Virtual Dataroom.
 
Furthermore, restructuring a troubled business often includes disposing of some of its less vital assets, which can also be supported by a virtual data room. “Once the restructuring is decided upon, the VDR can be used to divest certain units of a business, so as to optimise a portfolio which fits into the company’s strategy,” points out Alexandre Grellier, CEO of Data Room Services. “Flexible access to the relevant documents for the involved parties at any time makes a fast and complex restructuring process possible.” In the case of a §363 sale of a debtor’s assets, for example, the seller and its advisors can convert all the necessary documentation into a digital format and upload them into the VDR.