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Senior managers stand to be the biggest losers at troubled companies once bankruptcy reform goes into effect next month. Stricter limits on retention bonuses and pressure to move swiftly through a bankruptcy could lead to greater changes at debtor management, Bruce Zirinsky, head of financial restructuring at Cadwalader, Wickersham & Taft, said Tuesday. The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 will undermine the current emphasis on management as the key to reorganization when it takes effect on Oct. 17, Zirinsky said at a New York forum on the new law. “Changes in the bankruptcy reform act will create an environment where existing management will decide to move on to other companies,” Zirinsky said. “That means we’re likely to see a lot more professional turnaround people running bankrupt companies than we do now.” An amendment to �503 of the U.S. Bankruptcy Code will require managers to prove they have a bona fide job offer at the same or better compensation to snare a retention bonus, he told about 75 professionals attending the CWT forum. The debtor also must show that the insider’s services are essential to survival and that the bonus is not 10 times larger than the average incentive given to nonmanagers over the prior year, he said. “The change in the requirements for retention bonuses was obviously an attempt by Congress to react to the perceived abuses of senior management in general,” Zirinsky said. “I think the changes needed for a retention bonus will have an impact in almost all cases.” In response to the public’s concern over management abuse, so-called success fees for both senior managers and professionals will also be more directly tied to their ability to create larger creditor recoveries, he said. The shift to a strict 18-month limit on a bankrupt company’s exclusive right to file a reorganization plan will translate into more sales within bankruptcies, Zirinsky reasoned. Current law automatically gives a debtor 120 days to exclusively file a plan, but there are no precise limits on a judge’s discretion to extend the period. “We’re likely to see a lot more bankrupt companies being put into play and creditors becoming more proactive by developing their own plans either alone or with an equity sponsor,” Zirinsky said. “The time restriction means we’re likely to see a lot more out-of-court restructurings and greater emphasis on prepackaged filings.” An amendment to �1114 of the bankruptcy code giving judges more power to reverse changes in prepetition retiree benefits will also surface as a major point of contention, he said. The change specifically applies to medical and health care or insurance benefits not covered under pension plans that were renegotiated within 180 days of the filing. “The court will be able to relevel the playing field between the company and employees by negating modifications on these benefits and restating them to where they were before,” Zirinsky said. “This will be a hot issue.” Copyright �2005 TDD, LLC. All rights reserved.

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