A mass recall causes many problems. There's the damage to your reputation, but also the cost of replacing thousands of dollars of merchandise. Depending on the recall, there is often a product liability lawsuit to go with it. In severe cases where products cause actual harm, the damage can be so costly it puts the company in debt.
One example is Takata Corp, who made defective airbags used in Honda, Toyota and other cars across the world. They're being sued for damages--perhaps upwards of a $50 billion settlement.
When you're out of money, how do you pay for it?
The Reorganization Bankruptcy
Chapter 11 is a common bankruptcy petition for businesses that are in debt. Some bankruptcy filings are solely to liquidate and pay off creditors. Chapter 11 aims to restore profitability. When a business files for chapter 11, it puts a halt on payments until the organization submits a reorganization plan. This plan includes paying off debt, and often restructuring the business itself. If the court approves, the filing will move forward.
Each business has its own challenges that led to a bankruptcy filing. With Takata, the cost of the recall will be an ongoing expense as new injuries amass over time. To cover those liabilities, the reorganization will include a compensation fund for payments in the present, but also going into the future. Reuters notes similar funds were established in other bankruptcy cases, such as Dalkon Shield in 1985 and Dow Corning in 1995.
Reorganization and Rebirth
Takata surely faces an uphill battle for financial solvency, but chapter 11 provides them with a potential solution to their current crisis. American Airlines, General Motors, Sbarro and countless others have rejuvenated their brands after bankruptcy filings.
While chapter 11 bankruptcy may be the right choice for a struggling business, it is a complex process with high stakes. Any bankruptcy filing decision should be made with the counsel of an experienced attorney that understands both your business and how the applicable laws will apply to your short and long-term goals. Takata's faulty airbags have put the business in a hole, but they hope to climb back out with assistance from the US Bankruptcy Code.