Durham telecommunications firm Avaya files for bankruptcy amid federal investigation

Just over five years since the company emerged from its first bankruptcy, the Durham telecommunications firm Avaya on Tuesday filed for Chapter 11 in the U.S. Bankruptcy Court for the Southern District of Texas. In a statement Tuesday, Avaya officials said reentering bankruptcy will help the company implement a financial restructuring plan that will cut its total debt by more than 75%, from around $3.4 billion to $800 million.

Avaya, a publicly traded company, had previously filed for bankruptcy in January 2017 to reduce its debt load. While the company exited that bankruptcy within a year, recent setbacks had it on course for another Chapter 11.

In the past few years, the company has moved toward providing clients cloud-based communication services via subscriptions, but current and former employees have told The News & Observer this transition has been rocky.

Last year, Avaya twice missed revenue targets and saw a major debt deal with Goldman Sachs and JPMorgan Chase collapse. The company removed its CEO in July, and the next month told federal regulators it would delay filing its quarterly financial report as it launched an internal investigation into “control deficiencies” at the company. The U.S. Securities and Exchange Commission (SEC) is also investigating the company’s financial reporting.

Citing its ongoing internal investigation, Avaya has not filed a quarterly report since.

On Dec. 13, Avaya told the U.S. Securities and Exchange it was exploring multiple restructuring options to address debt obligations, including filing for bankruptcy. Two months later, the company took this option.

“Strengthening Avaya’s capital structure is a critical step to fully realize our transformation, and we are excited to move ahead as a well-capitalized company with one of the strongest balance sheets in our industry that includes substantial cash to invest in our own success,” Avaya CEO Alan Masarek said in a statement Tuesday.

Avaya relocated from California to the North Carolina Research Triangle in 2020. The company has declined to share how many people it employees in the Triangle area. As of late 2021, the company had around 8,000 employees worldwide, a total that’s been reduced by layoff rounds in September and January.

On Tuesday, its stock was selling below 30 cents, a precipitous decline from the $29-a-share price it had reached in February 2021.

Who gets paid back first?

Chapter 11 is one of the most common types of bankruptcy. It allows companies to remain operational as their businesses, debts and assets are subject to reorganization. There is not a common objective or outcome for companies that enter Chapter 11 said Ed Boltz, a bankruptcy attorney in Durham.

“There are so many things that can happen,” he said. “Most companies that file bankruptcy do file Chapter 11 in an attempt to reorganize. Some end up just doing it and failing. Others do it to try to sell off some of their assets to pay some creditors.”

When a company in bankruptcy is working to pay off its debts, U.S. bankruptcy law prioritizes debt holders will be paid back before shareholders. Boltz noted shareholders can sometimes “end up taking the hardest hit” when a company files bankruptcy, saying “their equity position gets wiped out.”

What’s Avaya’s internal investigation about?

On Friday, Avaya told federal regulators it wouldn’t file its latest quarterly financial report on time, marking the third consecutive quarter the company has failed to submit a major disclosure.

Publicly traded companies like Avaya must turn in quarterly and annual reports, called 10-Qs and 10-Ks respectively, to the U.S. Securities and Exchange Commission (SEC). However, Avaya says an ongoing internal investigation into “control deficiencies” at the company prevents it from releasing financial results with confidence.

Avaya last submitted a quarterly report on May 10. In August, the company notified the SEC it had opened an investigation into its financial results for the fiscal quarter ending in June 2022. The company said it brought on “outside counsel to assist in these investigations.”

In November, Avaya again cited this investigation when it told regulators it would miss the deadline for submitting its 10-K annual report for 2022.

The company’s most recent late-notice on Feb. 10 suggests the internal deficiencies the company is investigating may be tied to its previous leadership.

“Management is actively engaged in taking steps necessary to remediate the control deficiencies that constituted the material weaknesses,” Avaya told regulators on Feb. 10, adding that it was focused on establishing a strong “tone at the top.”

According to the Corporate Finance Institute, “tone at the top” is an auditing term referring to “a company’s management and board of director’s leadership and their commitment to being honest and ethical.”

Pledging to transform its culture “to embrace transparency and open communication,” Avaya told regulators on Friday that the company had reshuffled its executive ranks, including the removal of James Chirico as CEO in late July.

“They seem to be signaling there’s a connection between the internal investigation, problems they’ve found, and letting these people go,” said Tom Hazen, a corporate law professor at UNC-Chapel Hill.

Hazen cautioned the degree of Avaya’s concern is not yet clear.

“It’s obviously some concern the company has,” he said. “Now it could be something major. It could be something relatively minor like an accounting issue.”

To some Avaya investors, the company’s issues aren’t minor. On Feb. 1, a group of Avaya bondholders filed a $125 million lawsuit against the company alleging “massive fraud” by the company’s board.

This story was produced with financial support from a coalition of partners led by Innovate Raleigh as part of an independent journalism fellowship program. The N&O maintains full editorial control of the work.

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