Diamond Comic Distributors is in danger of administrative insolvency, and its records are in disarray, according to statements in an August 5 court hearing in the company’s Chapter 11 bankruptcy case, for which a transcript was filed on August 15.

Administrative insolvency refers to an inability of the bankrupt company to pay its professional fees and other essential costs after filing for bankruptcy.  Those essential costs can include payments to critical vendors necessary to keep the business operating while in bankruptcy.  When that happens, the Chapter 11 bankruptcy is typically converted to a Chapter 7 liquidation.

We know that some of Diamond's post-petition debts that were supposed to be paid have not been, and Universal Distribution’s Angelo Exarhakos explained that in the case of Alliance Game Distributors, those were payments that he does not have authorization to pay and that the bankrupt company apparently does not have the cash to pay (see "Diamond’s Post-Petition Debts").

It was the judge in the bankruptcy case, David E. Rice, who expressed concern about Diamond's ability to pay its current obligations in the August 5 hearing, in discussing issues related to the scheduling of hearing on motions related to Diamond's proposed seizure and selling of consignment inventory in its warehouse (see "New Filings in Diamond Consignment Dispute").

"I'm concerned that the last hearing and recent hearings that …the Debtor and these Estates are in potentially administrative insolvency jeopardy, and I'm not sure whether the Debtor and the Court have the luxury of waiting 90 days or 120 days for discovery," Rice said.  "I'm concerned that that circumstance means that there needs to be a prompt decision."

Rice also expressed concern over delays in Diamond's filing of required monthly financial reports.  He confirmed with Diamond's attorney that the reports were two months behind, the emphasized the importance of the late filings.  "Why can't these things be filed on time?," he asked.  "I mean, what can be more important in a Chapter 11 bankruptcy case than the Creditors and the constituents who are interested in this case and the Court having confidence in the numbers?"

The Diamond attorney said they were in the process of preparing the late reports, and noted that they were operating with very limited staff.  "The Debtors have a situation where there is one person responsible, really, for the bulk of the data," Paige Topper of Saul Ewing said.

In the same hearing, Adam Fletcher, the attorney for Image Comics, told the court that Diamond had told him that the records were in disarray, and that it was having difficulty supplying the information requested.  "We've been told multiple times that their books are a mess, that they were trying to clean them up, but I have no knowledge of how long it's going to take them to even provide us the information," Fletcher said.

The situation appears to be continuing to deteriorate, as a key hearing on the status of the consignment inventory and other issues takes place this week (see "Key Hearing Continues").