What is Chapter 11?

Chapter 11 is the section of the U.S. Bankruptcy Code that enables a business to reorganize and restructure debt while it continues to do business in the ordinary course. 
 

Does Chapter 11 mean liquidation?
 

Chapter 11 means reorganization, not liquidation. The purpose of filing for Chapter 11 protection is to reorganize and hopefully rehabilitate the company's finances for the future. To read a paper on the success of Chapter 11 cases see the publication by Professors Warren and Westbrook: Click here.

Who can use Chapter 11?
 

Chapter 11 is available to a business suffering severe financial difficulty, but that can be viable if its debt repayments can be reduced or postponed. The business can be a corporation, partnership or sole proprietorship. It may also be used by an individual. See Individual Chapter 11's.

Chapter 11 can also be used to liquidate the assets of a business in order to realize the best market value of those assets if realizing the best value is by continuing to operate the business while the sale or sales take place.

What is Automatic Stay?
 

Upon the filing of the Chapter 11 petition all civil suits, actions and proceedings against the company are stopped.  No creditor can take any action against the debtor. The stop is called the "automatic stay" and it  provides a breathing spell for the debtor during which a plan of reorganization can be formulated to resolve the difficulties in the debtor's financial situation.

Who runs the day-to-day operations of the business?
 

The company's management keeps control of the business. Management becomes known as  debtor-in-possession with the rights and powers of a trustee in bankruptcy.
 

What role do creditors play?

In some Chapter 11 cases a committee of creditors (the "creditors committee") may be appointed from amongst the largest 20 unsecured claimants. The committee can play a major role in chapter 11 cases. The United States trustee, a federal employee to be distinguished from a private case trustee or panel trustee, appoints the committee, which ordinarily consists of three to seven unsecured creditors.  The committee may consult with the debtor-in-possession on the administration of the case, investigate the conduct of the debtor and the operation of the business, and participate in the formulation of a plan of reorganization. A creditors' committee may, with the court's approval, hire an attorney or other professionals to assist in the performance of the committee's duties.
 

What is a Plan of Reorganization?
 

A plan of reorganization sets forth how the claims of creditors and interest holders will be treated.

After the order for relief, the debtor has 120 days to formulate and file a plan of reorganization with the bankruptcy court. If the debtor fails to submit a plan during the 120 day period, or if creditors fail to consent to the debtor's plan during the first 180 days, any of the creditors can submit a plan. The court is sometimes faced with conflicting plans.

A plan of reorganization must designate classes and interests under the plan and what these classes of creditors will receive under the plan. For example, secured creditors might be one class, unsecured trade creditors a second, and employees a third. The plan must be fair and equitable and must provide an adequate means for its own execution. Generally, all identified classes must accept the plan of reorganization by a majority vote in number of claims and at least 2/3 in dollar value, within each class. The bankruptcy court must approve the proposed reorganization plan after determining that it is in the best interests of the creditors.

Although each class of creditors must normally approve the reorganization plan, the bankruptcy court can still approve a plan over the objections of one or more classes of creditors. This power is called the "cram down" power.

 

When do companies exit from Chapter 11?
 

Companies exit Chapter 11 after the court approves the company's Chapter 11 plan of reorganization and the transactions and payments proposed in the plan have been started. Companies develop these plans in conjunction with their creditors. Once a plan of reorganization is submitted to the court and the disclosure statement is approved, the plan must be confirmed by the court. For an example of the process see the accompanying flowchart.

Are there any procedures for a small business?

A business with debt less than $2,000,000 will be treated as a "small business". The case is then put on a fast track and is treated differently than is a regular Chapter 11 case:

• A separate hearing to approve the disclosure statement is not mandatory. It may be combined with the confirmation hearing;

• The appointment of a creditors' committee is not mandatory;

• The debtor has a shortened period of time (100 days from the date of the order for relief, within which only the debtor may file a plan;

• After the 100 day period expires any party in interest may file a plan; however, all plans must be filed within 160 days from the date of the order for relief.