Chapter 11 Reorganization - An Overview
Who can use Chapter 11?
Chapter 11 of the Bankruptcy Code is available to a business suffering a severe financial difficulty which can still be viable, if its debt repayments can be restructured, reduced or postponed. The business can either be a corporation, partnership or sole proprietorship.
A Chapter 11 bankruptcy can also be used to liquidate the assets of the business and pay the creditors from the proceeds. A Chapter 11 bankruptcy liquidation often will obtain a greater realization for the creditors than a Chapter 7 bankruptcy.
Fast Tracking for Small Businesses.
A small business with less than $2,000,000 can elect to be treated as a "small business". The case is then put on a fast track and is treated differently than 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;
- At the expiration of the 100 day period 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.
How Does a Chapter 11 Bankruptcy Work
a. Automatic Stay
The business is protected by an automatic stay that takes effect upon the filing of the bankruptcy petition. During the period of the stay, no creditor can take any action against the debtor. The stay provides a welcome breathing spell for the debtor, during which negotiations can take place to try to resolve the difficulties in the debtor's financial situation.
b. Debtor in Possession
In a Chapter 11 bankruptcy the debtor retains control of the business by the fact the Bankruptcy Code (Section 1107) places the debtor in possession, with the rights and powers of a Chapter 11 trustee.
c. Creditors' Committees
The creditors' 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 unsecured creditors who hold the seven largest unsecured claims against the debtor. 11 U.S.C. § 1102. 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. 11 U.S.C. § 1103. 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. A creditors' committee can be an important safeguard to the proper management of the business by the debtor in possession.
d. Plan of Reorganization
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 by using what is called "cram down" power.