Welcome to Chapter 11. There will be many more surprise elements on this coaster ride, so hang on tight.
Chapter 11 is a reorganization, meaning you are looking to cleanse the entity of whatever was causing the financial distress, shed the accumulated debt and move on as a reorganized debtor. It sounds simple, but the process to get there is anything but. Get your ducks in a row, and you’ll have your arms in the air in no time!
To operate your business after bankruptcy will require an airtight communication plan. Customers, vendors and employees will all be interested in what occurred and your plans for the future. Discuss with your advisory team what you will communicate, how the information will be released and who will be sharing the news. Every company is unique and utilizes communication mediums, like social media or traditional press, in a way that will best benefit them and their customer base.
It will not take much for a key customer, vendor or employee to go elsewhere for business or employment. They may be critical to your plan for reorganization, so make sure you communicate with them.
Shortly after filing the schedules, a 341 meeting will be scheduled. At this meeting, you will provide background into the issues and the reorganization plan to creditors, who will have the opportunity to ask questions.
It is also at this meeting that the Office of the United States Trustee will attempt to form a committee of unsecured creditors. The committee will represent the interests of all unsecured creditors and will be actively involved in the pendency of the case. They will also typically hire their own counsel and financial advisor, who will be paid from the bankruptcy estate along with your advisors.
During the pendency of the Chapter 11 case, you will remain in control of your business and its operation as the debtor in possession (DIP). Generally speaking, there are no limitations on conducting business as usual. Keep in mind, however, that all operations are under a magnifying glass, and your decisions and motives may be questioned. This surveillance is particularly acute in businesses where there are numerous operating entities with common ownership, not all of whom are involved the bankruptcy.
Note that despite the DIP status, the court can, for cause, replace you with a Trustee.
The DIP has a limited period to accept or reject executory contracts, which include leases and other agreements calling for mutual performance. Depending on the industry, number of locations and other factors, this analysis and decision making should have been done in the planning stage.
The DIP has a limited period of time (120 days) to file a plan of reorganization. After this window, anyone can propose a plan.
Every month you will be required to file financial information related to the previous month with the court. These reports include typical financial statements, as well as additional details concerning various financial aspects and management of the company. They are public and reviewed by the Office of the United States Trustee.
This document provides specificity as to how the debtor will emerge, how to treat various creditors and the go-forward business plan. The Plan of Reorganization is why we are going through this exercise. It needs to be extremely detailed and is typically paired with a Disclosure Statement. Both of these documents will tell the story of the business, issues causing the bankruptcy, the plan to reorganize and detail the impact to each class of creditors, and perhaps most importantly, ask them to vote on the plan.
You and your advisors will need to answer the question: is the plan feasible, or will it result in a liquidation (Chapter 7) or the need for further reorganization? This is a critical question and can rest on assumptions that may be a bit rosy and valuations that may not materialize. It is crucial to rely on your advisors to avoid unrealistic expectations.
Due to the cost and time involved in a Chapter 11 filing, many debtors choose to sell the business as a going concern through the bankruptcy. The code section that provides for this is section 363, hence the name “363 Sale”. A 363 Sale is an auction under the supervision of the bankruptcy court. This is done through the bankruptcy process as the buyer can obtain the business’s assets free and clear of all liens.
Cases where the DIP contemplates a sale typically put things in motion before filing for protection ever occurs. The goal is to identify a stalking horse, a bidder willing to acquire the company’s assets and make the initial bid in the proceeding.
It all comes down to this. Separated and categorized into voting classes, creditors will vote on your plan. Each impaired class (creditors getting less than 100% of what they are out) gets a vote. To achieve approval, each impaired class must vote in favor (2/3 in total amount and ½ in number of those voting).
It is possible to confirm a plan if not all classes of impaired creditors vote in favor, however, a confirmation will be a facts-and-circumstances decision for the judge. The judge will need to determine that the plan does not discriminate unfairly and meets the fair and equitable standard under the code.
There are, of course, a myriad of details going on behind the scenes. While the above summarizes the major milestones, getting to each point can feel like that coaster ride. You will face challenges along the way. The creditor’s committee or other parties in interest will want to protect their rights and maximize their recovery. Having a competent and knowledgeable legal and financial team is critical to success. Don’t enter that twisting double loop without them.