Article Source: Dorsey & Whitney Bankruptcy
Team for Foreign Suppliers
This Series Six will address questions relating to the plan
process, including the disclosure and solicitation process, what happens if a
plan is or is not confirmed, and how that impacts your right to a distribution.
1. Question: What is a Chapter 11 plan and are there
different types?
A Chapter 11 plan, once approved by the bankruptcy court,
governs the debtor’s exit from bankruptcy and the treatment of claims against
and interests in the debtor’s estate. A Chapter 11 plan may either provide for
reorganization or liquidation of the debtor. Whereas reorganization will
involve the debtor itself continuing operations, liquidation will often involve
the sale of substantially all of the debtor’s assets to a new company. A debtor
may accomplish a number of other transactions through a plan, including a
merger, the creation of a liquidating trust, modification of liens, or issuance
of new debt or equity.
2. Question: How can I learn more about a proposed plan
and its effects?
A debtor is required to file and serve upon all creditors a
disclosure statement containing adequate information regarding the proposed
plan to enable a creditor to make an informed judgment regarding whether or not
to vote in favor of the plan. The disclosure statement will include information
regarding, among other things, the treatment of different types of claims and
estimated recoveries, what led to the bankruptcy filing, and what has taken
place during the bankruptcy case. Both the proposed plan and disclosure
statement tend to be lengthy, detailed documents and it would be worthwhile to
retain U.S. bankruptcy counsel to review them on your behalf, to determine how
your rights will be affected and to guide you through the confirmation process.
3. Question: What is the proposal, solicitation, and
confirmation process like and what role do suppliers play?
Chapter 11 debtors are given the exclusive right to file a
plan during the early months of the case, and are often the only party to do so
even after the exclusive period comes to an end. The plan proponent will first
request approval of a disclosure statement and solicitation and notice
procedures with respect to the proposed plan. Once approved, the plan proponent
solicits acceptance of the plan in accordance with the approved procedures. The
solicitation materials will include copies of the plan and disclosure
statement, a ballot, directions and deadlines for submitting the ballot and
objecting to confirmation, and notice of the confirmation hearing. When
solicitation is complete, a confirmation hearing will be held before the
bankruptcy court.
To the extent a supplier’s pre-bankruptcy claim against a
debtor does not qualify as a reclamation claim or for “critical vendor”
treatment (see Series Two), its claim will typically be classified as
general unsecured. General unsecured claims are placed near the back of the
line for distribution, behind several other typical classes of claims, e.g.
secured and administrative. As a result, suppliers’ pre-bankruptcy,
non-reclamation, non-critical vendor claims are often impaired, meaning they
will not receive a full recovery.
Holders of impaired claims are entitled to vote on a plan
unless they are not entitled to any distribution, in which case they are
typically deemed to reject the plan. A plan may be confirmed over the objection
of a dissenting impaired class if the plan satisfies certain requirements,
including that at least one impaired class has accepted the plan and the plan
is fair, equitable, and does not unfairly discriminate as to classes of claims
and interests.
4. Question: What happens if the bankruptcy court
confirms a proposed plan?
If the bankruptcy court confirms a proposed plan, the debtor
consummates the transactions contemplated by the plan on an effective date.
This will likely include distributions to creditors, such as administrative
expense creditors that provided goods and services to the debtor during the
bankruptcy case. To the extent such suppliers are not paid in the ordinary
course during the bankruptcy case, they must be paid in full on the effective
date in order for the plan to be confirmed. General unsecured creditors may
receive a distribution of cash or securities on the effective date, but often
plans provide for the creation of a liquidating trust out of which
distributions to general unsecured creditors are made depending on the extent
to which the trust successfully liquidates assets and prosecutes claims on
behalf of the post-confirmation estate.
Confirmation of the plan will result in the discharge of all
pre-bankruptcy liabilities of the debtor, meaning creditors cannot pursue their
pre-bankruptcy claims against the debtor even if the confirmed plan does not
pay such claims in full. Indeed, the plan substitutes a debtor’s pre-bankruptcy
obligations to its creditors with those obligations set forth in the plan.
5. Question: What happens if the bankruptcy court denies
confirmation of a proposed plan?
If a bankruptcy court denies confirmation of a proposed
plan, the debtor may amend its plan and seek confirmation of the amended plan,
or the debtor or another party in interest may propose an alternative plan. If
the estate lacks liquidity to continue reorganization proceedings, the
bankruptcy court may convert the case to a liquidation under Chapter 7 of the
Bankruptcy Code or dismiss it entirely. If the case is converted to Chapter 7,
the debtor’s business operations will cease and a trustee will be appointed to
marshal and liquidate the debtor’s assets for the benefit of creditors. In that
event, the costs of administering the Chapter 7 case will take first priority,
meaning general unsecured creditors are one step farther back in the line for
distributions.
6. Question: What is the likelihood that a Chapter 11
case will be successful?
Chapter 11 is open to businesses of all sizes and to
individuals. As a result, a considerable proportion of Chapter 11 cases filed
in the United States are unsuccessful and result in dismissal or conversion to
liquidation under Chapter 7. However, in our experience, larger cases (meaning
those where the debtor has over $10 million in assets or liabilities) are
dramatically more likely to succeed, particularly because they are more likely
to have the resources needed to complete a successful reorganization under
Chapter 11. Often, larger cases will involve the sale of substantially all of
the debtor’s assets to a new company, the proceeds of which are used to pay
creditors.
While a successful Chapter 11 case may result in some
creditors receiving less than they are due, the ultimate result is usually that
a business is able to continue operating which benefits the nation’s economy as
a whole. As such, reorganization in the U.S. is appropriately viewed as an
essential element of our capitalist system.
We do hope that you enjoyed these series and now have a
fuller understanding of the Chapter 11 process, at least as it may impact the
rights of foreign suppliers of bankrupt U.S. companies. From the outset of the
bankruptcy case, a creditor’s rights are directly impacted – whether through
imposition of the automatic stay which prohibits further collection efforts or
through the imposition of a 20-day deadline to file reclamation claims measured
from the filing date. As such, as soon as you learn of a customer’s bankruptcy
filing, you should contact your trusted U.S. bankruptcy counsel to guide you
through the process, ensure you do not miss any key dates or deadlines, and
obtain the greatest recovery possible.
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***For any questions regarding this article, kindly
contact:
Catherine Pan Giordano (pan.catherine@dorsey.com)