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Bankruptcy Plan of Reorganization

16. What is a plan of reorganization?

The debtor in possession (DIB) has an exclusive 120-day period to file plan of reorganization. The court may enlarge or reduce the exclusivity period “for cause”. The DIB has exclusive control over the case early on and may take a first stab at the terms of the proposed restructuring. The bankruptcy code provides guidelines for the contents of the plan of reorganization as follows:

•   Mandatory Provisions – The mandatory provisions to include a plan are as follows:

⁃    Classes of Claims – The plan must designate classes of claims.

⁃    Equal Treatment – All members of a class must be treated the same.

⁃   Secured Claims – Secured claims must be classified separately unless the creditors have common rights.

⁃   Unimpaired Classes – The plan must designate any class that is not impaired, any class that is impaired.

⁃    Plan of Implementation – The plan must provide adequate means for a plan’s implementation.

•   Permissive Provisions – The plan of reorganization may include any of the following provisions:

⁃    Impair a Class – The plan may impair any class.

⁃    Executory Contracts – The plan may provide for assumption or rejection of executory contracts.

⁃    Sale of Property – The plan may provide for sale of estate assets.

⁃    Handling Claims – The plan may provide for settlement or adjustment of claims belonging to the estate, such as turnover of property or avoidance claims.

⁃    Other Provisions – The plan may contain any other provisions that do not conflict with the reorganization of the estate.

•    Notice of the Plan – Before the plan can be distributed to creditors and interest holders, the court must approve a disclosure statement for distribution. The disclosure statement must contain adequate information about the debtor and the bankruptcy filing. This generally includes:

⁃    description of debtor’s business,

⁃    history of debtor’s business,

⁃    current financial information, including the financial statements,

⁃    description of plan and execution game plan,

⁃    liquidation analysis,

⁃    management retention and compensation,

⁃    pro forma operations projections,

⁃    summary of pending or planned litigation,

⁃    transactions with insiders, and

⁃    tax consequences if plan is confirmed.

Once the disclosure statement is approved by the court, the DIP may solicit acceptances from creditors and interest holders. The DIP must send the plan, disclosure statement, and ballot to all known creditors and parties in interest.

•    Acceptance of the Plan – To approve the plan, a class of impaired creditor must accept the plan and it must be approved by the court. A class of creditors accepts the plan if approved by at least two-thirds (2/3) of the total claims and one-half (1/2) of the total of allowed claims of the class. “Unimpaired” classes of creditor are not entitled to vote on the plan. An unimpaired creditor will receive full payment of its claim under the plan. It is conclusively presumed that unimpaired creditors accept a proposed plan. If a class receives no dividend under the plan (no payment), it is deemed to have rejected the plan. Once approved by a single class of impaired creditors, the bankruptcy court must hold a hearing to determine whether the plan can be confirmed. The plan must meet the following elements for court approval:

⁃    Best Interest – The plan must be in the best interest of creditors. Dissenting creditors often litigate this element. Each creditor must receive at least as much as it would receive under a Chapter 7 liquidation.

⁃   Administrative Priority – Unless otherwise agreed, holders of administrative expense priority must be paid in cash on the effective date of the plan.

⁃    Priority Claims – Holders of priority claims must be paid by the effective date unless such class has accepted the plan stating otherwise.

⁃   Feasible – The plan must be “feasible”, such that it is not likely to be followed by liquidation or further reorganization unless such course of action is proposed as part of the plan. Factors to determine whether a plan is feasible include:

⁃    earning power of the business,

⁃    adequacy of the capital structure,

⁃    economic and market conditions,

⁃    ability and retention of management, and

⁃    ability to meet obligations as they become due.

•    Discussion: What do you think about the process for proposing and approving a Chapter 11 bankruptcy plan? Why do you think the plan only requires approval of one class of impaired creditors? Should impaired creditors be given a vote? Why or why not? Do you think the rules required for confirmation of the plan adequately protect creditor interest? Why or why not?

•    Practice Question: ABC Corp files for Chapter 11 Bankruptcy. The DIP puts forward a plan for reorganization of the company. What is required for the plan to be approved by creditors? What is required for the plan to be approved by the bankruptcy court?

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