Creating a Chapter 11 Plan That Is Likely to Win Confirmation

A Chapter 11 plan is essentially a contract between a company and its creditors, governing how the company’s debt will be reorganized and managed during the Chapter 11 case. Every plan must go through court approval, which generally requires that it be workable and in the best interests of creditors. In fact, creditors who believe they will be impaired by the plan can vote against it. However, the court retains the ultimate authority to approve the plan, even over creditors’ objections.

A Chapter 11 plan that can withstand court scrutiny requires thorough and careful preparation. Here are some of the most important considerations:

• Feasibility — The debtor must show the plan has a reasonable probability of success. This requires crafting detailed and realistic financial projections demonstrating the company’s ability to generate sufficient revenue to meet its obligations under the plan. Ultimately, the court wants to see a plan that allows the company to emerge from bankruptcy successfully. This means the plan is not likely to be followed by a liquidation or further reorganization of the reorganized debtor.
• Fairness and equity — For the plan to be in the best interests of creditors, each holder of an impaired claim or interest must receive at least as much value as they would in a Chapter 7 liquidation. The plan must comply with the “absolute priority rule,” which means that higher-ranking creditors are paid in full before lower-ranking ones receive anything. It also must provide for comparable recoveries for creditors within each class. If existing owners intend to retain control, new value may have to be contributed to senior creditors, in the form of cash infusions, equity stakes or guarantees.
• Transparency — A Chapter 11 plan submitted to the court must be accompanied by a comprehensive disclosure statement that accurately and clearly explains the company’s financial condition, the plan’s terms and potential risks. A recommended means of ensuring transparency and thereby fostering approval is to enter a restructuring support agreement (RSA) with key creditor groups before filing. The RSA can lay out the particulars of the reorganization and the possible strategies for the company’s emergence from Chapter 11.
• Flexibility — The debtor should engage with creditors, keep them informed throughout the approval process and address their concerns. Project potential roadblocks and have contingency plans in place to address them, demonstrating preparedness to handle unforeseen circumstances. Be willing to make modifications as circumstances evolve and feedback is received.

There are numerous provisions in the Bankruptcy Code related to the actual contents of a Chapter 11 plan and the associated proceedings. Retaining an experienced Chapter 11 attorney is essential to navigating the code’s complexities and ensuring that a plan adheres to all statutory requirements.

The Law Offices of Michael Jay Berger in Beverly Hills represents businesses and individuals in Chapter 11 cases throughout California. Call us at 310-271-6223 or contact me online to schedule a free initial consultation.