Overcoming Objections to Plan Confirmation in Chapter 11
In Chapter 11, a financially struggling company uses bankruptcy protection to stay in business while restructuring certain debts and reorganizing business operations in accordance with a bankruptcy plan. One of the major challenges of a Chapter 11 bankruptcy is getting the plan approved by the bankruptcy court.
A Chapter 11 plan is a highly detailed document that completely discloses the company’s finances and shows how existing debts and obligations will be paid. The plan also provides information about revised operations designed to help the company successfully emerge from bankruptcy. Creditors and other stakeholders have a right to prior notice of the plan and an opportunity to be heard on any objections. Some common objections include:
- False or misleading financial disclosures — Debtors are required to fully and accurately disclose the company’s financial position. In some cases, creditors claim that the debtor has hidden or misstated relevant information.
- Understating debts — Creditors might accuse the debtor of minimizing the amounts of lawful debts to be paid. Some debtors do this in order to make the plan look more favorable.
- Debt repayments are too slow — Creditors sometimes complain that the payment schedule on past due debt unreasonably impairs their rights.
- The plan is not feasible — Some managers are overly optimistic about the company’s outlook. Projected revenues may not make sense given a wide variety of factors, including the general business climate. This could result in the creditors not being paid and the plan failing.
The best way to overcome objections to the proposed plan is to avoid them. Debtors should be open and honest about their financial position and about longer term prospects for the business. All of the information included in the plan should be accurate and traceable. Moreover, the plan should maximize creditor debt payouts on a schedule that is not overly optimistic. A seasoned Chapter 11 bankruptcy counsel can provide invaluable guidance for creating an acceptable plan.
When a creditor raises objections, they at first may be addressed informally. The parties are free to negotiate the issue. Many times, an objection to the plan is based on a misunderstanding of a particular financial matter. This can be addressed directly through clarification or by the debtor providing supporting documentation. The objection can then be withdrawn.
Sometimes the parties will simply disagree on whether a certain plan provision is reasonable. The parties and their attorneys can discuss the matter and possibly reach a compromise position. If there is an agreement, the debtor can modify the plan proposal to reflect the change and the objection can be withdrawn based on the agreed upon modification.
In certain situations, the debtor and objecting stakeholder(s) reach an impasse. Despite negotiations, the parties simply cannot agree on one or more provisions in the proposed plan. The dispute must then go to the bankruptcy judge for a decision and each party can present arguments and evidence.
The Law Offices of Michael Jay Berger in Beverly Hills has deep experience representing California businesses seeking bankruptcy protection. If you are considering Chapter 11, feel free to contact us online or call 310-271-6223 to schedule an initial consultation.