The Value of Restructuring Support Agreements in Chapter 11 Cases
When a company in financial distress seeks to reorganize via a Chapter 11 bankruptcy, one critical tool at hand is the restructuring support agreement (RSA). An RSA is a binding contract between the debtor and certain key creditors that outlines the terms and conditions of a proposed Chapter 11 plan before it is even filed with the court. This pre-negotiated agreement can be a game-changer, eliminating uncertainty and streamlining the bankruptcy process for both the debtor and the creditors involved.
The primary purpose of an RSA is to secure the support of critical creditors for a proposed Chapter 11 plan. By doing so, it increases the likelihood that the plan will be approved by the bankruptcy court and implemented successfully.
An RSA generally includes these key provisions:
- Voting commitments — One of the central provisions of an RSA is the commitment of the participating creditors to vote in favor of the proposed Chapter 11 plan. This helps ensure that the plan will garner the necessary support for confirmation.
- Treatment of claims and interests — The RSA outlines how the claims and interests of the participating creditors will be treated under the proposed plan. This can include details on repayment terms, the allocation of assets, and the extent of creditor recovery.
- Covenants and milestones — RSAs often contain covenants and milestones that the debtor must meet to maintain the support of the participating creditors. These can include financial targets, operational benchmarks, or other conditions that the debtor must fulfill.
- Exclusivity — In some cases, an RSA may set a period of time during which the debtor has the sole right to propose a Chapter 11 plan. This can be advantageous in preventing competing plans from emerging.
- Standstill provisions — To avoid aggressive creditor actions during negotiations, RSAs often include restrictions on the participating creditors taking certain actions against the debtor, such as pursuing litigation or foreclosing on collateral.
Restructuring support agreements are valuable tools for both debtors and creditors in Chapter 11 bankruptcy cases. For debtors, RSAs provide a level of certainty. By securing the support of key creditors, debtors can enter bankruptcy proceedings with a clearer path to restructuring and reemerging as a stronger, more viable entity. At the same time, RSAs give creditors a say in the restructuring process and help protect their interests. By negotiating terms in advance, creditors often achieve better outcomes than they would through a protracted and expensive bankruptcy litigation process.
If your company is facing financial distress and you are considering Chapter 11 bankruptcy, it’s helpful to have experienced legal counsel by your side. Based in Beverly Hills, the Law Offices of Michael Jay Berger represents clients in Chapter 11 bankruptcy proceedings throughout Southern California. Call our firm at 310-271-6223 or contact us online to arrange a consultation.
