When Is a “Chapter 22” an Effective Remedy for a Company?

The informal term “Chapter 22” is used to describe a second Chapter 11 filing after a company falls short of emerging successfully from the first one. This can happen for various reasons, often related to unfulfillment of assumptions or expectations underlying the original Chapter 11 plan. Unlike other types of bankruptcy, there is usually no waiting period for a repeat Chapter 11. Whether it will be effective, however, depends on multiple circumstances.

A company might consider filing a Chapter 22 if the original plan for restructuring debt was unrealistic or faced unforeseen challenges. Even if the initial Chapter 11 plan achieved debt reorganization and increased revenue, the company might still need additional resources to be viable. Changes in market conditions, unexpected competition or other external factors like inflation or higher interest rates might put the company again in financial distress and in need of bankruptcy protection.

Using Chapter 22 as a solution can be a slippery slope for the debtor company, since a new filing means undertaking the significant costs and considerable time span that Chapter 11 involves. It also means obtaining the approval of creditors, who in the previous plan agreed to take less than they were actually owed. If it appears that the company is suffering from the same problems that led to the first Chapter 11, creditors may be reluctant to accept new risks and might raise objections.

Even if the creditors acquiesce in a second Chapter 11 plan, court confirmation is still required. A major hurdle to confirmation is the U.S. Bankruptcy Code’s feasibility test. The court will confirm a plan only if, among other things, the plan “is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan.”

This means the company’s owners must show that there are sufficient benefits to be achieved in keeping the company running rather than it being forced into liquidation. For example, the company may be a fairly large employer and may contribute significantly to the local economy. Ultimately, the company must be able to demonstrate that its debts can be pared down to manageable levels, such that the new reorganization plan does not appear destined to fail.

Alternatively, Chapter 22 can be used as a vehicle for liquidation, or more precisely, an orderly, longer-term wind-down of the company that can offer creditors higher payouts than in a straight Chapter 7.

Whether you are a debtor company considering a Chapter 22 or a creditor looking to protect your interests in such an eventuality, the Law Offices of Michael Jay Berger in Beverly Hills, California can represent you. To schedule a free consultation, call 310-271-6223 or contact me online today.