How does Chapter 11 go about preserving the going concern value for a Company? The Chapter 11 process usually seeks to implement a plan of reorganization of the company.

What are the main elements of the reorganization plan in Chapter 11? The plan may contain any of the below elements: - The agreement between all creditors, the company and also the shareholders (if applicable) on a reorganization without third party investors; - The sale of all or nearly all assets as a going concern and the distribution of the proceeds to creditors; - The investment of capital by a third party; - A debt for equity swap; - The establishment of a litigation trust to pursue all claims.

Why is the Chapter 11 process called a debtor in possession process? Generally management continue to retain control (rather than possession) of the company without any involvement of an Insolvency Practitioner (IP).

What constraining factors are there on management’s control in Chapter 11? - For any transactions entered into outside the usual course of business, The approval of the bankruptcy court is required ; - A restructuring officer may have to be appointed by creditors if need be, in return for co-operation; - Creditor committees are normally be formed to represent interest groups.

Who do creditor committees represent in a Chapter 11 process? Creditor committees in a Chapter 11 process represent interest groups such as unsecured creditors, bondholders and tort claimants.

What is the role of a creditor committee in a Chapter 11 process? A creditor committee in a Chapter 11 process may take an active role in the conduct of the bankruptcy such as exercising the right to heard on court applications, to appoint lawyers, financial advisors and other professional advisors.

Who pays fees of professional advisors appointed by creditor committees in Chapter 11? The company who is undertaking the Chapter 11 Process pays the fees from their estate.

How does the Chapter 11 process commence? The company, which doesn’t need to be insolvent, begins the Chapter 11 process voluntarily, by lodging a petition, along with ther list of creditors and a summary of assets and liabilities, with the bankruptcy court.

How is the Chapter 11 petition filed? The petition is filed electronically at any time of day or night.

What is a ‘good faith’ filing of a petition in Chapter 11? The company must intend to bring about a reorganization, to realize assets or to achieve its sale to a third party. A filing that is not made with one of these objectives can be dismissed as a ‘bad faith’ filing.

The automatic stay following a Chapter 11 filing; What is it? The automatic stay takes place as soon as a filing takes place, under which all actions against the company or its assets anywhere in the world are prohibited without the consent of the bankruptcy court.

How is a breach of the automatic stay treated? A breach of the automatic stay means you are guilty of contempt of court and will be subject to automatic penalties. A creditor wishing to enforce security must first apply to the court for the stay to be lifted.

What special features does the automatic stay in Chapter 11 encompass? The automatic stay prevents the exercise of contractual termination; it prevents the exercise of set-off rights and it seeks to bind foreign creditors.

How does the Chapter 11 process affect the contracts of the company? The company still has the discretion to reject or continue with its contracts. If the company rejects any executory contract, the counterparty will have an unsecured claim for damages. The company can require a contract to continue, even if the counterparty has the contractual right to terminate it, provided that the company remedies any breach and, if a breach has occurred, it has given adequate assurances about future performance. Also the company has the right to assign a contract, which it decides to continue, even if the contract prohibits assignment. Such assignment may be made for example, in return for payment from the assignee.

How does a Chapter 11 process finish? A Chapter 11 process normally finishes with the approval and confirmation of a plan of reorganization.

When and how is the reorganization plan in Chapter 11 prepared? - Within the first 120 days of filing of the Chapter 11 petition, the company has the exclusive right to propose a reorganization plan. - The company normally negotiates the terms of the plan with the creditor committees and any other parties that are interested. - The company must provide a disclosure statment to their creditors, that contains information about the company and the plan.

How is the reorganization plan approved in Chapter 11? - Each class of impaired creditor (a creditor whose rights are to be affected) has to vote on the plan. - A plan will be approved by a class if a majority in number and two-thirds by value, who vote, vote in favour. - A dissentient minority will be bound by the class vote provided that the plan provides for each creditor to receive at least what it would have received in liquidation – the best interests test – and each creditor in the class is offered the same return. - The bankruptcy court must confirm the plan and it has the power to confirm even if a class of creditors has voted down the plan. Before doing this the court must be satisfied that the plan is fair and equitable.

The reorganization plan in Chapter 11 must be dealt with secured creditors? The reorganization plan must offer any secured creditors the full sum of their secured claims. However, instalments can be paid to them over a period of time, subject to the right to receive interest.

How must the reorganization plan in Chapter 11 deal with unsecured creditors? - The plan must generally provide for unsecured priority claims to be paid in full once the plan takes effect. Priority claims include certain pre-bankruptcy wages and employee benefits as well as the company’s post filing obligations. - Unsecured creditors with non-priority claims can typically expect the plan to offer them a combination of cash payments and new shares, loan notes or other securities. Cash payments may be payable immediately or in instalments over a period of time or be linked to future profits.

Can a Chapter 11 filing be pre-packaged? A filing can be pre-packaged by negotiating the plan and obtaining the class votes before filing. The necessary confirmation of the plan by the bankruptcy court can be obtained in four to six weeks. The principal advantages of a pre-packaged filing are that the outcome of the Chapter 11 process is certain and costs are saved due to the relative speed of the process.

Can a Chapter 11 filing be pre-negotiated? A Chapter 11 filing can be pre-negotiated through reaching agreement with major creditors before filing for it, but without voting by the general body of creditors. The advantages for the company are the expected cost saving and the expected early emergence out of bankruptcy.

How can a process be funded for a company in a Chapter 11 process? The US Bankruptcy Code has sophisticated rules allowing existing or new lenders to provide finance to the company after Chapter 11 filing, while the company puts together a plan of reorganization. This process is known as DIP lending. The bankruptcy court can authorize super priority liens (or security interests) to the DIP lenders in priority to any other security lenders. However, the court has to be happy with the fact that the existing security holders have adequate protection for the value of their security.

The method of sale of a company in a Chapter 11 process; What exactly is it? It is a section 363 sale; the sale of a distressed business and is a relatively quick process, under the US Bankruptcy Code. It needs only the bankruptcy courts approval, rather than the class consents that are required for the reorganization plan. The assets of the compamny can be sold by management without exposure to creditors’ claims and the buyer acquires the assets free of third party claims.

In a Chapter 11 process, what is the procedure for a section 363 sale? The procedure for a section 363 sale entails the company agreeing the terms of a sale with a bidder. This is known as a ’stalking horse’. The company must engage in an auction process whenever the deal is agreed. If the company accepts a higher offer made by a new bidder, it must make a compensating payment to the stalking horse. The compensating payment is normally a fixed amount between 1% and 5% of the sale price.

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Bankruptcy can be a scary and formidable event in our lives.  First of all, we probably all hope we never have to go through with it so we try not to pay any attention to it.  However, things happen in our lives and sometimes it is unavoidable.  When that happens, many times we are unprepared to face the challenges and tasks that come along with it because we are uninformed abot bankruptcy information.  This articles is dedicated to answering some of the most frequently asked bankruptcy questions.

1.What exactly is Bankruptcy?

Bankruptcy in its simplest form is a way for good people to get out of bad financial situations.  Almost everyone qualifies for a certain kind of bankruptcy and has a legal right to file for it.  You must file a petition which then will be presented to the court for them to either discharge your debts or determine that you still must settle with those creditors.

2. How do I go about filing for Bankruptcy?

This is a common bankruptcy question.  First of all you need to decide if you want to go through a bankruptcy attorney or try and file the paperwork on your own.  If you decide to go with a bankruptcy lawyer (which is always the safe way to go)  he will probably require you to fill out a questionnaire to determine if bankruptcy is really the avenue you should take.  Once that is decided then the attorney will help you decide what chapter of bankrupcy you should file for.  You will probably have to schedule a few meetings with the lawyer to go over more questions about bankruptcy and provide important documents that the attorney may need.  Once your bankruptcy petition is filed you will either meet with the Meeting of Creditors for a Chapter 7 filing, or with the Meeting of Creditors and Confirmation Hearing for a Chapter 11 or Chapter 13 filing.  Plan on a few different appearances to get everything worked out.

3.  What is a Chapter 13 bankruptcy?

A Chapter 13 bankruptcy is for residential homeowners.  It allows married couples to either pay off a portion or all of their debts under supervision and protection.  They can do this from the safety of their own home under the U.S. Bankruptcy Court.  This type of bankruptcy is mostly used to pay off mortagages, while still making sure other debts to creditors are taken care of as well.   Payments are usually spread out from three to five years.  Chapter 13 bankruptcies are for people that have employment and incomes but have just become overwhelmed with bills, lawsuits, credit card debts, and other obligations.

3. What is a Chapter 7 Bankruptcy?

A Chapter 7 Bankruptcy will have a trustee appointed by the court to sell off all of your assets in an attempt to pay back some of the money owed.  You then are exempt from your other debts, making you free of creditors that have hounded you for weeks and months previously.  The only debts that you are still liable for would be child support, taxes, alimony, and student loans.  These are not wiped away in a Chapter 7 Filing.