The mechanism for a successful compromise settlement is a two-step CMA process: (1) the formation of acreditors’ committee to review updated financial and operating information to determine whether the offer is at least equal to or greater than creditors would expect to receive through liquidation of the business and, (2) the solicitation and acceptance of the offer by creditors.
CMA facilitates the process by serving as a communications liaison between all parties and stabilizing valuable relationships. It then manages the solicitation process and serves as disbursing agent to ensure an equitable recovery for all creditors. The client’s credibility is strengthened through collaboration with a representative group of creditors, the committee, and the prospects for recovery are greatly improved.
The advantage of a Compromise Settlement is that it results in creditors agreeing to accept less than the total amount of their claims, in full settlement. The client emerges with a stronger balance sheet and the ability to go forward unencumbered by trade debt.
The distressed business believes it can survive and pay creditors in full, but needs time to stabilize its relationship with vendors and reorganize its affairs. CMA’s classic out-of-court alternative to a costly and time consuming Chapter 11 is accomplished through a meeting between the debtor and its unsecured creditors, the formation of a creditors’ committee, the establishment of a moratorium on collection activity and litigation to allow the business to reorganize, and the negotiation of an extended payment plan.
The debtor’s operating environment changes dramatically following the meeting with creditors. CMA, serving as Committee Secretary, issues strategic communications, which stabilize creditor confidence and lend credibility to the informal workout process. Prospects for litigation are greatly diminished, if not completely eliminated, and the client retains control of the business, enabling it to implement management decisions without the restrictions of the bankruptcy court. CMA is typically granted a blanket security interest in the debtor’s assets, which is held in trust for the fair and equitable treatment of all unsecured creditors.
The creditor’s committee serves in an advisory role and monitors the debtor’s operations during the moratorium with a view toward negotiating a payment plan which is feasible for the debtor and acceptable to the majority of creditors. CMA can serve as facilitator or mediator to help resolve disputed claims, thus ensuring the participation of a creditor in the payment program. CMA also serves a fiduciary role by acting as Disbursing Agent under a Workout Agreement.
General Assignment for the Benefit of Creditors
The general assignment is a common law analogue to a Chapter 7 Bankruptcy. The Assignment is created by contract and can be a quicker, more efficient and less expensive method of winding down the operations of a company, liquidation of its assets and distribution of the proceeds to creditors.
As an assignee, CMA can operate a business for a limited time to seek “going concern” value from prospective buyers or to maximize the collections on accounts receivable. In many instances, a general assignment is used to effect the quick sale of assets of a distressed company to a buyer for a purchase price negotiated prior to the assignment. Since an assignee is exempt from the requirements of California’s bulk sales laws, the asset sale can be completed without the notice requirements and risk associated with bulk sales. In all general assignments, CMA attempts to realize the maximum liquidation value for all assets, as permitted under the circumstances of each individual case.
Like a trustee, an assignee has the power to sue for recovery of preferences and fraudulent conveyances.
An assignee distributes the proceeds from its liquidation of assets according to a priority scheme that is similar to that contained in the bankruptcy code. CMA makes every effort to issue dividends to creditors as soon as funds are available. Unsecured creditors receive pro rata distributions which may commence anytime after the “bar date” to file claims.
CMA’s expertise in liquidating numerous companies through general assignments over the past century is unparalleled.
The key to any successful out-of-court arrangement is communication and professional administration. CMA has over a century of experience serving as Secretary to creditor’s committees. Its strategic communications provide creditors with answers to previously unanswered questions, reducing the probability of lawsuits and restoring creditor confidence. CMA’s presence lends credibility to any out-of-court workout; it serves as “information central” in every case and communicates with creditors on a one-to-one basis as needed.
CMA coordinates all committee communications and ensures the smooth administration of the case. Attorneys and other professionals rely on CMA to facilitate the negotiating process leading up to a formal proposal to creditors. The detailed sets of minutes provided to committee members and regular status bulletins to creditors are crucial to the out-of-court workout process. CMA’s advanced database software ensures effective communication and claims management.
CMA brings this same level of professional expertise to a formal Chapter 11 case when it is designated as Secretary to the Official Creditors’ Committee by the Bankruptcy Court. The Association has a long history of serving in this specialized capacity and is frequently used by insolvency attorneys to enhance the administration and communication in a Chapter 11.
Plan Trustee / Estate Representative / Sole Responsible Officer
In certain instances, a Chapter 11 Plan of Reorganization will provide for sale to a buyer substantially all the assets required for operations. However, certain of the debtor’s assets will not be acquired by the buyer. Under such plans, CMA often receives appointment as the Plan Trustee or Estate’s Representative with the authority to direct the liquidation of the remaining assets, pursue avoidance actions or object to claims. CMA’s directors have received personal appointment through a Debtor’s plan of liquidation as Sole Responsible Officer with the power to personally direct the liquidation of certain assets, subject to the Bankruptcy Court’s supervision.
The Adjustment Bureau of CMA regularly serves as disbursing agent for the administration of payments to creditors as a function of court-approved reorganization plans, out-of-court debt re-payment arrangements and distributions to creditors following liquidation of an insolvent business.
Creditor repayment plans often provide for multiple dividend payments to creditors over time. A series of payments to creditors over months or years can impose an extraordinary administrative burden on a re-organized company. In addition, creditors may lack confidence that a debtor’s management will treat creditors equally. Utilization of CMA as a third-party administrator removes from management of the re-organized or liquidated company the responsibility and liability for distributions to creditors.
CMA’s experienced staff utilizes advanced database management techniques to quickly and efficiently manipulate large amounts of claims information into accurate distributions and meaningful reports that directly respond to most inquiries. In addition, CMA uses the assembled data for frequent communication to creditors about the status of an on-going case. Because of its non-profit standing and long history of service to the credit community, CMA’s engagement as disbursing agent gives creditors the assurance that distributions will be fair, and payments will be timely and accurate.
CMA will often hold in trust, for the benefit of all creditors entitled to payments under the plan, a security interest in the debtor’s assets. The security interest granted to CMA, as stakeholder, ensures that the debtor will meet its obligations under the plan and that no individual creditors will be able to attach the debtor’s assets and receive more than the other creditors. If the debtor defaults on its obligations to fund the plan payments, CMA will seek instructions from a creditors’ committee regarding the remedies available in the plan, including foreclosure under the security interest and liquidation of the collateral, if appropriate.
Appointment of CMA as a disbursing agent is frequently a provision contained in an out-of-court debt repayment plan or Chapter 11 Plan of Reorganization. CMA’s staff can serve as a valuable resource in the drafting of plan provisions relating to distributions to creditors. Creditor acceptance of the plan signifies acknowledgment that CMA will administer payments under the plan. CMA can serve with or without bond. CMA’s standard compensation is a small percentage of the total amount distributed to creditors.