General Questions About The Out-of-Court Reorganization Process

Q. When management agrees to convene a meeting of creditors, who should be invited to attend that meeting, and what information should be given to creditors?

A. Management is encouraged to provide CMA a complete list of all creditors, as more harm than good can result by failing to invite “all” unsecured creditors to the first meeting of creditors. Using the list provided by management, CMA invites all creditors in writing to attend the meeting which is generally set 10 to 14 days from the notice date. Management of the debtor is urged to bring to the meeting copies of current financial information that will enable creditors to understand the financial condition of the company and its prospects for rehabilitation. CMA also recommends that management prepare a liquidation analysis of the company’s assets, that generally reinforces the fact that the value of the company is in its ability to generate income on a going forward basis an not through liquidation.

Q. How many creditors should serve on the Creditors’ Committee and who are they?

A. Following the debtor’s presentation and question and answer session, the debtor’s representatives are asked to leave the room in order to allow the creditors in attendance to discuss the information in private. CMA remains in the room to facilitate the discussions and help with the selection of a Creditor’s Committee. Unlike the formal bankruptcy process where only the top 20 creditors are invited to participate on the Committee, in the Out-of-Court Reorganization process, the Creditors’ Committee is selected from creditor body. Generally, the larger creditors offer to donate their time to serve on the Committee in order to protect their interest and the interest of other unsecured creditors. A workable Committee is usually 5-7 creditors, depending on the size of the case.

Q. Should the debtor invite its secured creditors to attend the first meeting of unsecured creditors?

A. No. Before calling the meeting of unsecured creditors, management of the company should inform its secured creditor(s) that it intends to call a meeting of its trade creditors for purposes of seeking their cooperation in an Out-of-Court reorganization of the company’s unsecured trade debt. Efforts to restructure the secured debt has generally already begun before calling the meeting of unsecured creditors. Secured creditors generally look favorably upon the Out-of-Court Reorganization process, as trade creditors will often defer collection efforts against the company if they understand the financial problems of the company and are asked to participate in the Out-Of-Reorganization reorganization process.

Q. Isn’t the debtor company better off filing bankruptcy as the court imposes the “automatic stay” once the bankruptcy is filed, preventing creditors from filing lawsuits or pursuing pre-petition unsecured claims.

A. There is no question that filing a bankruptcy petition will stay the collection efforts of creditors, however, the short period of relief derived from the automatic stay comes at a “huge” cost in terms of professional fees, court fees and loss of cooperation from the debtor’s suppliers. In making the decision to file bankruptcy, management’s judgment is often affected by the “crisis” mode that exist and generally underestimates the cooperation they will receive if venders are given he opportunity to participate in the Out-of-Court Process. The fact that the vendor can ship on a COD basis going forward will begin the credibility rebuilding process. In offering the vendors the choice between the Out-of-Court Reorganization process as opposed to filing bankruptcy, the dismal results of the bankruptcy process where only the professionals prosper is generally sufficient motivation for everyone involved to cooperate in an Out-of-Court process. On a national average, 95% of all attempted reorganizations under Chapter 11 of the Bankruptcy Code fail due to the high administrative cost. Within one year of the filing, most chapter 11 debtors are converted to a chapter 7 and liquidated by a Trustee.

Q. What if a debtor company is being sued by creditor(s) and/or a few creditors have judgments against the company, is it too late to uses the Out-of-Court Reorganization process?

A. No. As part of the Out-of-Court Reorganization process, CMA recommends that the debtor immediately grant to CMA as Trustee for all unsecured creditors who participate in the moratorium, a blanket security interest in the assets of the debtor. When the debtor grants unsecured creditors a junior lien , all general unsecured creditors now become in effect members of a class of secured creditors, where no one creditor can gain advantage over another because they are protected.

Q. Once a repayment plan is negotiated, can the Creditors’ Committee bind the other creditors to the Plan?

A. In the Out-of-Court Reorganization process, the general unsecured creditor generally agree to participate on a go forward basis, being represented by an advisory Creditors’ Committee. The Committee will have the right to extend or terminate the moratorium as it deems to be in the best interest of creditors. The Committee will also have the responsibility of negotiating a repayment plan for the benefit of all unsecured creditors. The repayment program to be negotiated will treat all unsecured creditors equally. It is understood that the Committee does not have the ability to bind creditors to a repayment program. When a consensual plan is agreed to, creditors will be given the opportunity to vote on the plan and make their own independent decision as to whether or not the terms of the plan are reasonable and acceptable under the circumstances. When the Plan is circulated to creditors to vote upon, the Committee and debtor should insist that creditors representing 90% or more of the total unsecured debt approve the Plan before the Plan become effective.

Q. What are the disadvantages of proceeding with an Out-of-Court Reorganization process as opposed to the bankruptcy process?

A. Creditors can pursue litigation against the debtor in the Out-of-Court Reorganization process. In the absence of the CMA lien discussed above, there is no ability to stop creditors from gaining an advantage over other creditors or seizing assets to satisfy their claims through litigation. . For every creditor who does not consent to the moratorium or subsequent Plan, the debtor may have to spend legal fees to fend off collection efforts. In addition. Equity plans are hard to confirm without bankruptcy court involvement. Real property and equipment leases are easily mitigated in bankruptcy.

Q. What are the advantages of using the Out-of-Court Reorganization process over Chapter 11 of the Bankruptcy Code?

A. The cost to administer an Out-of-Court Reorganization process is generally a fraction of the cost the debtor company will spend to accomplish the same results in bankruptcy. Repayment programs in Out-of-Court repayment Plans offer greater flexibility and can be implemented in shorter time frames as compared to the expensive and time consuming bankruptcy process. In Out-of-Court Reorganizations, since the company is not spending large sums of cash to finance the bankruptcy reorganization process, creditors are typically paid in shorter time periods and receive a greater recovery. Moreover, in some industries, the filing of a bankruptcy can be the death knell of the company. The Out-of-Court Reorganization process can also be part of a pre-package bankruptcy Plan in situations were the Estate would benefit greatly from the bankruptcy process in mitigating numerous real property/equipment leases.

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