An Alternative to Chapter 11 Under the Bankruptcy Code
Many attorneys automatically put financially troubled companies into bankruptcy without exploring alternatives. A decision is best made when all possible avenues are thoroughly explored and discussed beforehand. More times than not, the expensive and time consuming bankruptcy process can be avoided if the debtor’s creditors are given an opportunity to participate in the Out-of-Court Reorganization process.
What is an Out-of-Court Reorganization
Out-of-Court Reorganization is the alternative to reorganization under Chapter 11 of the Bankruptcy Code. The Out-of-Court reorganization process enables management of the debtor to keep control of the debtor’s assets while attempting to reorganize the financially troubled company outside of the bankruptcy process.
The Out-of-Court Reorganization process generally starts with calling a meeting of the company’s creditors for purposes of reviewing the history of the company, its current operating condition and future prospects, and to seek from creditors their participation in a moratorium. The moratorium will enable the company to revitalize itself so that a repayment program can be structured for the benefit of all creditors.
During the presentation, management should include the following:
- History of company.
- Cause of the financial distress.
- Current financial information. (Including a liquidation balance sheet)
- Request for cooperation (moratorium).
- Formation of a Creditors’ Committee.
- Request for a moratorium
Types of repayment programs typically negotiated between the debtor and Creditors’ Committee are:
A Compromise Settlement is an arrangement in which creditors agree to accept less than the total amount of their claims, in full settlement. The settlement must be fair (in an amount equal to, or preferably greater than creditors would expect to receive under a liquidation of the business) and must be offered without discrimination to all creditors of the same class. The funds for the settlement usually come from a third party. Such an approach can provide early cash to creditors and allow a distressed business to continue to survive. Funds for the settlement are distributed by CMA to ensure equitable recovery by all creditors.
Some businesses may not be able to generate sufficient cash to settle with creditors, but may have the ability to become rehabilitated and repay creditors over time from funds generated by continuing operations. The key to success in this type of case may be the extension time granted the company within which to repay creditors. The terms and conditions of the repayment program are negotiated between the business and the Creditors’ Committee that is formed at the first meeting of creditors. Once the repayment program is reached, CMA disseminates a copy of the written Plan detailing the debtor’s proposal to all creditors for their review and consent. Upon receiving the requisite number of consents to enable the Plan to go forward, the debtor makes regular payments to CMA for periodic distribution to all unsecured creditors on a pro-rata basis. During the term of the Plan, CMA works with the Creditors’ Committee in monitoring the debtor’s operations and keeps creditors informed by way of written reports of the status of the debtor’s operations and its compliance with the terms and conditions of the repayment program.