Chapter 11 bankruptcy is also known as the business bankruptcy and reorganization bankruptcy. Chapter 11 is usually filed by businesses that want to continue their operations and at the same time repay their creditors through a court approved plan of reorganization. Companies that know that their long term revenues will be more than the present liquidation value of their assets choose to file for Chapter 11 bankruptcy.
Chapter 11 bankruptcy needs to be filed with a bankruptcy court that serves the area where the debtor resides. Chapter 11 petition can be voluntary or involuntary. In a voluntary case, the petition would be filed by the debtor. In an involuntary case, the petition is filed by the creditors after meeting certain requirements.
When a company files a Chapter 11 petition, it has to declare all its assets and provide a comprehensive list of all its debts that it is seeking protection from. This is a very complex exercise especially in cases involving large enterprises.
Appointing A Trustee
Once a company files for Chapter 11 petition, the court looks into whether there was any fraud or gross mismanagement on part of the debtor. If they find so, they can appoint a trustee who then takes over the operations of the company for the entire duration of the proceedings.
In a Chapter 11 proceeding, a creditors’ committee is formed with the aim of negotiating the best possible payment terms for the unsecured creditors. If a company is very large, then there can be several creditors’ committees formed, each representing various groups. Stockholders also form a committee.
Reorganization Plan
Once a debtor files a Chapter 11 petition, the company has 120 days to submit a reorganization plan. During this period the debtor has the exclusive right to submit a reorganization plan. After the reorganization plan is submitted by the debtor, the creditors and the stockholders vote on it. The opinion of the stockholders is really not that important, because the court can go ahead with the plan even if they disapprove of it.
On the other hand, it is important that the reorganization plan is approved by the creditors. Once it is approved by them, the court goes ahead and approves it. Approval by the court means that the bankruptcy has been certified and confirmed.
After the certification, the debtor has to go according to the reorganization plan. Under the guidance of the appointed trustee, the debtor makes the payments to the creditors.
In simple terms, the reorganization plan is a payment plan. In cases of large bankruptcies, companies often have to reorganize their debts. They do so by closing their retail stores, offering stocks to creditors, reducing the number of employees, or renegotiating contracts.
Certain Provisions
It is important to note here that a provision in the Chapter 11 bankruptcy allows debtors to cancel their contracts with unions, suppliers and real estate leases in order to pay off their debts. Another provision in the Chapter 11 bankruptcy allows debtors to avoid payments and purchases made 90 days prior to filing bankruptcy.
Once Chapter 11 bankruptcy is certified, the company can only carry out the standard business operations like, sales and purchases of goods necessary for everyday business operations. It cannot buy another company or sell off its own division. The company cannot go for major expansion and neither can it sell a major portion of its property or equipment without court’s approval.
During the reorganization period, the company’s stocks become almost worthless. It is only after the company gets out of Chapter 11 that one would see a rise in the value of their stocks.
It is important to note here that the debtor should follow the reorganization plan completely otherwise there can be serious consequences. If the trustee finds that the debtor would not be able to follow through the plan, Chapter 11 bankruptcy can be converted to Chapter 7, which is a death blow to a company.
After the reorganization plan is successfully completed and the creditors are paid off, the company and go ahead and do business as usual.