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Chapter 11 Bankrutpcy A bankruptcy proceeding under Chapter 11 of the Bankruptcy Code is a financial reorganization in which a debtor continues to operate his or her business as a "debtor in possession" (DIP) with the protection of an automatic stay. The debtor in possession has the status of a trustee, in that the debtor must manage the assets of the estate for the benefit of creditors. Introduction* A voluntary Chapter 11 filing is an action taken by a U.S. company to resolve financial challenges, such as lack of liquidity or excessive debt, in order to maximize the value of the "Estate" (the company's assets and operations) for the benefit of all creditors. During the Chapter 11 process, a company is able to continue to conduct business while reorganizing its finances and operations in order to pay the claims of those to whom it owes money. This is accomplished in part through a legal mechanism known as an "Automatic Stay" which stops creditors from taking action to collect money owed to pre-petition creditors. A company in Chapter 11 may continue to sell goods, and to employ workers. It is also able to continue to do business with suppliers and customers. A company exits Chapter 11 when the U.S. Bankruptcy Court has approved a Chapter 11 Plan of Reorganization, and the transactions and payments proposed in the Plan are consummated. The Plan is usually developed by the company in conjunction with its secured and unsecured creditors, and in consultation with the Unsecured Creditor's Committee. Debtor in Possession Reporting The debtor in possession is required to make periodic reports about the business to the U.S. Trustee and the bankruptcy court, and are made available to interested creditors and the creditors' committee. The reports are standardized by the Office of the U.S. Trustee, and include the following elements:
The debtor in possession's broad authority to conduct business can include asking for the extension of credit and selling assets. If the debtor intends to sell assets outside the ordinary course of business, he or she is required to notify creditors and possibly get court approval. In addition, the Code limits the extent to which a debtor can use cash generated through the sale of inventory or the collection of receivables subject to a pre-petition lien. Creditors' Committee In a Chapter 11 case, a creditors' committee is appointed to represent the unsecured creditors. The U.S. Trustee is required to appoint individuals willing to serve, preferably the seven largest unsecured creditors. Although preferable, it is not necessary that those appointed hold the largest claims. Initially, the U.S. Trustee contacts the 20 largest unsecured creditors from the list filed with the debtor's bankruptcy petition and solicits their input in the appointment process. Any creditor who holds a substantial claim and wants to be appointed to the committee should contact the U.S. Trustee. The committee has a fiduciary duty to represent all unsecured creditors rather than just those appointed to the committee. Once appointed, the committee is provided with the debtor's business reports as they are filed with the U.S. Trustee. Committee Governance How the creditors' committee calls and controls its meetings, votes on issues presented, and otherwise governs itself is not covered by any statutory provision or rule. Most committees appoint a chairperson, meet on an ad hoc basis when everyone is available, and take action by a majority vote. Creditors' committees are allowed to retain counsel, accountants, and other professionals at the expense of the estate. Their professional fees are an administrative expense to be paid before any distribution is made to creditors. The out-of-pocket expenses of creditors' committees also may be treated as administrative expenses. Committee's Relationship with the Debtor in Possession The committee's relationship with the debtor in possession is often a complicated one, since there are no specific statutory or regulatory guidelines defining the role of the committee in the day-to-day operations of the business. In some respects the committee's relationship to the debtor is similar to that of an advisory board of directors which cannot directly instruct the debtor or the debtor's officers to take action in operating the business, but may make suggestions. However, if its suggestions are not considered, the committee may bring the issue before the court for ruling. Often, the committee will find itself pursuing fraudulent or preferential transfer actions, even against its own members. Equally frequently, the committee may ask the court for authority to pursue an avoidance action against a secured creditor whose claim is not properly perfected (proven). Perhaps the primary role that the creditors' committee can play is to help formulate the reorganization plan. The committee can object to the plan proposed by the debtor by soliciting votes against it or litigating its confirmation. Committee's Interaction with the Trustee The committee, as well as other parties in interest, may seek the appointment of an examiner or a trustee. In many cases the prompt appointment and qualification of a trustee is critical to safeguarding the assets. Creditors' Right to Be Notified Creditors have the right to be notified of certain actions affecting the operation of the business and the assets of the bankruptcy estate. In particular, unsecured creditors are entitled to be notified of actions that may significantly diminish the assets available for them. *Introduction by Michael Dennis, author of "Credit and Collection Handbook" available at the NACM Bookstore. Source:
"Manual of Credit and Commercial Laws," edited by Charles M.
Tatelbaum and John K. Pearson, available at the NACM
Bookstore. |
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