Analyzing a Restructure Plan
A company or individual who files for bankruptcy protection under Title 11 of the Bankruptcy Code seeks to reorganize their financial affairs in the context of the Bankruptcy Code. 1129 of the United States Bankruptcy Code states 16 mandatory requirements that must be met by a proponent of a bankruptcy Chapter 11 plan to achieve confirmation of that plan. In essence, a Chapter 11 plan is a proposed contract with creditors modifying in certain respects pre-petition rights held by various creditors and parties in interest. The Court must make specific findings in analyzing any Chapter 11 plan that every one of the 16 requirements are satisfied. Two of the most significant confirmation requirements address the determination of the appropriate dollar amount and number of claims in each class of creditors that must vote in favor of a reorganization plan to meet the confirmation standards. An analysis of each separate class of claims is undertaken to reach a conclusion as to whether that class is designated as a “accepting class” under the plan. Each class of claims is examined to determine if two-thirds of the dollar amount of the claims within that class and 50% of the creditor vote in favor of the plan. An interesting aspect of Chapter 11 cases is that after receipt of a proposed disclosure statement and plan, creditors fail to vote and their non-action in some instances can result in a positive or negative influence on the determination of the status of that class as an accepting or rejecting class. For example, an unsecured creditor class consisting of claims of $1 million wherein only $500,000 worth of claims vote must in total have claims valued at $330,000 vote to accept that plan. If the class consists of ten voting creditors, then at least six of the ten or simple majority must also vote in favor of the plan.
One significant confirmation requirement is that each class of claims or interests must either accept the plan or not be impaired under the plan. Impairment is generally defined as some alteration of contractual rights. A plan proposing to pay unsecured creditors 100% would not impair that class. Under another section of 11 U.S.C. 1129, if there is at least one class of impaired claims under the plan, one of those impaired classes must vote to accept the plan and that determination is made without including the voting of any “insider” shareholder manager (relative of debtor) under the Bankruptcy Code. The court must also make findings at the confirmation hearing whether a plan is feasible and whether there might be need for further financial reorganization of the debtor or any successor to the debtor under the plan. All Chapter 11 plans must also be proposed in good faith and not by any means forbidden by law. This is just a general summary of some of the major confirmation requirements that make it challenging for a debtor to achieve confirmation of their plan proposed under Chapter 11 of the Bankruptcy Code.
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