Last year I published an article about “COVID-19’s Impact on Chapter 11 Cases”, suggesting its impact for debtors, secured lenders, unsecured creditors, and equity interest holders may be to turn the Chapter 11 process into true reorganizations of companies, rather than mostly asset sales of the Debtor’s assets as has been the situation for many years.
Now, as we Americans emerge from the pandemic, this author is experiencing more and more efforts by business executives to use Chapter 11 as a cure for their companies’ financial problems.
As we attorneys advise our clients about Chapter 11 and the various alternatives available to them in Chapter 11, we should keep in mind the legal and factual difficulties of confirming Chapter 11 reorganization plans generally and the relative ease legally and factually of sales of substantially all assets of the Debtor in Chapter 11 cases.
For reorganization plans, §§ 1122-1129 of the Bankruptcy Code contain the legal requirements to confirm a plan, and the relevant facts may not allow for the legal requirements to be satisfied. It is always a useful exercise to consider each of the mandatory plan requirements of §§ 1123(a)(1) - (a)(8) and 1129(a)(1) - (a)(16) to evaluate whether they can likely be satisfied factually. Extensive discussions with the clients (including creditor clients) are often required to determine if the facts will likely satisfy the legal requirements for confirmation of a plan.
In addition, extensive discussions between and among the Debtor, its secured lenders, its major unsecured creditors, and its major equity interests are usually important and can often lead to constructive results in terms of the best path forward for everyone. This can also help to avoid extensive, contentious, and expensive litigation fights within the Chapter 11 case over the various issues.
Indeed, it may well turn out as a result of all these extensive discussions that a sale of all of the Debtor’s assets as a going concern and operating business to a third-party purchaser is the best path forward for everyone under the circumstances. Or, it may turn out that a sale of some of the Debtor’s assets, and a reorganization of the remainder of the Debtor’s assets and business through a plan of reorganization in the Chapter 11 case, is the best path forward. If a broader consensus among the Debtor, its secured lenders, its major unsecured creditors, and its major equity interests can be reached, that is usually a better result and path forward for everyone.
The possible alternatives to discuss and consider are usually many, and extensive candid discussions where the pros and cons of each alternative are carefully considered and evaluated are usually beneficial. Like many things in life, when a business (or a person) is in distress over finances or anything else, the process of carefully considering and evaluating the various alternatives to help to relieve the distress is usually beneficial and leads to constructive results.
Clients also need to be made aware of the potential expenses involved with the entire process and a Chapter 11 case, including the fees of attorneys, experts and others.
In short, we attorneys need to be mindful to explain fully, advise, and inform our clients of the risks, rewards, benefits, and costs of a Chapter 11 case and the pre-Chapter 11 process too, so that they are equipped to make informed, intelligent decisions whether or not it is advisable to seek relief under Chapter 11 and, if so, their alternatives within a Chapter 11 case, including sales of assets, efforts to reorganize through a plan the company’s assets, debts, and liabilities (secured and unsecured) as well as possibly the company’s ownership structure, litigation of the various issues, and others too.