For a business in financial distress, Chapter 11 bankruptcy, also known as a business reorganization bankruptcy, offers a win-win solution for both you and your creditors. Creditors recover a larger percentage of debt than would be possible with liquidation, while you are able to repay a more manageable portion of debt and remain open for business.
People have been known to say, “where you stand depends on where you sit.” Nowhere is this more applicable than in bankruptcy. Your perspective on the case will depend on the role you play, the risks you face and/or the objectives you hope to achieve. The debtor, its equity-holders, bank lenders, the U.S. Trustee and even the judge each bring a unique set of perspectives, concerns and goals to a chapter 11 case. Today we discuss the roles of creditor and debtor.
Role of the Debtor
NOLO states that, “generally, the debtor continues to operate its business as the ‘debtor in possession.’ The bankruptcy court can appoint a trustee to take over operations from the debtor if it finds sufficient cause. Cause for appointing a trustee includes fraud, dishonesty, incompetence, and gross mismanagement of the debtor’s affairs.”
According to the American Bankruptcy Institute, while the debtor ordinarily continues in business after it files Ch
apter 11, it loses control over major decisions to the bankruptcy court. Among other things, the bankruptcy court must approve:
- any sale of assets, such as property or real property (except for items such as inventory sold by a retail debtor in the ordinary course of business)
- entering into or breaking a lease of real or personal property
- mortgage or other secured financing arrangements that allow the debtor to borrow money after the case is filed
- shutting down or expanding business operations
- entering into or modifying union, vendor, licensing, and other contracts and agreements, and the retention of, and payment of fees and expenses to, attorneys and other professionals.
Role of Creditors
According to NOLO, creditors may support or oppose actions that require bankruptcy court approval. The bankruptcy court will consider input from creditors in deciding how to proceed. Formal votes by creditors; however, are taken only in connection with proposed Chapter 11 plans.
Unsecured creditors usually participate in the Chapter 11 case through a committee that is appointed to represent their interests. The unsecured creditors’ committee can retain attorneys and other professionals to assist it at the debtor’s expense. In some cases, equity security (i.e., shareholder) and other committees also take an active role.
There are a number of ways a Chapter 11 bankruptcy can be structured. An experienced bankruptcy lawyer at Penachio Malara, LLP can help you to develop a workable restructuring plan, retain control of your assets, and represent you with creditors and the courts. We work closely with financial professionals to formulate a restructuring plan that will be attractive to creditors and help you avoid liquidation.
Because a Chapter 11 bankruptcy can be very complex, it’s essential to have a seasoned Chapter 11 bankruptcy lawyer representing your interests. Contact Penachio Malara, LLP for a free initial consultation to discuss your situation. With nearly 25 years of experience serving clients in the Westchester, Putnam, Rockland and Dutchess Counties of New York, you can count on reliable legal counsel and a strong commitment to a positive outcome.