Business Bankruptcy--Plan of Reorganization



Business Bankruptcy - Simplified Operating Guidelines

A "How-To" Manual

For Non-Bankruptcy Professionals
Page 11
Robert S. Apfelberg, Karrie L. Bercik, Esq.

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Chapter 9. Plan of Reorganization

The plan of reorganization is the successful conclusion of the chapter 11 business reorganization. The plan must specify how the debtor intends to pay the creditors. It will typically specify: (i) which assets will be kept or sold, (ii) whether there will be new investors or a merger, and (iii) which contracts, liens and debts will be satisfied, canceled or modified.

The debtor is given the sole power to file the plan during the approximately 120-180 day post-petition "exclusive period." Once the exclusive period has expired other interested parties may also file a "competing" plan.

The plan will describe the payments to be made to each class. Creditors in the same class must be treated equally, unless they individually agree to be treated differently.

Accompanying the plan is a separate description of the economic terms in the plan, referred to as the "disclosure statement." It is similar to an investment prospectus utilized by solvent companies, and contains simple explanations, many caveats and warnings. There is a securities law exemption for companies "going public" by virtue of a chapter 11 plan. Therefore, utilizing a standard form disclosure statement can become a relatively inexpensive form of investment prospectus.

The disclosure statement must contain adequate information for the creditors to appropriately vote on the plan. The plan and disclosure statement must be approved by the court. The plan must be approved by the creditors.

The plan and disclosure statement are filed and served on the creditors before the noticed court hearing to approve ("confirm") the plan. A class of creditors "accepts" the plan, if two-thirds in amount, and more than one-half in number, vote to accept the payments they will receive under the plan. If these voting requirements are not met the class has "rejected" the plan. However, creditors whose interests are not altered by the plan ("unimpaired") are deemed to have accepted the plan without separately voting.

The plan takes effect on a specified date ("effective date") after it has been approved by a sufficient amount of classes, and the court ("confirmed"). The "post confirmation" "reorganized" debtor must make the payments required under the plan. Payments to different classes may be made over various time periods under the plan. Interest rates, payment periods and principal amounts of secured loans may be altered by the plan ("cram down").

There are many technical requirements for plan approval, including:

1. It must be proposed in good faith and meet all chapter 11 requirements.

2. Payments to anyone performing administrative period services must be reasonable and approved by the court.

3. Future managers of the debtor must be identified and their compensation described.

4. If any class of creditors is impaired, by receiving less than full payment, either the class must approve the plan, or it must receive value (either monetary payments or an interest in the debtor's property) equal to what that class would have received if the debtor had liquidated in a chapter 7.

5. Certain creditors must be paid on the effective date, or within specified periods of the court approved applicability of the plan.

6. At least one impaired class must approve the plan.

7.    The plan must be proven to be economically "feasible". This means that the debtor is not likely to: (i) need further reorganization, (ii) fail to make agreed upon payments, or (iii) liquidate.

8. A higher ranked class of creditors must receive all of its payments under the plan, before a lower ranked class of creditors may receive any payments.

When the plan becomes effective the debtor receives a "discharge" from the prior debts except for payments required by the plan.

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