Chapter 11 bankruptcy reorganization provides business organizations with an opportunity to reduce or eliminate debt and other liabilities, adjust their organizational structure by selling or liquidating underperforming lines of business, and implement changes in corporate governance and management structures to provide for enhanced opportunities for future operations, among other benefits.
A business organization may pursue either an in-court or out-of-court restructuring. If an organization flies a voluntary petition for relief under the United States Bankruptcy Code, it will be required to work with legal and financial professionals, judicial officers, and other stakeholders, such as governmental entities and regulators, groups of creditors and parties that have an interest in the outcome of the proceeding, the media, and the public.
Before it commences a chapter 11 bankruptcy proceeding, the organization will typically retain bankruptcy counsel to analyze its organizational structure, business operations and financial performance, debt structure and lienholders, employee compensation, and tax liabilities, among other information. Depending on the size and scope of its operations, the organization will also work with a financial advisor and investment bank, both of which will help it study its operations and finances, as well as determine optimal paths forward.
The organization must remain aware that, once it becomes the subject of a bankruptcy proceeding, a federal bankruptcy judge will be named to administer its legal proceedings in front of the applicable federal bankruptcy court. At that time, the organization will be identified as the “debtor.” The bankruptcy judge must approve all matters outside the ordinary course of the organization’s business operations. For instance, the court must approve the retention and compensation structure for the debtor’s attorneys and financial advisors. Ultimately, whether the court approves of the debtor’s plan of reorganization will determine whether the debtor will emerge out of bankruptcy.
Also involved in the bankruptcy process is the Office of the United States Trustee, or “UST.” The UST is an agency within the United States Department of Justice that is responsible for ensuring the fairness and integrity of the bankruptcy process. Typically, the UST will closely monitor the debtor’s court filings, hearings, and spending to ensure that it acts in compliance with the Bankruptcy Code. The UST will, for instance, file an objection with the bankruptcy court if the debtor’s professionals seek to charge unreasonable fees, costs, or expenses to provide the debtor with their services.
Typically, in chapter 11, the organization’s pre-bankruptcy management will continue to operate the debtor’s business and manage its properties. That may change, however, if management has previously engaged in prohibited conduct, including, for example, intentional misconduct. If that occurs, the court has the authority to appoint a chapter 11 trustee to manage the debtor’s affairs.
Other key players in chapter 11 include organized groups of creditors or interested parties whose formation the bankruptcy court may approve to protect the interests of the group’s members. That includes, for instance, an official committee of unsecured creditors whose role is to protect the interests of vendors, suppliers, customers, service providers, and other entities that have claims against the debtor that are not secured by collateral. Another such committee includes holders of the organization’s equity interests, such as common or preferred stock. Certain parties may separately form ad hoc committees to protect their interests. That includes, for example, tort claimants, noteholders, and other parties that have shared interests regarding the debtor’s bankruptcy estate.
Other parties that are involved in a chapter 11 include other government regulators that had regulated the debtor’s pre-bankruptcy business, such as the Internal Revenue Service, Securities and Exchange Commission, and Bureau of Land Management, among other similar types of agencies.
As part of a chapter 11 bankruptcy, the debtor must plan to work with other stakeholders that have a more general interest in the matter. That includes the media, the organization’s employees, and its customers, especially if the debtor had provided pre-bankruptcy services to the wider public.
The debtor must ensure that its management and professionals navigate its relationships with the parties, officials, and stakeholders named above. Doing so may allow the debtor the opportunity to more smoothly and quickly emerge from bankruptcy to resume normal course operations.
