Page 92 - Bankruptcy Volume 1

Chapter 12

Plan of Reorganization

The alternatives available to companies in financial distress are numerous: out-of-court workout settle-
ments, assignments for the benefit of creditors, Chapter 7 liquidations, and reorganization or liquidation
proceedings under Chapter 11 of the Bankruptcy Code. This section describes the process of developing
a Chapter 11 plan of reorganization.

The Reorganization Process

The ability of a Chapter 11 debtor to emerge from bankruptcy depends on the development of a plan that
is acceptable to the parties that have an interest in the case. A plan of reorganization resolving the claims
of the secured and unsecured creditors and the interests of equity security holders of the debtor requires
that each impaired class of creditors receiving a distribution vote in favor of the plan. However, it is pos-
sible under certain conditions, as described in the following pages, to confirm a plan of reorganization
even if one or more classes do not approve the plan.

Exclusivity

During the first 120 days after the order for relief, the debtor has the exclusive right to negotiate and file
a plan of reorganization. A debtor may petition the court for one or more extensions of this exclusive pe-
riod, up to a total of 18 months. One rationale for granting such extensions is to provide the debtor suffi-
cient time to amass the financial and other information required to determine and negotiate its plan. For
example, a bankruptcy judge may extend exclusivity in the case of a retailer filing for bankruptcy in
March, after it collects the revenues from its previous holiday season sales. One rationale for an exten-
sion is that the retailer needs at least one year (or another holiday selling season) to reassess its opera-
tions and financial needs to adequately prepare a reasonable business plan.

If a plan is filed during the exclusivity period, the court grants the debtor an additional exclusive period
in order to solicit the necessary acceptances of its plan — initially limited to 180 days from the date of
the filing in a voluntary case, and usually until 60 days after the expiration of the exclusive period for
filing a plan, up to a total period of 20 months after the bankruptcy filing.

Creditors and other parties in interest may object to numerous extensions of a debtor’s exclusivity period
because of the inherent delays to the reorganization process. Though extensions of the exclusive period
are fairly routine, courts may be reluctant to extend the period in the face of strong creditor opposition,
particularly where there does not appear to be any realistic prospect for a debtor to propose a feasible
plan within the extended period. The Bankruptcy Code also provides creditors with mechanisms that
force the debtor to keep the process moving — or risk losing the debtor’s exclusive rights. One such
mechanism ending a debtor’s exclusivity period (in addition to the court refusing to grant an extension)
is a creditor’s successful request for the appointment of a Chapter 11 trustee to oversee the debtor’s re-
organization. The appointment of a Chapter 11 trustee automatically ends a debtor’s exclusivity period.

A debtor may file a plan on the day exclusivity ends, even though it has not come to a consensual
agreement with its creditors as to the terms of the plan and even if the debtor realizes the proposed plan
is not feasible. This act allows the debtor to use the additional exclusivity period normally used for plan

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