Page 93 - Bankruptcy Volume 1

solicitation to continue to negotiate with its creditors (without a competing plan). Plans may be amended
after they are filed. In fact, amendments are common and may be material.

Types of Reorganization Plans

Debtors may meet with creditors well before a bankruptcy filing is ever anticipated. Creditors also may
organize themselves into a committee and negotiate with the debtor to restructure existing debt. If the
creditors and the debtor agree unanimously to the terms of a plan or restructuring, such that court ap-
proval is not needed to bind any holdouts, the restructuring may be accomplished out of court. Such so-
called out-of-court workouts are generally the preferred choice of any distressed company because they
avoid the likely significant time and expense of a Chapter 11 filing and any attendant harm to the com-
pany’s reputation. However, as is often the case, should one or more creditors not agree to the terms of a
proposed workout, a debtor may be forced to pursue an in-court process.

If an out-of-court workout is not possible, the option generally providing for the shortest stay in Chapter
11 is a prepackaged Chapter 11 case. In a prepackaged plan, a debtor will solicit acceptances to a pro-
posed plan of reorganization, often over the objections of dissenting creditors. Upon obtaining the requi-
site number of acceptances, the plan proponent files a Chapter 11 petition and, concurrently, a prepack-
aged plan (preapproved by the requisite number of creditors, not as yet by the court). Once approved, the
plan will bind the dissenting creditors through the provisions of the Bankruptcy Code. Such prepackaged
plans, if successfully implemented, can help a financially distressed company avoid the expense, time,
and diversion of management energies that are often associated with protracted Chapter 11 filings, as the
time associated with developing and soliciting support for a plan of reorganization occurs pre-filing.

Prepackaged plans generally work best for debtors with financial difficulty caused by financial rather
than operational issues. Examples of an appropriate prepackaged plan include a leveraged buyout, a sin-
gle-asset real estate case, or a holding company case in which there are a limited number of creditor
classes and little or no relief is sought from trade creditors. Generally, a prepackaged plan works in situ-
ations in which an out-of-court settlement could have developed but for a lack of time or the existence of
a few recalcitrant creditors. Moreover, applicable securities laws and regulations may limit the types of
creditors who may be solicited prepetition and make prepackaged plans unsuitable in cases in which
nonfinancial creditors, such as trade creditors or tort claimants, will be impaired. Debtors who take ac-
tion as soon as problems begin to develop, rather than waiting until the creditors begin filing liens, have
a much better chance to reorganize out of court or through a prepackaged plan. The accountant should
know, however, that prepackaged plans are not always successful and can develop into lengthy Chapter
11 proceedings if, for example, one of the dissenting creditors makes a successful objection to the plan
that requires amending and re-soliciting support for the plan. The accountant may consider seeking a re-
tainer sufficient to cover the necessary expenses associated with such proceedings.

Many businesses with operational problems are unable to complete a prepackaged plan solicitation.
Many, however, will do a considerable amount of pre-bankruptcy planning before filing the Chapter 11
petition. The extent of their pre-bankruptcy plans will vary, but the planning often involves an analysis
of source(s) of the debtor’s financial or operational problems and the type of action that is needed to
solve those problems, such as the elimination of selected business divisions, product lines or retail out-
lets, and the development of a business plan. In some cases, the debtor will proceed with preliminary
discussions with selected creditors as to the terms of the reorganization plan. Thereafter, the debtor will
file its Chapter 11 petition and continue the process of finalizing and filing a plan postpetition. Such
plans are often referred to as pre-negotiated plans.

© 2020 Association of International Certified Professional Accountants 91