Page 98 - Bankruptcy Volume 1

1. designate classes of claims or interests;

2. indicate whether each class is impaired or unimpaired;

3. if such class is impaired, indicate the treatment it will receive under the plan;

4. provide the same treatment for all members of a class of claims or interests, except to the extent
that the holder of a particular claim or interest agrees to accept less favorable treatment; and

5. provide adequate means for the plan’s implementation.

For example, manufacturing company XYZ Company (XYZ) in Chapter 11 could develop the following
agreement. XYZ’s financial schedules accompanying its petition (commonly referred to simply as
schedules) listed $2.5 million of senior secured debt, $1 million of subordinated debt, $200,000 of trade
payables, and 1,000 common shareholders. During the exclusivity period, the debtor and its creditors
negotiate and agree on a consensual reorganization plan calling for the senior secured debtholders to re-
ceive repayment of $1.5 million over time and a conversion of its remaining $1 million of debt into eq-
uity of the reorganized entity. XYZ’s subordinated debtholders agree to repayment over time of
$700,000 as satisfaction of their $1 million debt. XYZ’s trade creditors agree to a one-time payment of
$140,000. The debtor’s reorganization plan filed with the court encapsulates this information in a writ-
ten, formal agreement between the parties. As this example illustrates, a consensual plan often provides
for distributions outside of the absolute priority rule if voting requirements are met. (Under the absolute
priority rules of the Bankruptcy Code, the most-senior creditors are entitled to payment in full before
any junior creditors or equity interests are satisfied.)

In addition to the mandatory provisions described, Bankruptcy Code Section 1123 also contains several
permissible provisions. For example, the plan proponent may provide for the assumption or rejection of
executory contracts, provide for the sale of some or all of the debtor’s property and the distribution of
the proceeds to the creditors in the form of a liquidation plan, and include any provision in the plan that
is consistent with the provisions of the Bankruptcy Code.

The Bankruptcy Code provides that confirmation of a plan (other than a liquidating plan) discharges the
debtor of most debts arising before the petition date. In addition, to supplement and strengthen this dis-
charge, plans often provide for parties in interest — including the debtors, the reorganized debtors, and
creditors — to release claims arising out of or in connection with the Chapter 11 case or the plan of re-
organization and enjoin all actions arising prior to the effective date of the plan. The extent to which
these releases and injunctions can bind third-party creditors generally, and to those creditors who do not
expressly vote in favor of the plan in particular, varies by jurisdiction. Courts generally require fairly ex-
tensive disclosure of any release or exculpation provisions to ensure that parties understand the rights
they are waiving. Plans also generally set out deadlines, procedures, and guidelines for the debtor’s ob-
jections to and resolution of claims, the establishment of any creditor’s trust, and payment of distribu-
tions under the plan. To the extent the plan provides for a rights offering or other similar process, the
plan will likewise outline that process and generally will attach and incorporate the offering memoran-
dum. The plan will also commonly set out certain provisions with respect to governance or operation of
the debtor post-emergence, including, potentially, identifying post-emergence directors or establishing
procedures for the selection of such directors. Finally, another commonly included provision provides
for the bankruptcy court to retain jurisdiction over disputes or other matters arising in connection with
the plan of reorganization after confirmation.

96 © 2020 Association of International Certified Professional Accountants