Chapter 11 is a court supervised proceeding to restructure a company's business and financial obligations. The idea is that the business continues to operate normally and with the aim that it will emerge from this process with a stronger balance sheet once the process is complete. During this time, no creditor is able to launch a legal claim on the assets of the company.
A company may generally file for Chapter 11 in any US district that has strong links to foreign firms can also file for Chapter 11, but they have to prove sufficient US links. In most cases, the company's directors stay in place. This can also be referred to as a debtor in possession process. They will continue to make decisions regarding the running of the company. Once a company has filed for Chapter 11 protection, it has 120 days to present its reorganization plan to the court. Although this period may be extended by the court, if it deems it reasonable. The plan will be deemed to be approved if it has more than two thirds by value of each class of impaired creditors accepting it. An impaired creditor is someone who will potentially receive less than what is owed, or in other words, is expected not to be repaid in full. Proceedings take usually between six months and two years unless the deal is prepackaged, which makes things much quicker. Once in Chapter 11, debtors can use section 363 to sell assets free and clear of any liens, claims and encumbrances. This provides an exceptionally interesting opportunity for potential buyers to acquire assets that were once too toxic or too risky on a free and clear unencumbered basis, which in turn increases their value. Despite some clear advantages for the company. The pros and cons of the Chapter 11 process need to be weighed before filing. Pros, there's an automatic worldwide stay on creditor claims, giving the debtor some breathing room to work out its reorganization plan. The debtor is allowed to unilaterally cancel unprofitable contracts and leases. Financial obligations can be restructured or canceled via a confirmation of reorganization plan, which combined holdouts in case certain consents are achieved. Cons, the company needs to file monthly operating reports and failure to do so in a timely fashion gives reason to the court to dismiss the case. Directors lose some discretion on certain strategic decisions as they must obtain court approval for certain transactions that are not in the ordinary course of business, such as selling assets, refinancing high value purchases, and leasing major items. There are significant costs involved In the in the process, from fees payable to the courts to legal and financial advisors involved in drawing up and negotiating the restructuring plan. Once the decision has been taken and after each class of creditor has voted on the proposed plan, the court will hold a confirmation hearing where the company must show that its plan complies with Chapter 11 confirmation requirements, including showing the results of the vote confirmation will be given if the plan is accepted by every class of impaired claims or when the plan has been rejected by one or more classes of impaired claims, but has been accepted by at least one class of impaired claims.
Courts can't confirm a plan that has not been accepted by at least one class of impaired claims. Chapter 7. Chapter 7 is distinct from Chapter 11 in the US bankruptcy code. It's a court supervised proceeding that can be used for businesses to liquidate assets and repay creditors. All assets are disposed of and proceeds are used to repay the company's obligations. According to priority ranking. There is no debtor in possession option under Chapter 7. The entire process is conducted by an appointed trustee rather than the company's prior management team. The company ceases to exist as a going concern once it's liquidated.
