4 Questions Troubled Companies Ask About Chapter 11 Bankruptcy

Question 1:  Does a company that files a chapter 11 bankruptcy case loose control of its business to a trustee?

Answer 1:  Not usually.  After a company files a chapter 11 bankruptcy case it remains in control of its business as a "debtor in possession".  The company continues to conduct is business in the ordinary manner.  There is no longer a trustee immediately appointed to take control of the company.
The company does take on new reporting requirements to the Office of the United States Trustee, a branch of the Department of Justice which serves an oversight function in chapter 11 bankruptcy cases.  Further, the Bankruptcy Code provides for the appointment of a creditors' committee which can investigate the company's affairs, and take positions in the bankruptcy case.  

Question 2: How does chapter 11 bankruptcy affect a company's ability to do business.

Answer 2: The effect of being in a chapter 11 case on a company's business can vary from very little to a lot.   There is no requirement that a business give all of its customers and client's notice that it is in a chapter 11 bankruptcy case.  From the customer side, business can go on relatively normally while the company attempts for confirm a plan of reorganization through a bankruptcy proceeding.   The time that ****

Question 3: What is a chapter 11 plan of reorganization?

Answer 3: The goal of a chapter 11 bankruptcy case is the confirmation of a plan of reorganization.  The plan is usually proposed by the debtor company, and is drafted by its bankruptcy attorney, with major input from management and professionals such as accountants and financial consultants.  The plan must include a manner of satisfaction for each class of claims.   A plan is a tremendous opportunity for creativity.  Terms can, under proper circumstances, involve payment of claims at less that their full amount, payments over time,  merger of the company, or sale of certain of its assets.  Once the plan is confirmed, it is a binding legal contract between the debtor company and its creditors.  Thus, after confirmation of the plan, the debtor company is out of the safe haven of bankruptcy protection and "back out on the street",  with its obligations now consisting of its obligations under the plan.  

Question 4: Is there a problem with professional fees getting out of hand in chapter 11 cases.

Answer 4: The fees which must be paid to professionals in a chapter 11 case are significant.  There are several reasons for this. 

First, chapter 11 is not a minor "tweaking" of the company and its financial structure, but instead is major surgery where many aspects of the business must be dealt with:  non-productive assets must be sold,  under performing divisions of a large company are often spun off, new lines of credit must be negotiated, often the company's the very survival is at stake and significant attention must be paid to determining whether the firm's business is viable.  This all requires the input of professionals, with the attendant cost

Second,  chapter 11 bankruptcy is a "highly regulated industry" and is also "infrastructure intensive".  Significant new compliance and reporting requirements are imposed on a company in chapter 11.   Court approval, with written notice to creditors and a hearing in the bankruptcy court is notice is required for many transactions which would otherwise take a few hours outside of bankruptcy.  A plan of reorganization, which, in scope of effort, resembles the underwriting of an initial public offering, must be confirmed if the company is to "emerge" from chapter 11.  All of this requires significant input from bankruptcy attorneys, attorneys from other disciplines, accountants,  appraisers, interim managers, and other consultants.  The attendant professional fees for this intensive procedure are a fact of life in bankruptcy cases

Third, although chapter 11 is designed to be collaborative, and the system favors compromise, the fact that it is a court procedure brings with it a "fight factor".  If an obstreperous and well funded creditor or group of creditors opposes the reorganization case at every step, additional professional fees are be incurred.    Alternatively,  if the parties are able to "choose their battles", and not make every contested matter before the court a separate piece of litigation to be fought to the end, the professional fees are commensurately less.