Reform of American Business Law

The Reorganization Plan

In the previous class we said that ideally the the insolvent debtor should file a Reorganization Plan together with the request for relief, or within 120 days of such request. The Plan needs to be both sound and capable of gathering "political" support from the Creditors Committee(see below).

After this period, if the Debtor in Possession has not filed a Reorganization Plan, then any creditor or the Case Trustee if any, may file a plan. The U.S. trustee may not file a plan.

The obvious purpose is to provide an incentive to act timely, or a Chapter 11 case could continue forever, with public confidence and business opportunities eroding as the viability opf the debtor as a business is in dispute.

The plan must include a classification of claims and specify how each class of claims will be treated. Creditors whose claims are "impaired" under the plan i.e., those whose contractual rights are to be modified (in the sense of being paid later or less than the full value of their claims) will have to vote on the plan.

Creditors' Committees

Creditors' committees can play a major role in chapter 11 cases. The committee ordinarily consists of unsecured creditors who hold the seven largest unsecured claims. Among other things, the committee: consults with the debtor in possession on administration of the case; investigates the debtor's conduct and operation of the business; and participates in formulating a plan.

A creditors' committee may, be an important safeguard to the proper management of the business by the debtor in possession.

What happens next

Well, you probably guessed, the business tries to collect money owed to it, and avoiding to paid as much of its own debt as possible.

Avoidable Transfers

Whoever runs the business (Debtor in Possession or Case Trustee, as the case may be) has "avoiding" powers. This means that certain transfers of money or property made, for instance during the 90 days prior to the filing of the bankruptcy petition can be undone. In addition, transfers to "insiders" (i.e., relatives, general partners, and directors or officers of the debtor) made up to a year before filing may be avoided.

By avoiding these transfers of property, the business forces the return or "disgorgement" of the payments or property, thus adding to the assets available to pay the creditors. Thus "avoiding powers" prevent unfair prepetition payments to one creditor at the expense of all other creditors.

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