Entering a Chapter 11 bankruptcy with an exit strategy is important, particularly for smaller debtors who are more likely to be impacted by the costs that result from a bankruptcy filing compared to their larger debtor counterparts. This article discusses the various exit strategies that prospective debtors should evaluate with their bankruptcy attorneys.
A debtor can enter into an agreement with key creditor groups before its petition is even filed. A prearranged Chapter 11 plan can be memorialized in a restructuring support agreement, which sets forth the terms for resolution of the case. This affords the debtor more control over its case, and instills confidence in trade creditors, employees, and customers by showing a quick exit path from Chapter 11. However, debtors should be cautious because restructuring support agreements can be utilized by dominant creditors to exercise control over the debtor and its operations, among other things.
Next, whether restructuring under a plan is a viable exit strategy depends on several considerations, such as the feasibility of the business strategy, the availability of DIP financing or other funds to pay for Chapter 11 administrative expenses, and whether creditors would recover more in a Chapter 11 restructuring than they would receive in a liquidation – to name just a few.
By contrast, a Chapter 11 plan of liquidation is typically used as an exit option after the debtor's assets have been liquidated or sold as a going concern under section 363 of the Bankruptcy Code, and the sale proceeds are then distributed to creditors. In a liquidating Chapter 11, the debtor ceases operating after its business assets are sold, and every day spent in bankruptcy reduces creditor recovery by the administrative expenses of the bankruptcy. Dismissal, or a consensual structured dismissal, are viable alternatives to avoid the expense of confirming a liquidating plan or if there are insufficient funds to confirm a plan.
Entering bankruptcy with a strategy to ensure a smooth and efficient confirmation process additionally helps to minimize costs and shorten the time a debtor is in Chapter 11. The Chapter 11 plan confirmation process typically ranges from 75 to 90 days, but a contested confirmation process has the potential to significantly increase the time period. The debtor can reduce the time and expense of the process by employing various tools at its disposal, such as negotiating the key terms of the plan with parties in interest to minimize objections and gain creditor support. The debtor can also move to combine the hearing to approve the disclosure statement and confirm the plan.
There are many other methods to implement exit strategies that a debtor can use during the course of a Chapter 11. Each method naturally depends on the specific circumstances of each debtor and requires careful evaluation by counsel who is fluent in the field.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
