If you are reading the pages on this website, you are not researching bankruptcy for the mid-size or large business. The turnaround professional overseeing the workout or bankruptcy reorganization process of such a business already knows the big firms capable of handling such large and complicated cases, and interviews with prospective firms are already underway or on the horizon.
Selecting the lawyers, accountants and perhaps financial advisers to assist with efforts to work-out debt or reorganize a small business in bankruptcy is one of the most significant set of business decisions you will make. Your professionals should become familiar with your business, its assets, liabilities, past and future cash flows, business and financial challenges, opportunities and value. If the case is not being filed at the last minute to avoid a foreclosure or other business-ending event, the direction of the case should be understood before it is filed, and preparations to finance the case, negotiate with creditors and to file a chapter 11 plan of reorganization should already have begun.
Certain steps should be taken as soon as the case is filed to stabilize the debtor’s business, and depending on the nature and size of the business, include interim Bankruptcy Court approval for post-petition financing and/or the use of the proceeds of pre-petition lenders’ collateral (known as “cash collateral”); the uninterrupted payment of employees and employee benefits; providing for bankruptcy utility deposits; maintaining some or all of the debtor’s pre-petition financial management arrangements (e.g., the continued use of payroll processing firms and the associated debtor deposit and sweep accounts); possible store closures and going out of business sales; payment of critical vendors for pre-petition obligations (an otherwise prohibited practice), etc.
Bankruptcy Court approval is required for the employment of the debtor’s professionals, and those applications and disclosures (to show the absence of disqualifying conflicts) should be filed immediately after the commencement of the case.
Very soon after filing, the U.S. Trustee will schedule an initial debtor interview (“IDI”) to acclimate the debtor to its new responsibilities as a debtor in possession (or “DIP”, see below). The debtor becomes subject to oversight by the Bankruptcy Court, the U.S. Trustee, the trustee in a case under the Small Business Reorganization Act (“SBRA”), and creditors. Within a few weeks, the IDI is be followed by the first meeting of creditors (the “341(a) meeting”) at which the U.S. Trustee will interrogate the debtor’s management about where the debtor’s business has been and where management sees it going in and after chapter 11. Adequate preparation for the 341 meeting is essential.
In the small chapter 11 case without the clear need to maintain existing deposit accounts, pre-petition bank accounts must be closed as soon as the case is filed and new, DIP accounts opened at a government approved bank, identifying the accounts as belonging to a chapter 11 debtor. Operating reports must be filed with the Bankruptcy Court each month and served on the U.S. Trustee, with the level of detail required depending on the complexity of the case, at the discretion of the U.S. Trustee. Each quarter (except in cases under the SBRA), the debtor must pay a fee to the U.S. Trustee based on disbursements from the DIP accounts.
In order to avoid a loss of confidence by the Bankruptcy Court, creditors and the government, and to avoid a U.S. Trustee motion to dismiss the case or convert it to chapter 7, at a bare minimum post-petition payables must be paid according to their terms; adequate insurance on estate assets must be and remain in place; and post-petition taxes must be paid when they are due.
Chapter 11 debtors, as long as they abide by the rules governing the process, remain in possession of the property and continue to operate their business after filing for chapter 11 relief. (Contrast this with a business in chapter 7, which must cease operations immediately upon filing, unless the interim chapter 7 trustee seeks and obtains an operating order from the Bankruptcy Court – an exceedingly rare situation.) As soon as the case is filed, the automatic stay of Bankruptcy Code § 362(a) prevents the commencement or continuation of a host of creditor collection and lien enforcement actions. The steps required to maintain the automatic stay in place and to prevent the loss of critical assets can depend on the kind of chapter 11 case that is filed, and the risks that maintaining the case and the stay in place presents, e.g., to the collateral of secured creditors.
The goal of the chapter 11 debtor in possession is to obtain Bankruptcy Court confirmation of a plan of reorganization, a document that proposes to restructure debts and permit the debtor to emerge from bankruptcy. Generally speaking, a confirmed plan substitutes the debtor’s obligations to each class of creditors in the plan (as they existed when the case was filed) for obligations to that class as per the plan. The old pre-bankruptcy debts are discharged, either when the plan is confirmed or when a stream of payments called for under the plan is completed.
The Bankruptcy Court will ordinarily enter a case scheduling order based on routine timelines formulated by the U.S. Trustee, for the filing of a disclosure statement to accompany plan of reorganization and the plan itself, for the hearing on approval of the disclosure statement, and for the hearing on confirmation of the plan. The Bankruptcy Court may permit the debtor to combine the disclosure statement with the plan in less complicated cases, in order to save time and expense.
The disclosure statement is required to contain “adequate information” for a creditor to make an informed decision about whether to accept or reject the plan. The debtor will initially have the exclusive right to file and solicit approvals of its plan, and that exclusivity may be extended by the Bankruptcy Court for cause shown. If and when exclusivity expires, any party in interest may file a plan.
Michael D. Pinsky, P.C. represents clients throughout New York’s Hudson Valley in a full range of bankruptcy matters. Please call 845-394-2616 or contact me online for a free initial consultation at my office in Newburgh.