CHAPTER 11 PLAN CONFIRMATION

Chapter 11 plan confirmation is a Court’s authorization for debtor to execute its plan of reorganization–or plan of liquidation.  Except in most Small Business Reorganizations, a Chapter 11 plan is accompanied by a disclosure statement, which is similar to an offering memorandum typically seen in a standard business offering.

Disclosure Statement

The disclosure statement must contain an explanation of the debtor’s assets, liabilities and financial / operating projections, together with a liquidation value analysis.  The disclosure statement must be approved by the bankruptcy court as providing adequate information for a creditor to make an informed judgement on whether to vote to accept or reject the proposed plan.

Claims and interests are grouped into classes by type such that any given class contains similarly situated creditors for treatment and distribution under the plan. Typically these classes are: administrative claims, secured claims, priority unsecured claims, non-priority unsecured claims and equity interests.

Balloting of Impaired Creditors

Chapter 11 plan confirmation requires balloting of creditors whose interest will be impaired under the Plan. Each class must vote in favor by a majority in number and two-thirds in amount of allowed claims of such class held by creditors who vote. A class of creditors or interest holders not receiving any distribution under the plan is deemed to reject the plan, and a class of creditors or interest holders whose legal rights are unimpaired (not altered) is deemed to accept the plan. Under certain circumstances, if at least one class votes to accept the plan, it may be confirmed over the objection of the other classes, which is generally referred to as ‘cramdown’.

Fair and Equitable Treatment

Chapter 11 plan confirmation does allow for “cram down” of impaired secured creditors, on specific conditions. For a Chapter 11 plan to be crammed down, the bankruptcy court must find that, among other things, the plan is fair and equitable to all non-accepting creditors and interest holders, and that it does not unfairly discriminate against dissenting classes.

In addition to fair and equitable treatment, the plan must not unfairly discriminate between or among classes of claims or equity interests that are of equal priority and receiving different treatment.  This test does not require treatment to be the same, just fair.

Chapter 11 plan confirmation may take into account a number of factors, in which the court determines whether a plan discriminates unfairly: such as whether the discrimination has a reasonable basis and is proposed in good faith, whether the debtor can confirm the plan without the discrimination, and whether the degree of discrimination is proportionate to its rationale.

The American Bankruptcy Institute Journal has published an excellent publicly-available summary on Chapter 11 plan confirmation, here.

chapter 11 plan confirmation