Confirming the Bankruptcy Plan

The reorganization process begins by sending out information to all stakeholders. Their votes are then received and tabulated. The tabulated version of these reports then needs to be presented to the bankruptcy court as part of the next step. However, the bankruptcy court does not simply approve each and every detail of the plan that has been agreed upon between the debtors and the creditors’ committee. There are certain tests that have been prescribed by the courts and which need to be passed by the court before the reorganization plan comes into effect.

Compliance with the Law

The bankruptcy plan is only approved if the entire process has been strictly followed as per the guidelines of the law. This means that if a mistake or oversight happened even during the proposal phase and is later pointed out to the court, the entire process would become invalid. This also means that all participants have been acting in good faith. If any stakeholder is able to prove that any act in the bankruptcy process was malafide or committed with bad faith, then the entire process may be rejected by the bankruptcy court.

Approval of Payments

The services of a lot of professionals need to be employed during the bankruptcy process. This includes accountants, auditors, professional valuation experts, and even public relations professionals. It is important to ensure that the fees which are going to be paid to these professionals are declared in the courts, and approval is sought for the same. The courts generally check these fees for reasonableness to ensure that the company is not paying excessive fees in order to make a backhanded payment to one of the creditors, thereby bypassing the bankruptcy process.

Approval of Post Re-organization Management

After the reorganization of the company, the underlying management also changes. The directors and officers who will form a part of this new management also need to be approved by the courts. Other stakeholders have the right to object to the appointment of certain personnel to certain positions. The debtor company must be able to defend the appointments failing, which the court may mandate different people to be appointed to the committee or may order the process to be repeated again.

Approval from Regulatory Bodies

There are certain industries that are highly regulated. For example, if a company in the pharmaceutical industry faces bankruptcy, it cannot decide to take all the steps on its own. Even if all the shareholders and creditors agree on a reorganization plan, it may still not be implemented. This is because it may be against the rule of the law. Similarly, utility companies may not be able to raise the prices of their services even if they decide to do so. This is because it may be against the law to do so. Therefore, in such instances, it becomes necessary to obtain regulatory approval from the relevant bodies, along with having an approved plan of reorganization.

Best Interest

The debtor organization has to prove to the court that the reorganization plan is in the best interest of all the creditors given the current situation at hand. Any impaired creditor who has voted in acceptance of the plan is presumed to have done so in their best interest. In such cases, the debtor organization does not have to prove anything.

The bankruptcy court takes this declaration at face value. On the other hand, if an impaired class of creditors has voted to reject the plan, then the debtor organization has to prove that the plan is in their best interest.

To prove the best interest, they have to prove that the creditors would receive more money under the plan as compared to what they will receive now. Hence, a comparison has to be drawn with the liquidation value, and the court has to be convinced that the creditor is better off under the plan.

Bankruptcy courts do not sign off on reorganization plans unless they are certain that the needs of each and every creditor have been met.

Feasibility Test

Many times it is possible that the creditors may argue that the reorganization plan looks good on paper. However, in reality, it is not feasible because of the competition or any other external factors. In such cases, it is the responsibility of the debtor organization to prove that the plan is feasible. It needs to be understood that feasibility means that there is a reasonable chance of success and not that there is a guarantee of success. Many times, companies have shown feasibility plans but have then failed to deliver on them.

The End Result

The end result of all the above processes is that the company gets a legal reorganization plan formulated. This reorganization plan then dictates all the future actions of the company. However, more importantly, the reorganization plan helps in the creation of a new list of creditors. This list then becomes the final list of people to whom the debtor organization owes money.

Any claim not mentioned in this plan ceases to have any legal validity and is assumed to be written off. This is why the approval of a bankruptcy reorganization plan is a long drawn process. If this process is finished in haste, then there is a chance that the interest of some creditors might be overlooked.

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