The Voting Process

After the solicitation, packages are sent out, and the creditors are given all the information that they need, it is time to vote.

Voting is an important part of the reorganization process. This is the part where the will of the creditors becomes known to the debtor organization and to the public in general.

However, the process of voting on the acceptance of a reorganization plan is a complicated process. It starts with who is allowed to vote and ends with how the data is tabulated in order to communicate the results of the process.

The details about the voting process have been explained in detail in this article.

Deciding Who is Allowed to Vote?

Not every creditor who is owed money by the debtor is allowed to vote on the reorganization plan. There are various provisions in the bankruptcy law that bar certain types of creditors from voting. Let’s first understand how the decision regarding who is allowed to vote is made.

  • Allowed Claims: An allowed claim is a claim on which the creditor, as well as the debtor organization, have reached a consensus. This means that the debtor must have stated the claim in the schedules which they have submitted to the court and other creditors.

    Alternatively, the claim must have been filed with the court, and the debtor must not have objected to the same. The reason for defining an allowed claim is very simple. When creditors realize that a company is facing imminent bankruptcy, they know that it is likely that they will have to take a haircut.

    Hence, they start inflating the claims, to begin with, so that they receive at least what they are owed even after the haircut.

    Therefore, as long as the validity of the claim is disputed, the votes will not be considered valid.

  • Debtor organizations may take unfair advantage of this fact. For instance, once they submit their reorganization plan, they may receive several rejection votes.

    Many times the company tries to change the decision by challenging the validity of the claim after the creditor has given a rejection vote.

    In such cases, the bankruptcy court has to quickly conduct a trial and provide a temporary allowance to the creditor so that they are able to have a fair say in the process.

  • Impaired Claims: Certain classes of votes do not need to be solicited. This is because their opinion is not going to be considered anyways.

    For instance, the bankruptcy law states for a creditor to have a right to vote, their claim must be impaired. This means that the debtor company should have missed a few payments which had to be made to the creditor.

    If all payments have been made in time, then as far as the creditor is concerned, the company is not facing any financial distress.

    As a result, they are not given the right to vote on the proposed reorganization plan.

    Similarly, there are parties who will not get paid even after the liquidation process. This may be because of the nature of the contracts that they had signed with the debtor company, or it may be because of the shortage of assets to pay back that class of creditors.

    Either way, their opinion is also not considered, and they are also not allowed to vote. The privilege to vote is only given to creditors whose opinion the bankruptcy court deems to be relevant.

  • Debtor companies use this rule strategically. They purposely keep paying certain creditors who they know will vote against the plan.

    As a result, their claims are not impaired, and they are not allowed to vote on the plan!

  • Bad Faith Claims: The bankruptcy court works with the assumption that each and every vote which is being cast by the creditors is being done to increase the amount of funds available to the enterprise as a whole. This is called the good faith principle.

    However, in certain cases, creditors cast their votes in such a manner that they are only beneficial to them and harmful to the other stakeholders. These are called bad faith claims.

    For instance, a competitor may buy out claims from the genuine creditors of the company. Then the creditor may purposely vote in such a manner that the company does not return to normalcy.

    By doing so, the competitor is able to wipe out their competition and enable more cash flow to themselves in the future. If bad faith claims are made, the debtor company has the right to bring them to the notice of the bankruptcy court and then invalidate them.

Voting in Classes

Not all votes related carry the same weightage during bankruptcy proceedings. The bankruptcy court is more interested in how the classes have voted. This means that the votes are segregated according to classes, and then the decision of the class is considered.

In the United States, the vote is considered to have been approved by a class when the approval of two-thirds of creditors by the amount and half by number has been achieved. This means that if a company has six creditors in a class and a total debt of $300 owed to that class, then the vote will be considered to be passed if it is accepted by at least three creditors and these creditors must hold at least $200 out of the total $300 debt.

The imposition of two criteria instead of one ensures that a handful of creditors are unable to hijack the entire process.

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