1. Introduction to Law of U.S. Corporate Reorganizations
Insolvency Professional Agency of
Institute of Cost Accountants of India
February 2019
Prof. C. Scott Pryor
Fulbright-Nehru Research Scholar at
National Law University, Delhi
Professor of Law at
Campbell University School of Law, Raleigh, NC, USA

2. Personages in US Bankruptcy System
Bankruptcy Judge
Part of the federal judiciary
Not part of companies/corporate law administration (not NCLT)
Debtor-in-Possession in Chapter 11
Management of pre-bankruptcy debtor remains in control of its assets and continues to run its business after filing Chapter 11 (Bankr. Code § 1107(a))
Has most of the powers of a liquidation trustee (Bankr. Code § 1108)
Has fiduciary duties to the bankruptcy estate and may be sued by creditors for violation of the duties of care and loyalty
May be replaced by Bankruptcy Court with a managing trustee (similar to RP) but only for fraud or gross incompetence

3. Personages in the Bankruptcy System
Creditors’ Committee in Chapter 11
“As soon as practicable” after filing, a committee of unsecured creditors shall be appointed
Typically seven members drawn from volunteers among unsecured creditors holding 20 largest claims
Empowered to investigate, negotiate, and advocate on behalf of all unsecured creditors
Expenses of members paid by estate
With approval from the Bankruptcy Court, Committee may retain its own legal counsel and accountants who will be paid by the DIP

4. Basic Bankruptcy Concepts
CLAIMS AND PRIORITY
What Is a Claim? – Bankr. Code § 101: “(5) The term ‘claim’ means–
right to payment, whether or not such right is reduced to judgment, liquidated, unliquidated, fixed, contingent, matured, unmatured, disputed, undisputed, legal, equitable, secured, or unsecured
“All legal obligations of the debtor, no matter how remote or contingent, will be able to be dealt with in the bankruptcy case. It permits the broadest possible relief ” (H.R. Rep. No. 595, 95th Cong., 1st Sess. 180 (1977))

5. CLAIMS AND PRIORITY (WATERFALL)
Basic Bankruptcy Concepts
CLAIMS AND PRIORITY (WATERFALL)
Basic Priority Scheme – Bankr. Code § 507(a): The following expenses and claims have priority in the following order:
Administrative expenses …
Wages
Employee benefits
...
Certain taxes

6. Corporate Reorganization
Life Cycle of Corporate Chapter 11
What Must Be Filed
Rights, Powers, and Duties of a Debtor-in-Possession
Cash Collateral and Debtor-in-Possession Financing
Sales Outside Ordinary Course of Business
Plan of Reorganization
Disclosure Statement
Classification of Claims and Voting
Confirmation of Plan
Cram-Down of Plan
Post-Confirmation

7. Corporate Reorganization
Life Cycle of Corporate Chapter 11
Rights, Powers, and Duties of a Debtor-in-Possession – Bankr. Code § 1107(a): DIP has all the rights and powers, and shall perform all the functions and duties of a trustee
If DIP fails to take seriously its fiduciary obligations, creditors may seek appointment of a managing trustee (RP)
If management of DIP violates its fiduciary duty of loyalty, creditors or subsequent liquidation trustee may sue for damages

8. Corporate Reorganization
Life Cycle of Corporate Chapter 11
Plan of Reorganization – Bankr. Code § 1123
The plan shall address 8 mandatory matters
The plan may provide for 6 permissive matters (in fact, Bankruptcy Courts have allowed plans to address more than the permissive items listed in the statute)
What Is a Plan?
A plan is a an agreement between the DIP, its creditors, and its equity holders that provides terms for emergence from bankruptcy, including treatment of their respective claims and interests

9. Corporate Reorganization
Life Cycle of Corporate Chapter 11
Plan of Reorganization – Process and Procedure
Core issue is usually cash flow: The troubled company’s cash flow is too small to service debt and pay variable (costs of goods sold) plus fixed (overhead) obligations
How does Chapter 11 address this issue?
Excess expenses, such as leases and losing contracts are addressed during the case by rejection
Plan of Reorganization looks to restructure debt service

10. Corporate Reorganization
Life Cycle of Corporate Chapter 11
Plan of Reorganization – Process and Procedure
Core issue is usually cash flow
Bankruptcy cannot grow money!
The final question: Can the restructured debtor make its anticipated net revenues cover the new debt service?

11. Corporate Reorganization
Life Cycle of Corporate Chapter 11
Classification of Claims and Voting– Bankr. Code § 1126(c):
a class of claims has accepted a plan if creditors that hold
at least ⅔ in amount, and
> ½ in number
vote to accept the plan

12. Corporate Reorganization
Life Cycle of Corporate Chapter 11
Confirmation of Plan – Bankr. Code § 1129(a): The court shall confirm a plan only if all of the following requirements are met: …
With respect to each impaired class
Each holder of a claim has either (i) accepted the plan or (ii) will ultimately receive under the plan payments the present value of which is at least as much as it would have received under a Chapter 7 liquidation [the “best interests” test]
Proof that payments under plan > liquidation value requires evidence from cost accountants and valuators

13. Corporate Reorganization
Life Cycle of Corporate Chapter 11
Confirmation of Plan – Bankr. Code § 1129(a): The court shall confirm a plan only if all of the following requirements are met: …
Feasibility
Will the restructured debtor have sufficient net income to service its restructured debt obligations?
Requires evidence from accountants and valuators