USA Law and Practice Contributed by: Davis Lee Wright, Natalie D. Ramsey, Katherine M. Fix and Rachel Jaffe Mauceri, Robinson & Cole LLP
5. Statutory Insolvency and Liquidation Procedures 5.1 The Different Types of Liquidation Procedure Voluntary and Involuntary Proceedings Under the Bankruptcy Code Liquidation proceedings under the Bankruptcy Code are initiated in the same manner as Chapter 11 Reor - ganisations. See 4.1 Opening of Statutory Restruc- turing, Rehabilitation and Reorganisation . Chapter 7 Liquidations A Chapter 7 liquidation may be preferable to a Chapter 11 reorganisation in the following circumstances: • the debtor’s business is no longer a going concern; • the value of the debtor’s properties has deterio - rated beyond recovery; • the financial liquidity to continue or restart the busi - ness is no longer available; or • existing management is untrustworthy, unreliable or uncooperative. Upon filing, the UST appoints an interim Chapter 7 trustee who will immediately displace the debtor’s existing directors and officers (11 USC Section 701 (a)). Unsecured creditors will then meet to elect a permanent trustee (which may be the existing interim trustee) (11 USC Section 702). A Chapter 7 trustee “investigat[es] the financial affairs of the debtor”, gathers the debtor’s assets, disposes of the debtor’s assets, and distributes the proceeds from the sales of the debtor’s property “as expedi - tiously as is compatible with the best interests of par - ties in interest” and in accordance with the priority scheme set forth in Section 726 of the Bankruptcy Code (11 USC Section 704). Chapter 11 Liquidations A company may choose to file a Chapter 11 liquida - tion if the debtor’s assets have significant value such that management continuity and sales experience may maximise going-concern values or if the com - pany’s existing management possesses knowledge or experience necessary to oversee continued operation and liquidation.
much as the unsecured creditor would receive in a hypothetical Chapter 7 liquidation; and • that the plan does not discriminate unfairly against the dissenting unsecured creditor class and is “fair and equitable” to the unsecured creditors (11 USC Section 1129 (a)(7)(A)(ii) and (b)). “Fair and equitable” requires a showing that (i) no class junior to a non-accepting unsecured creditor class receives any payment until the non-accepting class is paid in full; and (ii) no class senior to the non- accepting unsecured creditor class will receive more than the allowed amount of their claims (11 USC Sec - tion 1129 (b)(2)(B)). Claims Trading Unless statutorily or contractually prevented from doing so, unsecured creditors may trade or transfer their claims during the Chapter 11 case, provided notice is given to the bankruptcy court. The specific rules for claims trading are found in Bankruptcy Rule 3001 (e). Equity Holders Generally, a company’s existing equity holders receive no distribution on account of their equity as part of a Chapter 11 case. Moreover, depending on the treat - ment of claims with higher priorities, existing equity holders may find their shares cancelled following con - firmation of a Chapter 11 plan. The facts and circum - stances of each bankruptcy case are different, and equity holders may retain their equity (especially if a shareholder provides substantial “new value” to the debtor during the bankruptcy case) or receive equity distributions as part of a plan. Section 1129 (b)(2)(C) permits cram-down of a Chap - ter 11 plan on dissenting classes of equity interests so long as the debtor shows that no class junior to a non-accepting equity class will receive any payment until the non-accepting class is paid in full.
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