USA Law and Practice Contributed by: Michael Chernick, Sara Coelho, John Chua and Josh Tryon, A&O Shearman
“Prearranged” plans, where requisite creditors have largely agreed to a plan framework but have not been solicited before the case is filed can also be expedited and completed within two to three months. If a plan must be formulated after the filing, three to six months is more typical, and cases with more complex issues, litigation, and lack of consensual resolution can take significantly longer. There is no time limit for exiting bankruptcy, but the debtor may not maintain the exclusive right to file a plan for longer than 18 months after the petition date and/or the exclusive right to solicit a plan for more than 20 months after the petition date. Cases may also be dismissed or converted to liquidation, particularly where there is no prospect of reorganisation. Chapter 11 effectively preserves going-concern value, and sizeable enterprises frequently reorganise suc- cessfully using this process. Additionally, there is a mature investor base specialised in acquiring dis- tressed companies (or their debt or assets), which aids in supporting value. Companies that cannot reor- ganise may be liquidated under Chapter 7. 7.4 Rescue or Reorganisation Procedures Other Than Insolvency Where the borrower can obtain requisite consents, parties may restructure debt or other obligations with- out proceedings – eg, borrowers and issuers may seek to exchange or amend existing debt to allow for cove- nant relief, extended payment terms or payment relief, and sometimes simultaneously solicit consents for a pre-packaged bankruptcy to be filed if requisite con- sents are not obtained. Inducements can be offered as well, such as improvements in collateral, guaran- ties, or other terms. Some deals involve incumbent lenders providing additional capital or other conces- sions to participating lenders in exchange for improve- ments in their priority position relative to other lenders or by lending against separate collateral. The ability to effectuate such transactions without unanimous consent allows the architects of these transactions to propose coercive terms that leave non-participating lenders in a worse collateral, guaranty and/or cov- enant position, or to exclude some lenders from par- ticipating altogether.
When there are few secured creditors in the capital structure and no need to restructure operations, con- sensual or non-judicial foreclosures under Article 9 foreclosures of the UCC are relatively common. Some equity investors can also handle operational restruc- turings without the tools of bankruptcy. 7.5 Risk Areas for Lenders Insolvency of an obligor creates risks of a change of control, degradation of the value of the obligors or their assets, and avoidance liability. In a bankruptcy, the company may be sold or transferred to creditors regardless of any constraints in loan documentation. In some scenarios, lenders, including secured lenders, may be given notes against the reorganised company. Additionally, lenders can be forced to accept virtually any distributional outcome that provides more than liquidation value if their class consents. Any circumstance that further stresses the business, creates a forced-sale dynamic, or delays the process can diminish recoveries. Dilution by other creditors, including priming financing and related fees, addition- al equity financing provided under a rights offering and related fees (often in the form of rights to acquire equity at a discount), distributions to senior creditors under a low valuation, and necessary payments to other creditors, as well as the costs of the process, are all potential causes of lost value. Finally, depending on the timing and circumstances of their loan, some lenders may be subject to risks of avoidance of rights transferred to them or obliga- tions undertaken by the estate. The most typical of these is preference liability for transfers to unsecured or under-secured creditors within the 90 days preced- ing the case on account of antecedent debt. Fraudu- lent transfer liability generally arises in circumstances where a debtor is insolvent or inadequately capitalised and does not receive reasonably equivalent value for a transfer or obligation, or where the transfer is intended to hinder creditors.
681 CHAMBERS.COM
Powered by FlippingBook