American Bankruptcy Institute
6 II. Executive Summary of Proposed Principles
Chapter 11 works to rehabilitate companies, preserve jobs, and provide value to creditors only if distressed companies and their stakeholders actually use the chapter 11 process to facilitate an in-court or out-of-court resolution of the company’s financial distress.4 Chapter 11 in turn needs to offer tools to resolve a debtor’s financial distress in a cost-effective and efficient manner. To that end, the recommended principles seek to, among other things:
• Reduce barriers to entry by providing debtors more flexibility in arranging debtor in possession financing, clarifying lenders’ rights in the chapter 11 case, disclosing additional information about the debtor to stakeholders, and providing a true breathing spell at the beginning of the case during which the debtor and its stakeholders can assess the situation
and the restructuring alternatives;
• Facilitate more timely and efficient diligence, investigation, and resolution of disputed matters through an estate neutral — i.e., an individual that may be appointed depending on the particular needs of the debtor or its stakeholders to assist with certain aspects of the chapter 11 case, as specified in the appointment order;
• Enhance the debtor’s restructuring options by eliminating the need for an accepting impaired class of claims to cram down a chapter 11 plan and by formalizing a process to permit the sale of all or substantially all of the debtor’s assets outside the plan process, while strengthening the protection of creditors’ rights in such situations;
• Incorporate checks and balances on the rights and remedies of the debtor and of creditors, including through valuation concepts that potentially enhance a debtor’s liquidity during the case, permit secured creditors to realize the reorganization value of their collateral at the end of the case, and provide value allocation to junior creditors when supported by the reorganization value; and
• Create an alternative restructuring scheme for small and medium-sized enterprises that would enable such enterprises to utilize chapter 11 and would enable the court to more efficiently oversee the enterprise through a bankruptcy process that incentivizes all parties, including enterprise founders and other equity security holders, to work collectively toward a successful restructuring.
The Report organizes the recommended principles based on the key stages of a chapter 11 case: Commencing the Case; Administering the Case; and Exiting the Case. In addition, the Report proposes a set of principles for Small and Medium-Sized Enterprises. Finally, the Report includes a section on issues related to chapter 11 cases, but not directly tied to the Commission’s mission statement or addressed by this Report. This final section discusses, among other things, issues relating to venue and jurisdiction in chapter 11 cases.
4 The utility of the chapter 11 process is important not only for companies that file chapter 11 cases, but also for companies trying to achieve an out-of-court resolution. Distressed companies and their stakeholders frequently consider the federal bankruptcy alternative in deciding whether to pursue or ultimately agree to an out-of-court restructuring plan.