Standing on the Edge

Unsecured creditors typically recover next to nothing in these liquidations. Moreover, there is not even the potential upside of ownership in a reorganized company as is common in non-liquidating cases. In the case of a piecemeal liquidation, there is usually no hope of new business with a reorganized company on a go-forward basis, as occurs in many other Chapter 11 cases. Employee morale is difficult to manage because employees know from the onset that it is just a matter of time before they lose their jobs. Furthermore, accounts receivable sometimes become difficult to collect. Liquidating Chapter 11 cases often end in administrative insolvency or at least plan insolvency (that is, the inability to pay priority claims in full on the effective date. But note that for a plan to be confirmable, section 1129(a) of the Bankruptcy Code requires that all holders of administrative and priority claims be paid in full on their claims on the effective date, unless they consent to other treatment under the plan.). This in turn often results in conversion or dismissal. Such an outcome is often unfortunate for all parties, including administrative and priority creditors who generally receive less than they would have under a confirmed Chapter 11 plan.

In this article, we share some of the strategies we have used with success to confirm Chapter 11 plans under these difficult circumstances. We start with 'front-end' strategies that may be used when entering Chapter 11, to prevent problems from arising in the first instance. We then discuss 'back-end' strategies that may be utilized as a case progresses.