HOW CHAPTER 11 PLAN IS CONFIRMED BY BANKRUPTCY COURT ?
The filing of a Chapter 11 plan and its acceptance by the requisite classes of creditors and equity holders do not, by themselves, bring the reorganization to an end. The plan must still be presented to the Bankruptcy Court for confirmation. Confirmation is the stage at which the Court determines whether the proposed plan satisfies the requirements of the Bankruptcy Code and whether it can be made binding upon the debtor, creditors, equity holders, and other parties whose rights are affected by the plan.
Confirmation is therefore a judicial process, whereas acceptance is primarily a process of creditor and interest-holder voting. A plan may receive substantial creditor support and nevertheless be denied confirmation if it fails to satisfy a statutory requirement. Conversely, a plan may be confirmed notwithstanding rejection by one or more impaired classes if the requirements for cramdown under §1129(b) are satisfied.
The principal provision governing confirmation is 11 U.S.C. §1129. It establishes a series of requirements that must generally be satisfied before a Chapter 11 plan can be confirmed. These requirements address, among other matters, compliance with the Bankruptcy Code, good faith, proper classification and treatment of claims and interests, acceptance or non-rejection by classes, the best-interests-of-creditors test, feasibility, payment of certain administrative and priority claims, and the absence of prohibited treatment of junior interests. Where an impaired class has rejected the plan, §1129(b) provides the mechanism by which the Court may nevertheless confirm the plan if the statutory cramdown requirements are satisfied.
Confirmation is consequently one of the most important judicial stages of a Chapter 11 case. It represents the transition from the negotiation and voting phase of the restructuring to the implementation of the confirmed restructuring arrangement.
Confirmation is not merely a ministerial recording of creditor approval. Section 1129 imposes independent statutory requirements that must be satisfied before a plan can be confirmed. The Supreme Court’s decisions in Ahlers, 203 North LaSalle and RadLAX demonstrate that creditor voting does not authorise a bankruptcy court to disregard mandatory provisions concerning priority, treatment of secured claims or the rights of junior interests. The confirmation inquiry therefore involves both the procedural outcome of voting and the substantive compliance of the plan with the Bankruptcy Code.
MEANING AND PURPOSE OF CONFIRMATION
Confirmation is the formal approval of a Chapter 11 plan by the Bankruptcy Court. Through the confirmation order, the Court determines that the plan complies with the requirements of Chapter 11 and is capable of becoming legally binding upon the parties affected by it.
The purpose of confirmation is not merely to record the outcome of creditor voting. The Bankruptcy Court has an independent responsibility to determine whether the statutory requirements for confirmation have been satisfied. Although the Court gives significant importance to the voting results and the commercial agreement reached among the parties, creditor consent cannot eliminate mandatory requirements of the Bankruptcy Code.
The confirmation process therefore serves two related purposes. First, it protects the collective bargaining and voting process that lies at the heart of Chapter 11. Second, it ensures that the restructuring approved by the Court complies with the statutory safeguards imposed by Congress.
Confirmation also provides finality. Once a plan is confirmed, the rights and obligations of the debtor, creditors, equity holders and other affected parties are generally governed by the confirmed plan and confirmation order, subject to the Bankruptcy Code and any applicable provisions of the plan itself.
FILING OF THE PLAN FOR CONFIRMATION
After the plan has been formulated, the disclosure statement has been approved where required, and creditors and equity holders entitled to vote have been given an opportunity to vote, the plan is presented to the Court for confirmation.
The plan proponent ordinarily bears the responsibility of demonstrating that the requirements of §1129 have been satisfied. The confirmation process may therefore involve a comprehensive evidentiary presentation concerning the debtor’s financial condition, the value of its assets, the proposed treatment of claims and interests, projected cash flows, the feasibility of the reorganized business, and the anticipated distributions to creditors.
The plan itself ordinarily identifies the classes of claims and interests, specifies the treatment proposed for each class, provides for the means of implementation of the plan, and addresses matters necessary to carry out the restructuring. The Court examines the plan together with the disclosure statement, ballots, voting results, objections, supporting declarations, financial projections, valuation evidence and other relevant materials.
NOTICE OF THE CONFIRMATION HEARING
The confirmation hearing is conducted after appropriate notice has been provided to creditors, equity holders and other parties entitled to notice. The Bankruptcy Rules establish procedures concerning notice, solicitation, voting, objections and confirmation.
The notice is important because confirmation may substantially alter the legal rights of creditors and equity holders. Creditors may have their prepetition claims reduced, modified, converted, deferred or otherwise treated in accordance with the plan. Equity interests may be cancelled, diluted or otherwise affected. Accordingly, parties must receive an adequate opportunity to object to confirmation.
The confirmation hearing therefore provides the principal judicial forum in which objections to the plan are considered and the plan proponent is required to establish compliance with the Bankruptcy Code.
REQUIREMENTS FOR CONFIRMATION UNDER SECTION 1129
Section 1129 contains the principal statutory requirements for confirmation. These requirements must be examined as a whole because satisfaction of one requirement does not dispense with the others.
Among the most important requirements are those relating to proper classification and treatment of claims and interests, good faith, compliance with applicable provisions of the Bankruptcy Code, acceptance or deemed acceptance by the requisite classes, the best-interests-of-creditors test, feasibility, payment of administrative and priority claims, and the treatment of secured and unsecured claims.
The Court may also consider whether the plan was proposed in good faith and not by any means forbidden by law. Good faith requires the Court to examine the circumstances surrounding the formulation and proposed implementation of the plan. The inquiry is not simply whether the plan is commercially attractive; the plan must be proposed for a legitimate reorganization purpose and in conformity with the objectives of Chapter 11.
COMPLIANCE WITH THE BANKRUPTCY CODE
Section 1129(a)(1) requires that the plan comply with the applicable provisions of the Bankruptcy Code. This requirement gives the Court an important statutory basis for examining the plan.
The Court may therefore consider whether the plan properly classifies claims and interests, provides the treatment required by the Code, complies with applicable priority provisions, properly addresses secured claims, respects the rights of creditors and equity holders, and otherwise conforms to the statutory framework governing Chapter 11.
A plan cannot be confirmed merely because the creditors favor it if its provisions are inconsistent with mandatory provisions of the Bankruptcy Code.
GOOD FAITH AND LAWFUL PURPOSE
Under §1129(a)(3), the plan must have been proposed in good faith and not by any means forbidden by law.
Good faith does not require that every creditor approve of the plan. Chapter 11 necessarily permits a debtor to propose a restructuring that may be opposed by some creditors. The relevant question is whether the plan represents a legitimate attempt to reorganize the debtor or otherwise accomplish a permissible Chapter 11 objective.
The Court may examine the circumstances surrounding the preparation and negotiation of the plan, the debtor’s financial condition, the proposed treatment of creditors, the feasibility of the restructuring, and whether the plan is being used for an improper purpose. A plan proposed merely to achieve an objective inconsistent with the Bankruptcy Code may fail the good-faith requirement even if the voting requirements are otherwise satisfied.
PAYMENT OF ADMINISTRATIVE EXPENSES AND PRIORITY CLAIMS
Chapter 11 establishes a statutory priority structure governing various categories of claims. A plan must appropriately address administrative expenses and other priority claims in accordance with the requirements of the Bankruptcy Code.
Administrative expenses generally arise from the costs and expenses of administering the bankruptcy estate, including qualifying claims under §503(b). Certain administrative expenses receive priority under §507(a)(2). Other categories of priority claims are identified in §507.
The plan must therefore provide treatment consistent with the applicable priority provisions unless the Bankruptcy Code permits a different treatment. The Court examines whether the plan improperly attempts to subordinate or otherwise impair claims that are entitled to statutory priority.
ACCEPTANCE OF THE PLAN
One of the principal confirmation requirements concerns acceptance of the plan by the affected classes. Section 1129(a)(8) generally requires that each class of claims or interests either accept the plan or be unimpaired under the plan.
A class that is unimpaired is generally deemed to have accepted the plan under §1126(f). An impaired class, by contrast, ordinarily must satisfy the applicable voting requirements under §1126.
However, failure of one or more impaired classes to accept the plan does not necessarily prevent confirmation. If the requirements of §1129(a), other than §1129(a)(8), are satisfied and the requirements of §1129(b) are met, the Court may confirm the plan notwithstanding rejection by an impaired class.
Thus, the voting process and the confirmation process are closely related but legally distinct.
ACCEPTANCE BY AT LEAST ONE IMPAIRED CLASS
Section 1129(a)(10) is particularly important in a cramdown situation. Where a class of claims is impaired under the plan, at least one impaired class of claims must have accepted the plan, excluding acceptance by any insider.
This requirement prevents a debtor from obtaining confirmation solely through the support of unimpaired classes or through the manipulation of classification. The Bankruptcy Code requires genuine support from at least one impaired class of claims before the Court may proceed to confirm a plan over the rejection of another impaired class.
The Court therefore examines the voting results carefully to determine whether the statutory requirements of §1129(a)(10) have been satisfied.
THE BEST INTERESTS OF CREDITORS TEST
Section 1129(a)(7) contains the best-interests-of-creditors test. In general terms, each holder of an impaired claim or interest who has not accepted the plan must receive, under the plan, property of a value that is not less than the amount that such holder would receive if the debtor were liquidated under Chapter 7.
The purpose of this requirement is to ensure that a dissenting creditor is not forced to accept a Chapter 11 restructuring that would leave the creditor worse off than liquidation.
The test therefore requires consideration of the hypothetical Chapter 7 liquidation value of the debtor. This may involve valuation of real estate, inventory, accounts receivable, intellectual property, operating assets and other property, together with consideration of the costs and expenses that would arise in a liquidation.
The best-interests test is distinct from the feasibility requirement. The former compares the proposed plan distribution with a hypothetical Chapter 7 liquidation; the latter examines whether the debtor is likely to be able to perform the plan and meet its obligations after confirmation.
TREATMENT OF SECURED CLAIMS
The Court must also examine the treatment of secured claims under the plan. A secured creditor’s rights depend upon the nature and extent of its security interest and the value of its collateral.
Where a plan proposes to retain the creditor’s lien and make payments over time, the plan must satisfy the applicable requirements governing treatment of secured claims. In a cramdown situation, §1129(b)(2)(A) sets out specific alternatives through which treatment of a rejecting class of secured claims may qualify as fair and equitable.
The Court may therefore examine the value of the collateral, the amount of the allowed secured claim, the proposed payment schedule, the applicable interest or discount rate, and the adequacy of the proposed treatment.
Valuation disputes can become particularly important at confirmation because a determination of collateral value may affect both the secured and unsecured portions of a creditor’s claim.
FAIR AND EQUITABLE TREATMENT
Where cramdown is sought, §1129(b) requires the plan to be fair and equitable with respect to each impaired class that has rejected the plan.
For secured claims, the statute provides specific alternatives under §1129(b)(2)(A). For unsecured claims, §1129(b)(2)(B) generally requires either payment of property of a value equal to the allowed amount of the claim or satisfaction of the statutory absolute-priority requirements. For equity interests, §1129(b)(2)(C) contains corresponding requirements.
The Court must therefore determine whether the proposed treatment respects the relative rights and priorities of the affected classes. Cramdown is not an unrestricted power to impose any treatment upon a dissenting creditor. The plan must remain within the statutory framework established by §1129(b).
FEASIBILITY OF THE PLAN
One of the most commercially important confirmation requirements is feasibility. Under §1129(a)(11), the Court must find that confirmation of the plan is not likely to be followed by liquidation, or the need for further financial reorganization, unless the plan itself proposes such liquidation or reorganization.
The feasibility inquiry requires the Court to consider whether the reorganized debtor is realistically capable of performing the obligations contemplated by the plan.
The debtor may present financial projections, cash-flow forecasts, business plans, budgets, market assumptions, financing arrangements, capital requirements and evidence concerning the future operation of the business. The Court may also consider the debtor’s historical financial performance and the assumptions underlying the projections.
Feasibility does not require absolute certainty of success. Businesses operate in an environment of commercial uncertainty. The question is whether the proposed restructuring is sufficiently realistic that confirmation is not likely to be followed by another liquidation or restructuring.
Feasibility objections are particularly significant where the plan depends upon aggressive revenue projections, substantial refinancing, uncertain asset sales, highly leveraged operations or other assumptions that may make performance difficult.
VALUATION AT CONFIRMATION
Valuation frequently plays a central role in contested confirmation proceedings. The value of the debtor and its assets may affect the treatment of secured creditors, the best-interests test, distributions to unsecured creditors and the interests of equity holders.
The Court may receive expert testimony concerning the value of the reorganized enterprise. Different valuation methodologies may be presented, including discounted cash-flow analysis, comparable-company analysis, precedent transactions and asset-based approaches.
Valuation may become particularly contentious when the economic value of the reorganized enterprise determines whether unsecured creditors are paid in full or whether existing equity holders may retain an interest in the reorganized debtor.
The Court ultimately determines the valuation issues necessary to decide whether the statutory confirmation requirements have been satisfied.
CLASSIFICATION AND UNFAIR DISCRIMINATION
The Court may examine whether claims and interests have been properly classified. Section 1122 requires claims or interests placed in the same class to be substantially similar.
Classification is important because it determines voting rights and plan treatment. A plan proponent cannot ordinarily create classes merely to manipulate voting outcomes or manufacture acceptance of a plan.
Where cramdown is involved, the Court may also examine whether the plan unfairly discriminates between classes. Different treatment is not automatically impermissible. Creditors having materially different legal rights may properly receive different treatment. The question is whether the distinction is justified within the statutory framework and whether the treatment is consistent with the rights and priorities of the affected classes.
OBJECTIONS TO CONFIRMATION
Creditors, equity holders, the United States Trustee and other parties in interest may raise objections to confirmation where they contend that the plan does not satisfy the requirements of the Bankruptcy Code.
Objections may concern classification, voting, disclosure, valuation, feasibility, treatment of secured claims, treatment of priority claims, the best-interests test, unfair discrimination, cramdown requirements, good faith, or other statutory or procedural matters.
A creditor may, for example, contend that the debtor has undervalued its assets, that projected cash flows are unrealistic, that the creditor would receive more in a Chapter 7 liquidation, or that the proposed treatment does not adequately protect the creditor’s statutory rights.
Confirmation hearings may therefore range from relatively straightforward proceedings in consensual cases to highly contested evidentiary trials in large or complex corporate reorganizations.
EVIDENCE AT THE CONFIRMATION HEARING
In a contested confirmation proceeding, the Court may receive documentary and testimonial evidence concerning the debtor’s financial condition and the operation of the proposed plan.
Evidence may include financial projections, valuation reports, expert testimony, declarations of officers and advisors, liquidation analyses, business plans, capitalization structures, financing commitments, voting reports and other documents relevant to the confirmation requirements.
The plan proponent generally must establish the factual foundation necessary for the Court to make the findings required by §1129. Objecting parties may introduce evidence challenging those assertions.
The confirmation hearing is therefore not merely a procedural hearing. In a contested case, it may involve substantial examination of the debtor’s business, financial projections, valuation and restructuring assumptions.
MODIFICATION OF THE PLAN BEFORE CONFIRMATION
A Chapter 11 plan may be modified before confirmation in accordance with §1127. Modification may become necessary where negotiations with creditors produce a revised agreement, where voting results reveal deficiencies, or where objections identify problems that can be corrected.
A modification may alter distributions, classification, treatment of particular claims, interest rates, maturity dates, releases, financing arrangements or other provisions of the plan.
Where a plan is modified, the Bankruptcy Code and applicable Bankruptcy Rules impose requirements concerning notice, disclosure and voting, depending upon the nature and timing of the modification.
The possibility of modification is commercially significant because many Chapter 11 cases continue to involve negotiation even after the original plan has been distributed for voting.
CONFIRMATION HEARING
At the confirmation hearing, the Bankruptcy Court considers the plan, the confirmation record, voting results, objections and evidence presented by the parties.
The plan proponent may present evidence demonstrating compliance with §1129. Creditors and other parties may present objections and evidence in opposition. The Court may question counsel, examine witnesses and require clarification concerning particular provisions of the plan.
If the Court concludes that the requirements of §1129 have been satisfied, it may enter an order confirming the plan. If the requirements have not been satisfied, the Court may deny confirmation, allow the plan proponent an opportunity to modify the plan, or take other appropriate action consistent with the Bankruptcy Code.
In a consensual case, the confirmation hearing may be relatively straightforward because most affected constituencies support the plan. In a contested case, however, the confirmation hearing may involve extensive litigation concerning valuation, feasibility, classification, discrimination and cramdown.
CONFIRMATION ORDER
Once the Court determines that the plan satisfies the statutory requirements, it enters a confirmation order.
The confirmation order formally approves the plan and may contain findings concerning the requirements of §1129. It may also address the implementation of the plan, vesting of assets, releases and injunctions to the extent permissible, treatment of claims, effectiveness of transactions contemplated by the plan, and other matters necessary to implement the restructuring.
The confirmation order and the plan should therefore be read together. The plan establishes the substantive restructuring arrangement, while the confirmation order gives that arrangement judicial effect and determines the manner in which it becomes effective.
EFFECT OF CONFIRMATION
Confirmation produces significant legal consequences. Section 1141 provides that, subject to specified exceptions, the provisions of a confirmed plan bind the debtor, any entity issuing securities under the plan, any entity acquiring property under the plan, and each creditor, equity security holder and general partner in the debtor, whether or not the claim or interest of that party is impaired under the plan and whether or not the party has accepted the plan.
This binding effect is one of the principal reasons why confirmation is so important. A creditor who voted against the plan may nevertheless be bound by it if the statutory requirements for confirmation have been satisfied.
The confirmed plan consequently becomes the governing framework for the debtor’s post-bankruptcy obligations and the distribution of value among creditors and equity holders.
VESTING OF PROPERTY AFTER CONFIRMATION
Section 1141(b) generally provides that, except as otherwise provided in the plan or confirmation order, confirmation vests all of the property of the estate in the debtor.
This provision facilitates the debtor’s transition from the bankruptcy process to post-confirmation operations. The reorganized debtor ordinarily emerges from bankruptcy with the assets necessary to continue its business, subject to the rights and obligations established by the confirmed plan.
The plan may contain different provisions concerning the vesting or transfer of particular assets. Accordingly, the specific language of the plan and confirmation order must be examined when determining the post-confirmation ownership and control of estate property.
DISCHARGE UPON CONFIRMATION
Confirmation may also have significant consequences for the debtor’s prepetition liabilities. Section 1141(d) generally provides for the discharge of debts provided for by the plan, subject to the statutory exceptions and limitations contained in the Bankruptcy Code.
For a corporate Chapter 11 debtor, the discharge is an important consequence of successful reorganization because it enables the reorganized entity to continue its business without remaining subject to the full burden of its prepetition obligations, except to the extent those obligations survive or are treated under the confirmed plan or applicable law.
Discharge should nevertheless be distinguished from confirmation. Confirmation is the Court’s approval of the plan. Discharge concerns the legal effect of the confirmed plan upon the debtor’s prepetition debts. The two concepts are closely connected but are not identical.
IMPLEMENTATION OF THE CONFIRMED PLAN
After confirmation, the debtor and other relevant parties begin implementing the restructuring contemplated by the plan.
Implementation may involve payment or distribution of cash and securities to creditors, issuance of new equity, refinancing of debt, cancellation or modification of existing obligations, transfer or sale of assets, execution of new agreements and restructuring of the debtor’s corporate governance.
In many cases, the plan establishes an effective date on which these transactions occur. Certain conditions precedent may need to be satisfied before the plan becomes effective.
The post-confirmation phase may therefore involve substantial commercial activity even though the principal judicial restructuring process has reached its conclusion.
ROLE OF THE BANKRUPTCY COURT AFTER CONFIRMATION
Confirmation does not necessarily mean that the Bankruptcy Court immediately ceases to have any role in the case. The plan and confirmation order may provide for the Court to retain jurisdiction over specified matters.
Such matters may include interpretation and enforcement of the plan, resolution of disputes concerning distributions, implementation of transactions contemplated by the plan, determination of certain claims, and other matters expressly or implicitly within the Court’s post-confirmation jurisdiction.
The extent of retained jurisdiction depends upon the Bankruptcy Code, applicable jurisdictional principles, the plan and the confirmation order.
DENIAL OF CONFIRMATION
The Court may deny confirmation where the plan proponent fails to satisfy the requirements of §1129.
Denial of confirmation does not necessarily mean that the Chapter 11 case must immediately be dismissed or converted. Depending upon the circumstances, the debtor may be permitted to modify the plan and present a revised plan for confirmation.
This possibility is important because Chapter 11 is fundamentally a restructuring process. The confirmation process may identify deficiencies that can be corrected through further negotiation or modification.
However, where the debtor is unable to produce a confirmable plan, the case may ultimately face conversion to Chapter 7 or dismissal under the applicable provisions of the Bankruptcy Code.
CONSENSUAL CONFIRMATION AND CONTESTED CONFIRMATION
A consensual confirmation occurs where the principal affected constituencies support the plan and the requirements of §1129(a) are satisfied without the need for cramdown.
Consensual confirmation is generally faster and less expensive because extensive valuation and legal disputes may be avoided. Nevertheless, the Court must still independently determine that the statutory confirmation requirements have been met.
A contested confirmation occurs where one or more parties object to the plan or where one or more impaired classes reject it and the plan proponent seeks confirmation through §1129(b). Such proceedings may involve substantial evidence and legal argument.
The distinction between consensual and contested confirmation is therefore primarily one of the level of opposition and litigation involved; both remain subject to judicial confirmation under the Bankruptcy Code.
CONFIRMATION AND CRAMDOWN: THEIR RELATIONSHIP
Cramdown is not a separate proceeding disconnected from confirmation. It is a statutory mechanism within the confirmation process.
Where one or more impaired classes reject the plan, the plan proponent may request confirmation under §1129(b). The Court must then determine whether the requirements of §1129(a), other than §1129(a)(8), have been satisfied and whether the plan satisfies the “fair and equitable” and “no unfair discrimination” requirements with respect to each rejecting impaired class.
Thus, the sequence is generally: preparation of the plan, disclosure and solicitation where required, voting, determination of acceptance, presentation of the plan for confirmation, examination of §1129 requirements, and, where necessary, application of §1129(b) to rejecting classes.
CONFIRMATION AS THE TURNING POINT OF CHAPTER 11
Confirmation represents the principal turning point in a corporate Chapter 11 case. Before confirmation, the debtor and its creditors are primarily engaged in restructuring negotiations, valuation, voting and litigation concerning the terms of the proposed plan.
After confirmation, the principal question becomes implementation. The debtor must perform the obligations imposed by the plan, make the required distributions, consummate the transactions contemplated by the restructuring and operate in accordance with its post-confirmation obligations.
Confirmation therefore transforms the proposed restructuring from a negotiated proposal into a legally binding arrangement enforceable under the Bankruptcy Code.
_____________________
Mukesh Suman is a lawyer based at Delhi. He also provides bankruptcy paralegal services to clients based in USA. He may be contacted at mukesh_suman@outlook.com or +91 9717864570.
