HOW CHAPTER 11 PLAN IS PREPARED ?

The formulation of a Chapter 11 plan is the central stage in the reorganization of a debtor under Chapter 11 of the United States Bankruptcy Code. The commencement of a Chapter 11 case provides the debtor with a statutory framework within which its financial affairs can be restructured, but the ultimate objective of the proceeding is ordinarily achieved through a plan that establishes the manner in which the debtor’s obligations will be dealt with and its business reorganized. The Chapter 11 plan is therefore the principal instrument through which the debtor’s financial and legal relationships with its creditors, equity holders and other stakeholders are restructured. A plan may provide for the restructuring of secured and unsecured debt, payment of priority claims, modification of contractual obligations, sale of assets, issuance of securities, changes in ownership and management, and continuation of the debtor’s business after emergence from bankruptcy. The Supreme Court has recognized the central role of the Chapter 11 plan in allocating the value of the bankruptcy estate among creditors and other stakeholders. In Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017), the Court described Chapter 11 as a statutory framework under which debtors and creditors may negotiate a plan governing the distribution of the estate’s value, while emphasizing the importance of the Code’s priority structure in that process.

The preparation of a Chapter 11 plan requires consideration of both the substantive provisions of the Bankruptcy Code and the commercial circumstances of the debtor. Section 1123 of the Bankruptcy Code prescribes certain matters that a plan must contain and also permits a plan to contain various other provisions concerning the restructuring and implementation of the debtor’s affairs. Section 1123(a), among other things, requires designation of classes of claims and interests, identification of classes that are unimpaired, specification of the treatment of impaired classes, and provision for equal treatment of claims or interests within the same class unless the holder agrees to less favourable treatment. Section 1123(b) permits the plan to contain additional provisions dealing with matters such as executory contracts and unexpired leases, settlement or adjustment of claims, sale of property and other appropriate matters not inconsistent with the applicable provisions of the Bankruptcy Code. The plan must ultimately be capable of satisfying the requirements for confirmation prescribed by §1129. In Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), the Supreme Court emphasized that the statutory provisions governing Chapter 11 plans, voting and confirmation must be applied as an integrated scheme, particularly where a plan affects the rights of senior creditors and existing equity holders.

OBJECTIVE OF CHAPTER 11 PLAN

The preparation of a plan should begin with identification of the principal objectives of the reorganization. The objective may be to preserve the debtor as a going concern, restructure its indebtedness, sell substantially all of its assets, facilitate a change in ownership, or provide for an orderly liquidation. The chosen objective will influence the entire structure of the plan, including the treatment of creditors, the source of funding, the future ownership of the debtor and the manner in which its business will be conducted after confirmation.

Where the debtor is capable of continuing its business, the plan may be structured around a going-concern reorganization. In such a case, emphasis will ordinarily be placed upon the debtor’s future operating performance, projected cash flows and ability to service its restructured obligations. Where the debtor’s assets are more valuable than its continuing operations, the plan may instead contemplate a sale of assets and distribution of the proceeds. Section 1123(b)(4) expressly permits a plan to provide for the sale of all or substantially all of the property of the estate and the distribution of the proceeds of such sale. A plan may also provide for a combination of operational restructuring and asset sales. The Supreme Court’s decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012), illustrates that the method selected for realizing value from assets must remain within the specific requirements governing cramdown of secured claims; a plan cannot avoid an express statutory protection applicable to secured creditors merely by characterizing the proposed transaction differently.

The plan should therefore be developed as an integrated restructuring proposal. The proposed treatment of claims, funding arrangements, asset dispositions, financing, management and post-confirmation operations should all be consistent with the underlying restructuring objective.

ASSESSMENT OF THE DEBTOR’S FINANCIAL POSITION

Before preparing the substantive provisions of the plan, the debtor’s financial position must be examined in detail. This requires identification and valuation of the debtor’s assets and liabilities, examination of its historical financial performance, assessment of its current cash position and working-capital requirements, and preparation of projections concerning its post-confirmation operations. The debtor must also consider contingent and unliquidated liabilities, litigation claims, guarantees, tax liabilities and other obligations that may affect the value available for distribution.

Particular attention must be given to secured obligations. The amount of a creditor’s secured claim may depend upon the value of the property securing the obligation, and the creditor may accordingly have both a secured and an unsecured component. The plan must take these distinctions into account when determining classification and treatment.

The financial analysis must also support the feasibility of the proposed restructuring. Section 1129(a)(11) requires that confirmation of the plan not be likely to be followed by liquidation or the need for further financial reorganization of the debtor or its successor, unless such liquidation or reorganization is proposed in the plan. The financial projections underlying the plan should therefore provide a reasonable basis for demonstrating that the reorganized debtor can perform its obligations after confirmation. The Supreme Court’s decision in Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988), is particularly relevant to the confirmation stage because the Court rejected confirmation based upon an asserted contribution of future labour where the statutory requirements of the absolute priority rule were not satisfied. The decision underscores that the commercial feasibility or desirability of a proposed reorganization cannot substitute for compliance with the express requirements of §1129.

DETERMINATION AND ADMINISTRATION OF CLAIMS

The preparation of a Chapter 11 plan is closely connected with the determination and administration of claims. The debtor must examine the claims asserted against the estate, the liabilities scheduled by the debtor, proofs of claim filed by creditors, objections to claims and claims that are contingent, disputed or unliquidated. The amount and legal character of claims directly influence the classification of creditors and, in turn, the voting and distribution structure under the plan.

The plan should establish an appropriate mechanism for dealing with disputed claims. A disputed claim may not yet have a final amount for purposes of distribution, and the plan may therefore provide for the reservation or withholding of amounts attributable to such claims until they are ultimately determined. The treatment of subsequently allowed claims should likewise be specified so that the plan can operate effectively after confirmation.

Claims administration is particularly important because the voting rights of creditors and the amount of distributions under the plan may depend upon the amount of their allowed claims. The claims process should consequently be substantially complete, or at least sufficiently developed, before the final structure of the plan and its distribution provisions are settled.

CLASSIFICATION OF CLAIMS AND INTERESTS

Classification of claims and interests is one of the fundamental steps in preparing a Chapter 11 plan. Section 1122(a) provides that, except as provided in subsection (b), a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to the other claims or interests of such class. Section 1122(b) permits the designation of a separate class of claims consisting of certain administrative convenience claims that are substantially similar to other claims in the relevant class.

Section 1123(a)(1) requires the plan to designate classes of claims and interests, subject to specified statutory exceptions. Classification should therefore reflect the substantive legal and economic characteristics of the claims rather than merely their labels. Secured claims, priority claims, general unsecured claims and equity interests may require separate treatment because their respective legal rights are materially different.

Classification is also significant because voting takes place by class. A plan proponent must consequently ensure that the classification structure is consistent with the requirements of §1122 and is capable of supporting confirmation under §1129. The creation of classes should not be viewed merely as an administrative exercise; it forms part of the substantive architecture of the reorganization. The Supreme Court’s decision in Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), demonstrates the importance of the classification and voting structure in determining the rights of existing equity holders and the operation of the absolute priority rule. The Court rejected a structure under which an exclusive opportunity to obtain equity in the reorganized debtor was given to the prepetition equity holders without the safeguards contemplated by the Code’s cramdown provisions.

DETERMINATION OF IMPAIRED AND UNPARIMED CLASSES

After the claims and interests have been classified, the plan must identify which classes are impaired and which are unimpaired. Section 1123(a)(2) requires a plan to specify any class of claims or interests that is not impaired under the plan, while §1123(a)(3) requires the plan to specify the treatment of any class that is impaired under the plan.

Section 1124 establishes the circumstances in which a class is considered impaired. Broadly speaking, a class is unimpaired when the plan leaves the legal, equitable and contractual rights of its members unaltered, subject to the provisions of §1124. Where the plan modifies the rights of the members of a class, the class will generally be impaired.

This distinction is important because it affects voting. Under §1126(f), a class that is not impaired under a plan is conclusively presumed to have accepted the plan and is not entitled to vote. An impaired class, on the other hand, is generally entitled to vote under §1126. The plan should therefore clearly identify the impairment status of every relevant class.

TREATMENT OF CLAIMS AND INTERESTS UNDER THE CHAPTER 11 PLAN

The treatment of claims and interests constitutes the substantive core of the Chapter 11 plan. Section 1123(a)(3) requires the plan to specify the treatment of any class that is impaired under the plan, while §1123(a)(4) requires that the plan provide the same treatment for each claim or interest of a particular class, unless the holder of a particular claim or interest agrees to less favourable treatment.

The plan should consequently specify, for each class, the nature and amount of consideration that creditors or interest holders will receive. The consideration may consist of cash, deferred payments, new debt, securities, interests in the reorganized debtor, property or a combination of these forms of consideration. The plan should also specify the timing of distributions and the conditions, if any, upon which distributions will be made.

The proposed treatment must be considered together with the confirmation requirements of §1129. The treatment of each class should be consistent with the statutory priority scheme and the requirements applicable to impaired and dissenting classes. In Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017), the Supreme Court emphasized the significance of the Bankruptcy Code’s priority rules in determining the distribution of estate value, holding that a structured dismissal could not be used to distribute estate property in a manner that contravened the Code’s priority scheme simply because the case was being dismissed rather than concluded through a confirmed plan.

Treatment of Secured Claims

Secured claims require particular consideration because the rights of the creditor are supported by a lien or other interest in property of the debtor. The plan should identify the collateral securing the claim, the amount of the secured obligation and the proposed treatment of the creditor’s secured rights.

Section 1123(b)(5) permits a plan to modify the rights of holders of secured claims, other than claims secured only by a security interest in real property that is the individual’s principal residence, subject to the statutory limitations. A plan may therefore provide for restructuring of secured debt, including modification of payment terms, interest, maturity or other applicable rights.

Where the value of the collateral is less than the amount of the underlying debt, the creditor may have a secured claim to the extent of the collateral value and an unsecured claim for the deficiency, subject to the applicable provisions of the Bankruptcy Code. The plan should therefore address both components where applicable.

Where a secured creditor rejects a plan and cramdown is proposed, the requirements of §1129(b)(2)(A) become particularly important. In RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012), the Supreme Court held that a Chapter 11 plan proposing a sale of collateral free and clear of a secured creditor’s lien could not satisfy the applicable cramdown requirements while denying that creditor the right to credit bid at the sale. The decision illustrates that the treatment of secured claims must conform to the specific alternatives prescribed by the Bankruptcy Code rather than merely provide what the plan proponent considers to be economically equivalent treatment.

Treatment of Administrative Claims

Administrative expenses occupy a special position in a Chapter 11 case. Such claims arise from the administration of the bankruptcy estate and include claims entitled to administrative priority under the Bankruptcy Code. Section 503(b) identifies categories of administrative expenses, while §507(a)(2) provides priority for allowed administrative expenses specified in §503(b) and certain related claims.

The plan should identify the administrative claims that will be outstanding as of the effective date and provide for their payment in accordance with the requirements of the Bankruptcy Code. Section 1129(a)(9)(A) generally requires, unless the holder agrees otherwise, that holders of administrative expense claims receive payment in full in cash on the effective date of the plan. The plan should therefore ensure that adequate funds are available to satisfy these obligations.

Treatment of Priority Claims

Priority claims must be treated in accordance with the statutory priority scheme. Section 507 establishes the categories of claims and expenses entitled to priority, while §1129(a)(9) establishes specific requirements concerning the treatment of certain priority claims under a Chapter 11 plan.

The plan should identify the relevant priority claims and specify the manner and timing of their payment. Depending upon the category of claim, the Bankruptcy Code may permit payment over time rather than requiring immediate payment in full. The plan must nevertheless comply with the particular requirements applicable to the relevant priority category.

The importance of adhering to the statutory priority scheme is reinforced by Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017), where the Supreme Court held that a bankruptcy court could not approve a structured dismissal that distributed estate value in a manner that skipped a higher-priority class and paid a lower-priority class, absent the consent of the affected priority claimants. The decision is relevant to plan preparation because the proposed distribution structure must be examined against the priority rules established by the Bankruptcy Code.

Treatment of General Unsecured Claims

General unsecured claims commonly constitute one of the principal creditor classes in a Chapter 11 case. Such claims may include trade debts, unsecured loans, contractual claims and deficiency claims arising from under-secured obligations.

The plan may provide for payment of a percentage of the allowed amount of such claims, deferred cash payments, issuance of securities or interests in the reorganized debtor, or another form of consideration permitted by law. The plan should specify the precise treatment of the class, including the amount or percentage of recovery and the timing of distributions.

Where recoveries are dependent upon future performance of the debtor, the plan should be read together with the financial projections supporting feasibility. The treatment proposed for general unsecured creditors must also be considered in light of the liquidation analysis required for confirmation under §1129(a)(7).

Treatment of Trade Creditors

Trade creditors may have a significant role in the debtor’s continued operations. The plan should therefore consider the legal status of trade claims as well as their commercial relationship with the debtor.

Trade creditors whose claims are general unsecured claims may ordinarily be included within the relevant unsecured class, although separate classification may be appropriate where supported by the requirements governing classification. The plan may also address the continuation of commercial relationships with suppliers and other essential counterparties. Any differential treatment must comply with §1122 and §1123 and must not improperly discriminate among claims within a class.

Treatment of Executory Contracts and Unexpired Leases

The plan should address the debtor’s executory contracts and unexpired leases that remain outstanding at the relevant stage of the Chapter 11 case. Section 1123(b)(2) permits a plan to provide for the assumption, rejection or assignment of executory contracts and unexpired leases that have not previously been rejected, subject to §365.

The debtor should therefore determine which contracts and leases are economically beneficial and should be retained, which should be rejected, and which may be assigned. Where assumption is proposed, the debtor must consider applicable cure obligations and other requirements under §365. Rejection may give rise to a claim that must be addressed under the plan. In NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), the Supreme Court recognized the importance of §365 to the Chapter 11 reorganization process and held that a collective-bargaining agreement falls within the category of executory contracts subject to rejection under §365(a), subject to the statutory and judicial requirements governing such rejection. The decision illustrates the relationship between contract restructuring and the broader objective of successful Chapter 11 rehabilitation.

Treatment of Tax Claims

Tax claims may require separate consideration because certain tax liabilities are entitled to priority under §507 and are subject to specific treatment requirements under §1129(a)(9). The plan should identify the nature and amount of tax claims and establish a payment structure consistent with the Bankruptcy Code and applicable tax law.

Where tax claims are proposed to be paid over time, the plan should clearly specify the duration and terms of payment. The debtor should also consider tax liabilities that may arise as a consequence of the restructuring itself, including liabilities associated with asset sales or other transactions contemplated by the plan.

Treatment of Equity Interests

The treatment of equity interests should be separately addressed because equity holders generally occupy a residual position in the debtor’s capital structure. The plan should specify whether existing equity interests will be retained, cancelled, diluted or exchanged for interests in the reorganized debtor.

Section 1123(a)(6) requires that a plan provide for the inclusion in the charter of the debtor, if applicable, of a provision prohibiting the issuance of non-voting equity securities and providing for an appropriate distribution of voting power among classes of equity securities possessing voting power. Section 1123(a)(7) further addresses provisions concerning selection of directors, officers or trustees and other corporate governance matters.

Where existing equity holders retain an interest despite the non-payment or partial payment of senior creditors, the plan must be considered in light of the requirements of §1129(b), including the applicable fair-and-equitable requirements. In Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988), the Supreme Court held that the absolute priority rule could not be avoided through the proposed contribution of future labour and expertise by existing owners. The Court therefore made clear that equitable considerations cannot displace the express requirements of §1129(b).

The issue was further developed in Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), where the Court considered the relationship between the absolute priority rule and the opportunity afforded to existing equity holders to obtain ownership of the reorganized debtor. The decision is particularly relevant where a plan proposes to preserve or transfer equity to existing owners despite the claims of senior creditors.

Distribution Mechanism

The plan should establish a clear mechanism for distributing consideration to creditors and equity holders. It should specify the property or consideration to be distributed, the classes entitled to receive distributions, the timing of distributions and the conditions governing such distributions.

Where distributions are to be made in several instalments, the plan should establish the relevant payment dates or mechanisms for calculating the payment amounts. Where disputed claims remain unresolved, the plan should establish a mechanism for reserving amounts and making subsequent distributions after the claims are allowed.

The plan may also establish a trust, plan administrator or other structure for holding and distributing assets following confirmation, where appropriate.

FUNDING OF THE PLAN

A plan must identify the sources from which the distributions and other obligations contemplated by the plan will be funded. Funding may be derived from the debtor’s post-confirmation operations, asset sales, refinancing, new investment, contributions from existing stakeholders or third-party financing.

Where the plan relies upon future operating cash flows, the debtor should provide financial projections supporting the proposed payment obligations. Where the plan relies upon a proposed sale or financing transaction, the relevant transaction should be sufficiently developed to provide a reasonable basis for determining whether the plan can be implemented.

The funding structure is closely connected with feasibility under §1129(a)(11). The debtor should therefore ensure that the proposed funding mechanism is consistent with the projected financial position of the reorganized enterprise.

RESTRUCTURING OF EXISTING DEBT

The plan should identify the existing debt instruments that will be reinstated, modified, refinanced or cancelled. The treatment may involve reduction of principal, modification of interest rates, extension of maturity dates, deferral of payments or exchange of existing debt for new debt or equity.

Where new debt is issued under the plan, the plan should specify its material terms, including principal amount, interest rate, maturity, security and payment structure. The plan should also identify any existing liens or security interests that will continue after confirmation and those that will be released upon implementation of the restructuring.

BUSINESS AND OPERATIONAL RESTRUCTURING

A financial restructuring may not by itself resolve the causes of the debtor’s financial distress. The plan may therefore incorporate operational measures necessary to make the reorganized business sustainable. Such measures may include disposal of non-core assets, closure of unprofitable operations, reduction of expenses, renegotiation of contracts, changes in management and restructuring of the debtor’s business operations.

Section 1123(b) permits a plan to contain various provisions appropriate to the restructuring of the debtor, provided that they are not inconsistent with the applicable provisions of the Bankruptcy Code. The operational provisions of the plan should therefore be integrated with its financial provisions so that the reorganized enterprise has a reasonable basis for meeting its obligations following confirmation. The Supreme Court’s discussion in NLRB v. Bildisco & Bildisco, 465 U.S. 513 (1984), illustrates the broader principle that restructuring contractual and operational obligations may be necessary to achieve the rehabilitation contemplated by Chapter 11, while remaining subject to the specific requirements of the Bankruptcy Code.

SALE OR TRANSFER OF ASSETS

Asset sales may form an important part of a Chapter 11 restructuring. Section 1123(b)(4) expressly permits a plan to provide for the sale of all or substantially all of the property of the estate and the distribution of the proceeds of such sale.

Where the plan depends upon asset sales, it should identify the assets to be sold, the expected proceeds and the proposed use of those proceeds. The plan should also specify how the sale proceeds will be distributed among the relevant creditor classes.

The debtor should distinguish between asset sales undertaken during the case under other provisions of the Bankruptcy Code and sales contemplated as part of the plan itself. The legal mechanism for the proposed sale should be consistent with the relevant provisions governing the disposition of estate property. Where a sale of encumbered property forms part of a cramdown plan, RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012), demonstrates the importance of complying with the specific secured-creditor protections contained in §1129(b)(2)(A).

TREATMENT OF LIENS AND SECURITY INTERESTS

The plan should expressly address the treatment of liens and security interests. It should identify which liens will continue following confirmation and which will be released, modified or satisfied.

Section 1123(a)(5) provides that the plan must provide adequate means for its implementation and identifies, among other things, satisfaction or modification of liens as a possible means of implementation. The plan should therefore clearly establish the circumstances in which liens will be released and the property to which any continuing lien will attach.

Clarity in this respect is particularly important where creditors are receiving replacement collateral, new securities or other forms of consideration in exchange for existing secured rights. The requirements applicable to secured creditors become particularly significant where the plan is proposed to be confirmed over the creditor’s objection. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012), confirms that the statutory alternatives governing the treatment of secured claims under §1129(b)(2)(A) must be respected in formulating the plan.

CORPORATE GOVERNANCE AND MANAGEMENT

Where the debtor will continue as a reorganized entity, the plan should address the corporate governance structure applicable after confirmation. Section 1123(a)(7) requires that provisions concerning the manner of selection of directors, officers or trustees and other matters relating to corporate governance be consistent with the interests of creditors and equity security holders and with public policy.

The plan may therefore specify the composition of the board of directors, appointment of officers, ownership structure and other governance arrangements. Where ownership is transferred to creditors or new investors, the plan should identify the manner in which the new ownership interests will be issued and the resulting governance structure. The Supreme Court’s decision in Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), is relevant where the proposed governance and ownership structure gives existing equity holders an opportunity to retain or obtain equity in the reorganized debtor, because such arrangements must be considered in conjunction with the absolute priority rule and the rights of senior classes.

RELEASES, EXCULPATION AND INJUNCTION PROVISIONS

A Chapter 11 plan may contain provisions concerning releases, injunctions and exculpation, subject to the applicable statutory requirements and case law. Such provisions should be drafted with particular precision because they may affect claims against persons other than the debtor.

The plan should clearly identify the parties covered, the claims or conduct affected and the circumstances in which the relevant protection becomes effective. Any proposed release or injunction must be evaluated against the statutory authority applicable to the particular provision and the requirements imposed by the bankruptcy court.

The Supreme Court’s decision in Harrington v. Purdue Pharma L.P., 603 U.S. 204 (2024), is particularly important in this context. The Court held that the Bankruptcy Code does not authorize a Chapter 11 plan to impose a release and injunction that effectively discharges claims against a nondebtor without the consent of affected claimants. The Court expressly distinguished such nonconsensual third-party releases from consensual releases, which it did not address. Accordingly, plan provisions involving releases and injunctions affecting nondebtor parties must be formulated with careful attention to Purdue Pharma and the particular statutory authority relied upon.

MEANS FOR IMPLEMENTATION OF THE PLAN

Section 1123(a)(5) requires the plan to provide adequate means for its implementation. The statute identifies a number of possible means, including retention of property, transfer of property, merger or consolidation, sale of property, satisfaction or modification of liens, modification of debt instruments, curing defaults, extension of maturity, changes in interest rates and issuance of securities.

The plan should therefore explain how the proposed restructuring will actually be implemented. If creditors are to receive cash, the plan should identify the source of the cash. If debt is to be refinanced, the plan should identify the refinancing mechanism. If assets are to be transferred or sold, the plan should identify the relevant transaction. If new equity is to be issued, the plan should establish the terms and recipients of that equity.

The Supreme Court’s decisions in RadLAX Gateway Hotel and 203 North LaSalle demonstrate that the means selected to implement a plan cannot be considered in isolation from the statutory protections governing secured creditors, senior claims and existing equity interests.

FEASIBILITY OF THE PLAN

Feasibility is an essential consideration in plan preparation. Section 1129(a)(11) requires the court to determine that confirmation of the plan is not likely to be followed by liquidation or the need for further financial reorganization, unless such liquidation or reorganization is proposed in the plan.

The debtor should therefore prepare realistic financial projections covering the post-confirmation period. These projections should ordinarily address anticipated revenue, operating expenses, working-capital requirements, capital expenditure, debt service and other significant financial obligations.

The assumptions underlying the projections should be clearly identifiable and reasonably supported. Where the plan depends upon substantial changes in business performance, the debtor should be able to demonstrate how those changes are expected to occur. Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988), is relevant in emphasizing that a proposed Chapter 11 plan must satisfy the statutory requirements for confirmation and that equitable considerations cannot substitute for compliance with the Code.

BEST INTERESTS OF CREDITORS

The proposed treatment of creditors should be compared with the recovery that would be available in a hypothetical liquidation. Section 1129(a)(7) establishes what is commonly referred to as the “best interests of creditors” test. Subject to the statutory requirements, each holder of a claim or interest in an impaired class must receive or retain under the plan at least the amount that such holder would receive or retain if the debtor were liquidated under Chapter 7.

A liquidation analysis is therefore an important component of plan preparation. It provides a basis for comparing the proposed recovery under the plan with the hypothetical recovery in liquidation. The analysis should take into account the value of the debtor’s assets, costs of liquidation, statutory priorities and the distribution that would be available to each relevant class.

CREDITOR VOTING AND ACCEPTANCE

The plan should be formulated with the voting requirements of §1126 in mind. Creditors entitled to vote do so by class, and acceptance is determined according to the statutory requirements applicable to the relevant class.

Under §1126(c), a class of claims accepts a plan if creditors holding at least two-thirds in amount and more than one-half in number of the allowed claims of such class that are actually voted have voted to accept the plan. Section 1126(d) contains the corresponding rule concerning acceptance by a class of interests.

An impaired class that rejects the plan does not necessarily prevent confirmation. Where the requirements of §1129(b) are satisfied, a plan may in appropriate circumstances be confirmed notwithstanding rejection by an impaired class. The possibility of such treatment should therefore be considered during plan formulation. Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), demonstrates that voting, exclusivity, classification and cramdown are interconnected components of the Chapter 11 plan process, particularly where existing equity holders seek to retain an interest in the reorganized debtor.

CRAMDOWN CONSIDERATIONS

The possibility of confirmation notwithstanding rejection by one or more impaired classes should be considered when the plan is prepared. Section 1129(b) permits confirmation of a plan despite rejection by an impaired class if the requirements of that section are satisfied.

In particular, the plan must satisfy the applicable “fair and equitable” and “not unfairly discriminatory” requirements. In the case of a class of secured claims, the statute provides specific alternatives concerning retention of liens, deferred payments and realization of the value of the creditor’s interest in the collateral. In the case of unsecured claims, the statutory requirements include the principle that a dissenting class must receive the treatment required by §1129(b)(2)(B).

Accordingly, the plan should be structured so that its treatment of each class can be evaluated against the confirmation requirements even if unanimous creditor support is not obtained. Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988), establishes that the absolute priority rule must be applied according to the statutory requirements, while RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 639 (2012), demonstrates the specific importance of complying with the statutory alternatives governing secured-creditor cramdown.

DISCLOSURE AND EXPLANATION OF THE PLAN

The plan must be accompanied by appropriate disclosure so that creditors and other parties entitled to vote can make an informed assessment of the proposed restructuring. Section 1125 governs the requirement of an approved disclosure statement before solicitation of acceptances or rejections of a plan, subject to the statutory exceptions.

The disclosure statement ordinarily explains the debtor’s financial condition, causes of financial distress, assets and liabilities, proposed restructuring, classification and treatment of claims, projected recoveries, risks and other material information. The plan and disclosure statement should therefore be prepared consistently so that the disclosure statement accurately explains the operative provisions of the plan.

CONDITIONS PRECEDENT TO EFFECTIVENESS

The plan should identify the conditions that must be satisfied before it becomes effective. These may include entry of the confirmation order, satisfaction of financing conditions, completion of an asset sale, receipt of regulatory approvals, execution of restructuring documents or occurrence of other specified events.

Conditions precedent should be drafted precisely because they determine whether and when the restructuring becomes effective. The plan should also specify the consequences if one or more conditions are not satisfied or are waived.

POST CONFIRMATION ADMINISTRATION

The plan should establish an appropriate framework for administering its provisions after confirmation. Where distributions are to be made over a period of time, the plan may provide for a plan administrator, trustee, distribution agent or other representative to undertake the necessary functions.

The plan should also provide mechanisms for resolving disputed claims, making distributions to subsequently allowed claimants, dealing with unclaimed distributions and administering any remaining assets or causes of action.

MODIFICATION OF THE PLAN BEFORE CONFIRMATION

The formulation of a Chapter 11 plan may involve extensive negotiations with creditors, equity holders and other stakeholders. The plan may consequently require modification before confirmation. Section 1127 governs modification of a plan after it has been accepted and before confirmation and establishes requirements concerning notice and acceptance where applicable.

Plan preparation should therefore allow sufficient flexibility for modifications resulting from creditor negotiations, changes in valuation, revised financing arrangements or developments in the debtor’s business. Any modification must nevertheless remain consistent with the applicable provisions of the Bankruptcy Code and procedural requirements of the court. The Supreme Court’s decision in Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), illustrates that negotiations concerning ownership, creditor treatment and plan structure remain subject to the statutory limitations governing confirmation and the rights of the various classes.

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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.