WHAT IS DISCLOSURE STATEMENT UNDER CHAPTER 11 PROCEEDINGS ?
The disclosure statement is an important component of the Chapter 11 reorganization process. Before creditors and other parties entitled to vote on a Chapter 11 plan are asked to make an informed decision, they must be provided with adequate information concerning the debtor, the proposed plan, and the consequences of its implementation. The disclosure statement serves this purpose. It is intended to provide creditors and interest holders with sufficient information to evaluate the plan and decide whether to accept or reject it. Section 1125(a)(1) defines “adequate information” by reference to information of a kind and in sufficient detail, as far as reasonably practicable in light of the nature and history of the debtor and the condition of its books and records, that would enable a hypothetical investor typical of the relevant class to make an informed judgment about the plan.
The disclosure statement should be distinguished from the Chapter 11 plan itself. The plan establishes the proposed treatment of claims and interests and sets out the terms of the reorganization, whereas the disclosure statement provides the information necessary for stakeholders to evaluate those terms. Thus, the disclosure statement is primarily an informational document, while the plan is the instrument through which the proposed restructuring is to be implemented.
Under section 1125 of the U.S. Bankruptcy Code, acceptance or rejection of a Chapter 11 plan generally cannot be solicited unless, at the time of or before such solicitation, the holder of the claim or interest is provided with the plan or a court-approved disclosure statement containing adequate information. The disclosure statement therefore performs an important procedural and substantive function in the plan-confirmation process. The Supreme Court’s decisions concerning Chapter 11 emphasize that the statutory requirements governing plan formulation and confirmation must be respected according to the structure established by Congress. Thus, in Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), the Court examined the relationship between plan voting, the rights of existing equity holders and the statutory requirements for confirmation, illustrating why creditors must receive sufficient information to evaluate the legal and economic consequences of a proposed plan before exercising their voting rights.
PREPARATION OF THE DISCLOSURE STATEMENT
The debtor ordinarily prepares the disclosure statement in connection with its proposed Chapter 11 plan. In appropriate circumstances, however, another plan proponent may prepare a disclosure statement. The document should contain sufficient information to enable a hypothetical reasonable investor typical of the relevant class to make an informed judgment about the plan.
There is no single statutory checklist prescribing every item that must appear in a disclosure statement. The adequacy of information depends upon the circumstances of the particular case. What may be adequate in a relatively straightforward reorganization may not be sufficient in a complex case involving numerous classes of creditors, substantial litigation, uncertain valuations, related-party transactions, or significant contingent liabilities. Section 1125(a)(1) expressly requires the court to consider the complexity of the case, the benefit of additional information to creditors and other parties in interest, and the cost of providing additional information.
The disclosure statement will generally explain the debtor’s business and financial condition, the events leading to the Chapter 11 filing, the debtor’s assets and liabilities, the significant terms of the proposed plan, the classification and treatment of claims and interests, the proposed distributions, the means of implementation of the plan, and the risks and uncertainties associated with the proposed reorganization.
It may also contain information concerning projected financial performance, liquidation analysis, valuation of the debtor, material litigation, executory contracts and unexpired leases, tax consequences, corporate governance after confirmation, sources of funding, and other matters relevant to the stakeholders’ decision whether to accept or reject the plan.
The disclosure statement should therefore be sufficiently detailed to permit creditors to understand not merely what they will receive under the plan, but also why the proposed treatment is being offered and what risks are associated with receiving it. This informational function is particularly important because the Supreme Court has recognized that the Chapter 11 process involves statutory allocation of value among competing creditor and equity interests. In Czyzewski v. Jevic Holding Corp., 580 U.S. 451 (2017), the Court emphasized the significance of the Bankruptcy Code’s priority structure in determining how estate value may be distributed. Information concerning the proposed distribution structure and its relationship to statutory priorities may therefore be material to a creditor’s evaluation of the plan.
FILING OF THE DISCLOSURE STATEMENT
Once prepared, the disclosure statement is filed with the bankruptcy court together with, or in connection with, the proposed Chapter 11 plan. The filing does not by itself authorize solicitation of votes on the plan.
The court must determine whether the disclosure statement contains adequate information before it can ordinarily be used for solicitation. Section 1125(b) expressly prohibits postpetition solicitation of acceptance or rejection of a plan unless the plan or a summary of the plan and a written disclosure statement approved by the court as containing adequate information have been transmitted to the holder.
The filing of the disclosure statement also provides an opportunity for interested parties to examine the proposed disclosure and raise objections where they believe that the information provided is inadequate, misleading, incomplete, or otherwise insufficient for an informed evaluation of the plan.
NOTICE AND OBJECTIONS
After the disclosure statement is filed, the court may establish procedures for its consideration. Parties in interest are generally given notice of the hearing at which the disclosure statement will be considered and an opportunity to object. Bankruptcy Rule 3017 establishes procedures concerning the hearing, notice, objections, transmission of the plan and disclosure statement, and the confirmation hearing.
Objections may concern matters such as the absence of material financial information, inadequate explanation of the plan, insufficient disclosure concerning valuation, treatment of particular classes, feasibility assumptions, litigation risks, insider or related-party transactions, or other information that creditors may reasonably require to evaluate the plan.
An objection to a disclosure statement should not be confused with an objection to confirmation of the plan. At the disclosure-statement stage, the principal question is whether creditors have been given adequate information to evaluate the plan. The court is not ordinarily conducting the final confirmation inquiry at this stage. The distinction is important because §1125 concerns the adequacy of information necessary for informed solicitation, whereas §1129 establishes the separate statutory requirements for confirmation.
COURT’S REVIEW OF THE DISCLOSURE STATEMENT
The bankruptcy court reviews the disclosure statement to determine whether it contains “adequate information” as required by section 1125 of the Bankruptcy Code.
Section 1125 defines adequate information as information of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records, including a discussion of the potential material Federal tax consequences of the plan to the debtor, any successor to the debtor, and a hypothetical investor typical of the holders of claims or interests in the case, that would enable such a hypothetical investor of the relevant class to make an informed judgment about the plan.
The standard is therefore flexible and case-specific. The court does not necessarily require complete disclosure of every fact concerning the debtor. Rather, the inquiry focuses on whether the information provided is sufficient for the relevant creditors and interest holders to make an informed decision concerning the proposed plan.
The court may consider the complexity of the case, the nature of the debtor’s business, the quality of its books and records, the interests of the creditors, the proposed treatment under the plan, available alternatives, and the risks associated with the proposed restructuring.
The Supreme Court has not prescribed a separate judicial checklist for determining “adequate information” under §1125. The statutory language instead places the determination within the bankruptcy court’s case-specific assessment. The Supreme Court’s Chapter 11 jurisprudence nevertheless reinforces the importance of adhering to the statutory structure governing plan rights. In Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), the Court examined whether the proposed plan structure improperly affected the rights of senior creditors by giving existing equity holders an exclusive opportunity to obtain ownership of the reorganized debtor. The decision illustrates why disclosure must permit stakeholders to understand the legal consequences of the proposed allocation of ownership and value before voting.
APPROVAL OF THE DISCLOSURE STATEMENT
If the court determines that the disclosure statement contains adequate information, it may approve the disclosure statement. Approval generally permits the plan proponent to proceed with the solicitation and voting process in accordance with the procedures established by the court.
Approval of the disclosure statement should not, however, be understood as approval of the Chapter 11 plan itself. The two proceedings serve different purposes.
Approval of the disclosure statement means that the court has determined that the information provided is adequate for purposes of solicitation. It does not mean that the court has determined that the plan satisfies all requirements for confirmation.
The plan must subsequently undergo the separate confirmation process prescribed by section 1129 of the Bankruptcy Code. The distinction between disclosure and confirmation is particularly significant because the Supreme Court has repeatedly treated the requirements governing confirmation as substantive statutory requirements that cannot be displaced merely by equitable considerations. In Norwest Bank Worthington v. Ahlers, 485 U.S. 197 (1988), for example, the Court held that the proposed contribution of future services by existing owners could not satisfy the absolute-priority requirements applicable to confirmation. The case therefore illustrates that approval of information for solicitation does not resolve substantive questions concerning whether the proposed plan ultimately satisfies §1129.
AMENDMENT OR REVISION OF THE DISCLOSURE STATEMENT
Where the court finds that the disclosure statement is deficient, it may require the plan proponent to amend or supplement it before approval. The court may identify particular deficiencies and require additional information or clarification.
For example, the debtor may be required to provide greater detail concerning its financial projections, valuation, proposed distributions, treatment of disputed claims, liquidation alternatives, sources of financing, or material litigation.
The plan proponent may therefore revise the disclosure statement in response to objections or judicial concerns. Depending upon the circumstances, a revised disclosure statement may be resubmitted for further consideration by the court.
CONDITIONAL OR PROCEDURAL APPROVAL
In some Chapter 11 cases, the court may establish procedures that allow the disclosure statement and solicitation process to proceed subject to later consideration of particular issues. The precise procedure depends upon the circumstances of the case and the applicable court rules and orders.
The important point is that creditors should receive the information necessary to make an informed decision before their votes are solicited. Any deficiencies that materially affect the ability of creditors to evaluate the plan may require correction before solicitation proceeds. Section 1125(f) contains specific provisions permitting conditional approval of a disclosure statement in a small business case, but those provisions should be distinguished from the ordinary Chapter 11 disclosure-statement procedure.
EFFECT OF APPROVAL
Approval of the disclosure statement marks an important procedural transition in the Chapter 11 case. Prior to approval, the plan is principally a proposal undergoing informational and procedural scrutiny. Following approval, the case ordinarily moves into the solicitation and voting phase.
The approval order may also establish important procedural matters, including the deadlines for voting, the record date for determining voting eligibility, procedures for distributing solicitation materials, the deadline for objections to confirmation, and the date of the confirmation hearing. Bankruptcy Rule 3017 specifically contemplates notice concerning the time for filing objections to confirmation and the date of the confirmation hearing.
Thus, the disclosure-statement approval order may establish the framework within which creditors will consider and vote upon the proposed Chapter 11 plan.
MODIFICATION OF THE PLAN AFTER DISCLOSURE STATEMENT APPROVAL
A Chapter 11 plan may, in appropriate circumstances, be modified after approval of the disclosure statement. However, the effect of a modification depends upon its nature and timing. A material modification may require additional disclosure, amended solicitation materials, or further consideration by the court to ensure that creditors have adequate information concerning the modified proposal.
The objective remains the same: creditors should not be required to vote on a materially different proposal without receiving information sufficient to understand the changes and their consequences. This principle is consistent with the broader statutory structure recognized by the Supreme Court in Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), under which the rights of creditors and equity holders in the plan process are determined by the Bankruptcy Code and cannot be altered merely through the structure or presentation of the proposed reorganization.
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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.
