Skadden comment on Chapter 11 reforms proposed by the ABI

Skadden, Arps, Slate, Meagher & Flom LLP comment on the ABI’s far reaching proposals to reform chapter 11 of the US Bankruptcy Code.

Proposed reforms to Chapter 11

Click here to view Skadden, Arps, Slate, Meagher & Flom LLP's paper on the reforms to Chapter 11 of the US Bankruptcy Code proposed by the American Bankruptcy Institute (ABI).

There has been a growing view that Chapter 11 does not work efficiently for many debtors and is prohibitively expensive.

Accordingly, the ABI established a Commission made up of some of the most prominent Chapter 11 professionals in the US to evaluate US business reorganisation laws. The culmination of the Commission’s work was a 400-page report and recommendation dated 8 December 2014.

The ABI reports's main proposals include:

  • debtor-in-possession (DIP) financing that rolls up; pre-petition debt must be provided by lenders unaffiliated with holders of the pre-petition debt or must include substantial new credit
  • DIP financing orders cannot impose case milestones within the first 60 days of the case; liens cannot be placed on avoidance actions; and there can be no waivers of the payment of costs and expenses from the proceeds of secured creditor's collateral
  • sales of substantially all of a debtor’s assets cannot occur sooner than 60 days after the petition date unless there is a high likelihood of significant loss of value; equity owners can participate in plans even though creditors are not being paid in full so long as the owners contribute new value that is subjected to a market test
  • the cramdown interest rate must be based on the market or a modified approach if there is no market, and should not be based on the so-called 'prime-plus formula'
  • a reorganisation plan may cram down and bind objecting creditors even if no class of impaired creditors votes to accept the plan
  • secured creditors can bid the full face amount of their debt on asset sales (ie credit bid); although it may chill bidding, it is not a reason to deny a credit bid
  • junior, out-of-the-money stakeholders may be entitled to redemption option value from senior creditors if evidence shows a possible upswing in value

The paper by Skadden, Arps, Slate, Meagher & Flom LLP's Jay M. Goffman (New York,jay.goffman@skadden.com), George N. Panagakis (Chicago, george.panagakis@skadden.com), Ken Ziman (New York, ken.ziman@skadden.com), Van C. Durrer II (Los Angeles, van.durrer@skadden.com), John K. Lyons (Chicago, john.lyons@skadden.com), Mark A. McDermott (New York, mark.mcdermott@skadden.com) and David M. Turetsky (New York, david.turetsky@skadden.com) considers each of the proposals in detail.

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