Comparison of US chapter 11 reorganisation and chapter 7 liquidation
Produced in partnership with Julie Lanz of Skadden Arps Slate Meagher & Flom LLP
Comparison of US chapter 11 reorganisation and chapter 7 liquidation

The following Restructuring & Insolvency guidance note Produced in partnership with Julie Lanz of Skadden Arps Slate Meagher & Flom LLP provides comprehensive and up to date legal information covering:

  • Comparison of US chapter 11 reorganisation and chapter 7 liquidation
  • Chapter 11 reorganisation
  • Chapter 7 liquidation
  • Commencement of chapter 7 case
  • Powers and duties of chapter 7 trustee
  • Funding of chapter 7 case liquidation process
  • Liquidation and closing of chapter 7 estate

Chapter 11 reorganisation

The reorganisation provisions of chapter 11 of the United States Bankruptcy Code, s 101–1532 (the US Bankruptcy Code or 11 U.S.C. §) provide a legal process for restructuring a financially troubled company’s liabilities, business assets and ownership.

The purpose of Chapter 11 is to preserve and maximise the enterprise value of a company and its assets, in order to maximise distributions to creditors pursuant to an orderly plan of reorganisation.

Incumbent management and directors typically remain in control of a chapter 11 company during its reorganisation process (ie the debtor remains in possession).

Chapter 7 liquidation

The purpose of chapter 7 is prompt liquidation of a debtor company’s assets, not reorganisation of the business or preservation of its going concern value.

Chapter 7 typically results in immediate cessation of business operations and loss of going concern value and employees, followed by an often disorderly and piecemeal liquidation of business assets and litigation claims.

Secured creditor recoveries and the value of their collateral may be substantially impaired in a chapter 7 case.

Commencement of chapter 7 case

A chapter 7 case may be commenced voluntarily by a debtor upon the debtor’s filing of a petition in the bankruptcy court (US Bankruptcy Code, s 301), or involuntarily by three petitioning unsecured creditors with non-contingent claims not subject to bona fide dispute if the debtor is generally not paying its undisputed debts as they become due (US Bankruptcy Code, § 303).11 U.S.C. §§ 301, 303

Creation of chapter 7 estate

  1. on entry of an order for bankruptcy relief (which will be entered automatically upon the filing of a voluntary chapter