Chapter 11 needs to be streamlined, writes a senior partner at law firm Kirkland & Ellis
May 11, 2020 / The Wall Street Journal- As the coronavirus pandemic forces a shutdown of the economy, many good companies facing massive revenue declines will need to avail themselves of bankruptcy.
A chapter 11 filing is not the end for a company but generally a new beginning. It is critical in today’s Covid-19 world, where bankruptcy courts are inundated with cases, to allow for a streamlined chapter 11 process.
During the past 15 months, three companies—FullBeauty Brands Inc., Sungard Availability Services and Sheridan Holding Company I LLC—have confirmed their respective prepackaged chapter 11 plans within 24 hours of commencing a bankruptcy case. These “one-day bankruptcy” cases enabled the companies to fix their capital structures without any impact on vendors, customers, employees or retirees.
This process should be codified, as it meets the goals of the bankruptcy code, eases the burden on bankruptcy courts, and is a net positive for companies, their employees and other stakeholders.
The quickest and most efficient way to restructure in bankruptcy is the prepackaged chapter 11 case, colloquially known as the “prepack.” The textbook company for a prepack is overleveraged and needs to right-size its capital structure but does not need to disavow burdensome contracts or leases and intends to pay all of its operational costs.
To effectuate a prepack, the company organizes its debtholders—such as lenders and bondholders—and educates them on the business, presents its view on debt capacity, and negotiates a plan that replaces the current debt with reduced debt under new terms. The amount of debt reduced is exchanged for equity in the restructured company, meaning the debtholders taking part in the exchange become the new owners of the deleveraged company.
Once the plan is supported by a core group of the affected debtholders, the company solicits votes on its restructuring plan before filing for bankruptcy. One rule is clear—the company needs to provide creditors with at least 28 days’ notice to vote on its chapter 11 plan (unless the bankruptcy court shortens notice for cause). However, it is unclear as to when the 28-day clock starts running, i.e., before or after the bankruptcy filing. This leads to uncertainty on the timing of prepacks in different jurisdictions.
Congress should create certainty by making it clear that the 28-day clock starts running prior to bankruptcy so long as due process is protected through sufficient notice and adequate disclosure. Specifically, the clock should start running as soon as the company provides notice of the solicitation of the one-day bankruptcy plan.
To assure due process is protected in connection with a one-day bankruptcy case, the company would be required to provide at least 28 days’ notice to, among others, all creditors impaired under the plan and applicable governmental parties. In addition, the company would be required to publish a notice in a national publication and an international publication if the company does business internationally. The amendment to the bankruptcy code to accomplish this is simple and noncontroversial.
The one-day bankruptcy would streamline the bankruptcy process and protect companies by reducing the business disruption and additional costs that can be incurred as a result of being in bankruptcy, while ensuring due process is met.
Congress should codify the one-day bankruptcy by having the bankruptcy code model current practice. This will benefit companies and bankruptcy courts by establishing a unified and codified process to enable companies to use the bankruptcy code to effectuate a one-day bankruptcy plan, thereby maximizing value without affecting employees, retirees or operations.
Corrections & Amplifications
Sheridan Holding Company I LLC was a “one-day bankruptcy” case. An earlier version of this article incorrectly said it was Sheridan Production Partners II LLC. (Corrected on May 11, 2020)
