What is Chapter 11?
Chapter 11 provides a company with time, under protection of the
court, to reorganize its business and/or capital structure before
having to meet the financial claims of its creditors. Unlike an
insolvency proceeding or liquidation (Chapter 7), companies that
file for Chapter 11 generally continue to operate their business
with the goal of emerging from the process as a viable and
financially healthier enterprise.
Why?
Companies file for Chapter 11 for a number of reasons, but
generally they are seeking to protect their assets while trying to
address financial problems – such as excessive debt,
insufficient liquidity, unreasonable contractual obligations,
and/or unmanageable liabilities. The process also is sometimes used
by companies to sell assets free and clear of any obligations.
How?
Chapter 11 is a legal process by which a company files a petition
with a federal bankruptcy court to reorganize under Chapter 11 of
the U.S. Bankruptcy Code. The filing triggers a legal mechanism
known as an “automatic stay,” which temporarily
prevents creditors from taking action against the company to
collect any monies or property they are owed from before the
filing. The automatic stay also temporarily prevents lawsuits
against the company from moving forward. The automatic stay can
only be lifted with specific court authorization, which for most
matters does not occur until the conclusion of the Chapter 11
proceeding.
How does it affect employees?
It is customary under a Chapter 11 proceeding for a company to
receive court authorization to continue to provide employees with
their regular compensation and benefits. In addition, U.S. federal
law generally protects the funds in 401(k) savings plans and in
qualified defined benefit pension plans from the claims of a
company's creditors.
How does it affect customers and suppliers?
A company that files for Chapter 11 generally is able to
continue to meet its obligations to its customers as usual.
Likewise, the company generally is able to pay suppliers for goods
and services provided after the filing under existing terms.
However, the "automatic stay" generally prevents a company from
paying suppliers for goods and services provided before the filing
without specific court authorization. For this reason, it is not
unusual for many of a company's suppliers to be creditors in its
Chapter 11 proceeding.
How does a company emerge from Chapter 11?
The Chapter 11 process ends after the Court has confirmed a Plan of
Reorganization, which provides for a distribution of the company's
economic value to its creditors and, possibly, equity holders. This
plan is usually developed by the Company in conjunction with its
creditors.
What is a Section 363 Bankruptcy?
Section 363 refers to the section of the U.S. Bankruptcy Code
that allows a company to enter a court-supervised process to sell
assets quickly as the best means to protect value for the benefit
of all stakeholders. Unlike a typical bankruptcy proceeding, which
can often take a few years to resolve, the advantage of 363
bankruptcy is speed. Through the 363 process, a company is able to
emerge from bankruptcy in approximately 30 to 60 days.
Additional information on bankruptcy can be found at:
www.uscourts.gov/bankruptcycourts/bankruptcybasics/chapter11.html
http://sec.gov/investor/pubs/bankrupt.htm
For further information on the Chrysler restructuring, go to http://www.ChryslerRestructuring.com,
where you will find court documents and other materials. That site
will be continually updated in the weeks ahead.
