By Jay M. Goffman, George N. Panagakis, Ken Ziman, Van C. Durrer II, John K. Lyons, Mark A. McDermott, and David M. Turetsky of Skadden, Arps Slate, Meagher & Flom LLP
The American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 recently released its Final Report recommending comprehensive reforms to Chapter 11 of the Bankruptcy Code. The report is the culmination of a three-year effort by over 200 restructuring professionals to evaluate Chapter 11 in light of the changing environment in which financially distressed companies operate. The Report is approximately 400 pages long. Skadden, Arps has prepared a comprehensive overview of the Report that condenses the salient points into a 30-page summary which can be found here. Selected recommendations for reform include:
- DIP financing orders cannot impose milestones requiring the debtor to perform material tasks within the first 60 days (e.g., conduct a sale or file a plan).
- No 363 sales of all or substantially all assets (“363x sales”) within the first 60 days unless the debtor demonstrates a high likelihood that the value of the debtor’s assets will decrease significantly.
- 363 sales must satisfy requirements similar to plan confirmation requirements.
- Junior, out-of-the-money stakeholders may be entitled to receive an allocation of value from senior creditors to reflect a possible upswing in the reorganized debtor’s value.
- The cost of capital for similar debt issued to companies comparable to the debtor as a reorganized entity should be used when determining the appropriate discount rate for purposes of cram down.
- Eliminating the requirement of at least one impaired accepting class of creditors for plan confirmation.
- No appointment of an unsecured creditors’ committee if general unsecured creditors do not need representation in the case (e.g., if their claims are out-of-the-money).