Generally accepted financial and legal wisdom now says that a financially troubled corporation that needs to restructure its debt is better off in terms of costs and expenditure of time doing so outside of bankruptcy. In a non-bankruptcy workout, the corporations’ debt-holders and possibly its stockholders negotiate and effect changes in the terms and amount of its debt and equity capital, thereby altering the corporation’s capital structure so as to more closely reflect and support its current and projected asset values and cash flows. Workouts reduce the amount of management time diverted from the operation of the corporation’s business and eliminate the substantial administrative expenses, possible impairment of asset values, and uncertainty of outcome that the bankruptcy process usually entails, and both creditors and stockholders may share in any preserved values.

Unfortunately, a workout is difficult to achieve because it almost always requires each participating debt-holder’s consent. Corporations with complex deb structures, particularly those with publicly-held debt, frequently find it impossible to obtain the consent of all or substantially all debtors. Hence the need of such corporations to resort to bankruptcy law, with its provisions to compel a dissenting minority of a class or an entire class of dissenting creditors and e/or equity holders to accept a proposed plan of reorganization.

What is a Prepackaged Bankruptcy?

The Problem: Chapter 11 Proceedings can be a strain on business

Although Chapter 11 is a last resort for businesses, it can be extremely effective in solving business problems. However, navigating through an extended Chapter 11 Business Bankruptcy reorganization can be expensive and invasive for a company. Management unfamiliar with how the process works can easily become overwhelmed by the intrusive nature of the process and the sheer number of advisors and attorneys involved. The length and costly nature of Chapter 11 reorganization can put significant strains on a company and its stakeholders. One option that may be available to address these challenges is to accelerate the in-court proceedings by filing a prepackaged bankruptcy.

A Prepackaged Bankruptcy can be the solution

In a prepackaged bankruptcy, or “pre-pack,” the plan of reorganization has been voted on and accepted by the classes of impaired creditors prior to the bankruptcy filing. (“Impaired” means that the creditors’ rights have been modified in some material way.)  By filing such a plan, a company can minimize the effect of the process on employee, vendor, and customer relationships.  Moreover, management has more certainty that the confirmation of the plan will be successful before being exposed to potential loss of control in an extended bankruptcy proceeding.

Creditors support prepackaged bankruptcies because, by definition, the creditor is receiving more under a plan in Chapter 11 that it would in a liquidation (11 U.S.C. § 1129(a)(7)).

Pre-packed bankruptcies tend to be shorter in duration than a traditional Chapter 11 bankruptcy filing and could spare the firm time and potential legal headaches (averages of 38 days rather than 306 days for non-prepackaged).

Because they are shorter in duration (at least the component of the reorganization in which the company is under Court oversight), there is less administrative costs, and fewer opportunities for distracting (and expensive) side battles to erupt.