Chapter 11 of the United States Bankruptcy Code

Yes — see Topic: Commencing the Process.

A debtor in possession may conduct the ordinary course of its business without court approval.

Bankruptcy court approval is required for any transaction that is outside the debtor's ordinary course of business, such as for major business decisions (e.g., sale of assets and entering into secured financing).

The debtor also has the exclusive right to propose a Chapter 11 plan for 120 days, subject to further extension of up to not more than 18 months from the date of the order for relief. After this period expires or is terminated by the court, other parties in interest may propose their own Chapter 11 plan.

Chapter 11 of the United States Bankruptcy Code

Upon the commencement of a bankruptcy case, the debtor obtains immediate protection from actions against its assets and operations by virtue of the automatic stay implemented under Section 362 of the Bankruptcy Code. By operation of the automatic stay, creditors are prohibited from attempting to collect prepetition debts of the debtor, seize assets of the debtor or otherwise exercise control over the property of the debtor. For example, the automatic stay prohibits the commencement or continuation of litigation against the debtor or an attempt by a creditor to foreclose on the property of the debtor.

There are, however, some exceptions to the automatic stay. For example, the automatic stay does not apply to the government's policy or regulatory power. There are also exceptions to the automatic stay for certain types of financial arrangements, including with respect to enforcement against collateral provided for under certain derivatives contracts.

Creditors can petition the bankruptcy court to lift the automatic stay, but such relief is usually only granted in narrow circumstances. Generally, secured creditors may seek relief from the automatic stay on the basis that their collateral is eroding in value and the debtor is not maintaining the value of their collateral, thereby entitling them to adequate protection from any diminution or relief from the automatic stay to permit foreclosure. To avoid being sanctioned for violating the automatic stay, any party considering adverse action against a debtor should first seek a bankruptcy court order granting relief from the automatic stay or, if uncertain, that the stay does not apply to the act proposed to be undertaken.

The automatic stay is theoretically applicable worldwide, coextensive with the original and exclusive jurisdiction of the bankruptcy court over all property of the debtor, "wherever located." As a practical matter, enforcement of the stay against the debtor of its assets outside the United States can be difficult against a creditor that has no assets in the United States or other connection to the United States. In such instances, it may be advisable for the debtor and bankruptcy court to appoint a foreign representative or other person or body to commence an ancillary insolvency proceeding in the foreign country, obtain recognition of the Chapter 11 case in that proceeding, and seek enforcement of the stay by the foreign court.

Chapter 11 of the United States Bankruptcy Code

Yes, and the provisions are quite extensive and more widely used in cases under Chapter 11 than in restructuring proceedings in many other countries.

A debtor can seek to entice lenders to provide debtor-in-possession financing ("DIP financing") with a range of tools that bankruptcy courts routinely approve. First, the debtor can offer administrative expense status to a potential lender. Next, if unable to obtain a loan on that basis, the debtor can offer the proposed lender a superpriority administrative claim (having priority over all other administrative claims). However, lenders usually require more than a simple administrative priority or superpriority claim to lend to a company in a Chapter 11 case because they are typically reluctant to run the risk of not being repaid in full as a result of administrative insolvency (i.e., insufficient funds to pay administrative claims in full).

At the next level, the debtor may seek court approval to grant the proposed lender a lien on its unencumbered assets or secured by a junior lien on the property that is already encumbered by a lien. Even though general unsecured creditors may object and insist on a showing of necessity for proposed financing that involves granting liens on unencumbered assets, debtors typically prevail in such cases where they can show a reasonable prospect or likelihood for reorganization.

At the highest level, a debtor may seek court approval to grant the proposed lender a lien on encumbered assets that is pari passu (of equal lien priority) with or that primes (of senior lien priority) existing liens. However, in this case, the debtor must establish "that it is unable to obtain such credit otherwise." Further, the debtor must establish that the interests of the existing lender are "adequately protected" notwithstanding the proposed pari passu or priming liens. This usually involves consideration of various factors, including (i) a valuation of the subject property to assess the nature of any equity cushion that may exist; (ii) whether the property is eroding in value; (iii) the nature of payments proposed or available; and (iv) whether the debtor has a reasonable prospect of reorganizing. Typically, holders of existing liens would object vigorously to any liens that are pari passu with or prime their existing liens, absent a clear showing of how their liens are adequately protected. As the above factors are often difficult to prove, it is rare that a bankruptcy court will approve this treatment unless the adversely affected secured creditor consents.

Chapter 11 of the United States Bankruptcy Code

Yes — this is a common feature of balance sheet restructurings that occur in Chapter 11 cases. Shareholder consent is not required, and the debt-for-equity swap can occur over the objection of shareholders as a result of the absolute priority rule and cramdown (each discussed above). Indeed, increasingly in recent years, prepackaged and prenegotiated Chapter 11 plans are arranged with the holders of "fulcrum debt" — the tranche of debt that is only partly covered by the going concern value of the company — in advance of the bankruptcy filing; and debt-for-equity swap plans are confirmed quickly by the courts in accordance with such arrangements.

Chapter 11 of the United States Bankruptcy Code

This is a highly controversial question and a "hot topic" in the United States. The Bankruptcy Code has been interpreted differently on this point by appellate courts in the various judicial circuits, and the Supreme Court has yet to issue a definitive decision to bring some consistency to this oft-litigated question.

In jurisdictions where third-party releases are not absolutely prohibited, non-debtors, including officers and directors of the debtor, may generally be released through a plan if such releases are consensual.

Non-consensual releases are generally approved only if essential to the debtor's reorganization, the parties being released are making a substantial financial contribution to the reorganization, and the affected creditors overwhelmingly support the plan.

The disparate treatment of releases is to be distinguished from the more common and less controversial practice of granting exculpation to third parties, including their respective professionals, for acts and conduct undertaken in the course of the Chapter 11 case.

Chapter 11 of the United States Bankruptcy Code

Yes. In accordance with the domestically adopted version of UNCITRAL or other applicable principles of international comity and/or treaties for other countries, cases under Chapter 11 are customarily granted recognition and enforcement in foreign courts, other than in those countries that as a matter of local law do not recognize foreign judgments.

Chapter 11 of the United States Bankruptcy Code

Yes — the Model Law was adopted as Chapter 15 of the Bankruptcy Code in 2006, and a wealth of case law has developed over its application and interpretation.

Chapter 11 of the United States Bankruptcy Code

Absent a finding by the bankruptcy court of fraud, dishonesty, incompetence, gross mismanagement or similar circumstances, the existing management of a company remains in control of the company and continues to manage its business operations and day-to-day affairs during the Chapter 11 case. A debtor can continue to do business during the Chapter 11 case, including trading and incurring unsecured debt in the ordinary course of its business, subject to obtaining court approval for any transactions outside of that ordinary course.