Just what is Chapter 11 bankruptcy?

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Also posted on: The Norfolk Punt

“Bankruptcy” is a dirty word in neo-Dickensian Britain and the American idea of Chapter 11 Bankruptcy is sometimes not well-understood in Europe. The term refers to Chapter 11 of the US Bankruptcy code; it is most commonly used by corporate entities (although it is available to all businesses and even private individuals); Chapter 7 covers liquidation bankruptcy and Chapter 13 covers a  reorganisation process for most private individuals.

Chapter 11, in essence, protects a business from having all of its assets sold and shared among its creditors by a trustee, outside of its control (under Chapter 7). Under Chapter 11, the principle debtor usually remains in control (subject to oversight by the court) of the business operation. It usually results in a plan for the restructuring of the company and its debt, but there are other possible outcomes. Attempts at debt collection from any creditors are put on hold, but the court looks after the interests of all creditors. There is some controversy about the degree of information disclosure by the restructuring creditor that is required to be made available for the court and the other creditors. There is also controversy about the alleged misuse of Chapter 11 in the airline industry, to escape labour contracts.

The Chapter 11 Plan is either confirmed or rejected by the court; in the latter case, it either becomes a Chapter 7 bankruptcy or things return to the status quo before the application for Chapter 11 bankruptcy. There are some complexities – readers should refer to the US Government’s information about Chapter 11.

I have just been updating Bloor’s company page for ASG Software Solutions and I think that this is a good illustration of the positive use of Chapter 11. ASG was, basically, a money-generating company that had largely grown by acquisition and ended up with debt that it couldn’t service. Rather than put it out of business, its principle creditors got together to restructure the company under new ownership (with representatives of the main creditors on the board) and more sustainable debt – this was a quick-turnaround “pre-packaged bankruptcy“, planned well in advance of the filing, with a consensual agreement already negotiated between all parties. ASG seems to have come out of Chapter 11 with minimal impact on its customers – maintaining their Trust – although it had to work a bit harder on reassuring its non-American customers. It has also retained its key people. So, all is well? Well, probably – it has lost its founder from the board, and there has to be some risk associated with the introduction of a new company vision, but Chapter 11 seems to be a much less wasteful option – more of a “good governance” choice – than the alternatives.