CIRA Bankruptcy & Restructuring Procedures Flashcards

What is the key difference between a Chapter 7 and a Chapter 11 bankruptcy filing?

Answer: Chapter 7 is a liquidation, while Chapter 11 is a reorganization intended to preserve the business as a going concern

Chapter 7 involves winding down and selling all assets to pay creditors, while Chapter 11 allows the debtor to continue operating and propose a plan to restructure its debts.

Which document provides creditors with enough information to vote on a Chapter 11 plan of reorganization?

Answer: Disclosure Statement

The Disclosure Statement must contain adequate information for a reasonable creditor to make an informed judgment about the plan, and must be court-approved before it is distributed for voting.

A CIRA advising on a debt restructuring identifies that a company's 'net debt' is significantly higher than its enterprise value. This most likely indicates:

Answer: The equity is underwater and equity holders would receive nothing in a reorganization without impairment of debt

When net debt exceeds enterprise value, equity has no residual value, meaning debt must be restructured (reduced, converted to equity, or otherwise modified) for a viable reorganization.

Which of the following is a common technique used in out-of-court restructurings to reduce a company's debt load?

Answer: Debt-for-equity swap, converting outstanding debt into ownership stakes in the reorganized company

In a debt-for-equity swap, creditors agree to cancel debt in exchange for equity in the company, reducing the debt burden while giving lenders an ownership stake in the reorganized business.

What is a 'stalking horse bidder' in the context of a Section 363 asset sale?

Answer: The initial approved bidder whose offer sets the floor price and bid procedures for subsequent competing bids

The stalking horse bidder negotiates a purchase agreement with the debtor that establishes the minimum acceptable price and terms, protecting the estate while inviting higher and better competing bids.

In a Chapter 11 case, 'substantive consolidation' refers to:

Answer: Merging the assets and liabilities of multiple related debtor entities into a single pool for distribution purposes

Substantive consolidation pools the assets and liabilities of related entities, effectively treating them as one debtor, which can simplify administration but may affect creditor recoveries depending on which entity held which assets.