CIRA Principles & Practices 2 — Questions and Answers
Question 1: Under Chapter 11, what is the primary purpose of the automatic stay?
- To permanently discharge all pre-petition debts
- To halt most collection actions against the debtor and its property (Correct answer)
- To freeze the debtor's post-petition cash flows
- To suspend the debtor's obligation to file financial statements
Correct answer: To halt most collection actions against the debtor and its property
The automatic stay under 11 U.S.C. § 362 immediately halts most collection actions, lawsuits, and enforcement efforts against the debtor upon filing.
Question 2: A debtor-in-possession (DIP) loan is typically granted 'super-priority' status, meaning it:
- Ranks below all pre-petition secured claims
- Has priority over most pre-petition unsecured claims and may prime existing liens with court approval (Correct answer)
- Is automatically subordinated to trade creditors
- Converts to equity upon plan confirmation
Correct answer: Has priority over most pre-petition unsecured claims and may prime existing liens with court approval
DIP financing under § 364 can receive super-priority administrative expense status and, with court approval, can prime existing liens to attract post-petition lenders.
Question 3: Which financial metric is most commonly used to determine a company's enterprise value during a restructuring?
- Net book value of assets
- EBITDA multiple based on comparable transactions (Correct answer)
- Total liabilities outstanding
- Current ratio
Correct answer: EBITDA multiple based on comparable transactions
Enterprise value in restructurings is typically derived by applying an EBITDA multiple from comparable company or transaction analyses.
Question 4: In a prepackaged bankruptcy, the plan of reorganization is:
- Filed after extensive court-supervised negotiations
- Negotiated and voted on by creditors before the bankruptcy petition is filed (Correct answer)
- Imposed by the court without creditor consent
- Developed exclusively by the U.S. Trustee
Correct answer: Negotiated and voted on by creditors before the bankruptcy petition is filed
A prepackaged bankruptcy involves securing creditor votes on a reorganization plan before filing, significantly shortening the in-court process.
Question 5: What does the 'absolute priority rule' require in a confirmed Chapter 11 plan?
- Secured creditors must be paid before the plan is filed
- Senior classes must be paid in full before junior classes receive any distribution (Correct answer)
- All creditors must receive equal recovery percentages
- Administrative expenses are paid last
Correct answer: Senior classes must be paid in full before junior classes receive any distribution
The absolute priority rule mandates that senior creditor classes be paid in full before any junior class (including equity) receives a recovery.
Question 6: A restructuring advisor performing a '13-week cash flow' analysis is primarily focused on:
- Long-term capital structure optimization
- Near-term liquidity management and cash runway (Correct answer)
- Historical earnings quality assessment
- Tax attribute preservation strategy
Correct answer: Near-term liquidity management and cash runway
The 13-week cash flow model is a short-term liquidity tool used to track weekly cash receipts and disbursements and forecast the company's near-term cash position.
Question 7: Which of the following best describes a 'cram-down' in Chapter 11?
- Forced conversion of debt to equity without any court approval
- Confirmation of a plan over the objection of a dissenting class of creditors (Correct answer)
- Liquidation imposed on a debtor who fails to propose a plan
- Priority granted to administrative creditors ahead of secured lenders
Correct answer: Confirmation of a plan over the objection of a dissenting class of creditors
A cram-down allows a bankruptcy court to confirm a plan even if a class of creditors rejects it, provided the plan meets specific statutory requirements.
CIRA Principles & Practices 2
Under Chapter 11, what is the primary purpose of the automatic stay?