CIRA Principles & Practices 3 — Questions and Answers
Question 1: Under the Bankruptcy Code, a 'preference payment' subject to avoidance is generally a transfer made to a creditor:
- More than two years before the petition date
- Within 90 days before filing (or one year for insiders) on account of an antecedent debt while the debtor was insolvent (Correct answer)
- After the bankruptcy petition was filed
- With court approval during the case
Correct answer: Within 90 days before filing (or one year for insiders) on account of an antecedent debt while the debtor was insolvent
Preference payments under § 547 are transfers within 90 days (one year for insiders) that improve a creditor's position over what they'd receive in a Chapter 7 liquidation.
Question 2: What is a 'fraudulent transfer' in the context of insolvency law?
- A payment made to a government taxing authority
- A transfer made with intent to hinder creditors or for less than reasonably equivalent value while insolvent (Correct answer)
- A transfer approved by a majority of unsecured creditors
- Any intercompany transaction occurring post-petition
Correct answer: A transfer made with intent to hinder creditors or for less than reasonably equivalent value while insolvent
Fraudulent transfers under § 548 include transfers made with actual intent to defraud creditors or constructively fraudulent transfers where the debtor received less than reasonably equivalent value while insolvent.
Question 3: In restructuring, 'equitable subordination' is a doctrine that allows a court to:
- Elevate trade creditors above secured lenders
- Subordinate a creditor's claim due to inequitable conduct that harmed other creditors (Correct answer)
- Convert equity to debt automatically upon insolvency
- Discharge tax claims ahead of schedule
Correct answer: Subordinate a creditor's claim due to inequitable conduct that harmed other creditors
Equitable subordination under § 510(c) permits courts to subordinate a creditor's claim as a remedy for misconduct that caused harm to other creditors.
Question 4: Which test does the Bankruptcy Code apply to confirm that a reorganization plan is feasible?
- The debtor must demonstrate net income profitability in the prior fiscal year
- The plan must not be likely to be followed by liquidation or further reorganization (Correct answer)
- All creditors must receive at least 50 cents on the dollar
- The debtor must obtain an investment-grade credit rating post-emergence
Correct answer: The plan must not be likely to be followed by liquidation or further reorganization
Under § 1129(a)(11), a plan is feasible if confirmation is not likely to be followed by liquidation or the need for further reorganization, i.e., the reorganized company can meet its obligations.
Question 5: A 'stalking horse' bid in a § 363 asset sale serves primarily to:
- Block competing bids from other parties
- Set a floor price and terms for competitive bidding, protecting the process (Correct answer)
- Allow the DIP lender to credit-bid the full loan amount
- Guarantee the sale will close without further court approval
Correct answer: Set a floor price and terms for competitive bidding, protecting the process
A stalking horse bidder establishes a minimum price and deal terms, encouraging higher competing bids while receiving bid protections such as a break-up fee.
Question 6: In analyzing a distressed company's capital structure, 'fulcrum security' refers to:
- The most senior secured debt tranche
- The security class where value breaks, giving that class the most influence over restructuring outcomes (Correct answer)
- Common equity that retains value post-restructuring
- Government-guaranteed debt exempt from restructuring
Correct answer: The security class where value breaks, giving that class the most influence over restructuring outcomes
The fulcrum security is the debt or equity layer where enterprise value is exhausted, making that class the pivotal negotiating party in a restructuring.
Question 7: What is the role of the Official Committee of Unsecured Creditors (UCC) in a Chapter 11 case?
- To manage the debtor's day-to-day operations
- To represent the collective interests of general unsecured creditors and provide oversight of the debtor (Correct answer)
- To replace the board of directors during the case
- To approve all DIP financing terms before court review
Correct answer: To represent the collective interests of general unsecured creditors and provide oversight of the debtor
The UCC is appointed by the U.S. Trustee and acts as a fiduciary for all unsecured creditors, investigating the debtor's affairs and negotiating plan terms.
CIRA Principles & Practices 3
Under the Bankruptcy Code, a 'preference payment' subject to avoidance is generally a transfer made to a creditor: