CTP CTP Corporate Governance & Legal Compliance in Distress 2 — Questions and Answers
Question 1: A key employee retention plan (KERP) during Chapter 11 is governed by which provision of the Bankruptcy Code?
- Section 363
- Section 503(c) (Correct answer)
- Section 1129
- Section 507
Correct answer: Section 503(c)
Section 503(c) of the Bankruptcy Code restricts key employee retention plans, requiring court approval and limiting payments to executives of distressed companies.
Question 2: What is a 'fraudulent transfer' in the context of bankruptcy law?
- A transfer of assets made with intent to hinder, delay, or defraud creditors (Correct answer)
- Any asset sale made within 90 days of filing for bankruptcy
- A payment made to a related party within one year before filing
- An unauthorized wire transfer executed by management
Correct answer: A transfer of assets made with intent to hinder, delay, or defraud creditors
A fraudulent transfer is a pre-bankruptcy asset transfer made to defraud creditors or for less than reasonably equivalent value when the debtor was insolvent.
Question 3: The 'absolute priority rule' in Chapter 11 requires that:
- Senior secured creditors be paid first in any reorganization plan
- No junior class can receive value unless all senior classes are paid in full first (Correct answer)
- All creditors receive equal treatment regardless of seniority
- Administrative expenses are always paid before secured claims
Correct answer: No junior class can receive value unless all senior classes are paid in full first
The absolute priority rule mandates that in a cram-down plan, a junior class cannot receive any distribution unless all senior classes are paid in full.
Question 4: A 'stalking horse' bidder in a Section 363 sale:
- Anonymously submits the highest bid at auction
- Provides the initial bid that sets a floor for competitive auction bidding (Correct answer)
- Represents the debtor's management team in the sale process
- Has an automatic right to match any competing bid
Correct answer: Provides the initial bid that sets a floor for competitive auction bidding
A stalking horse bidder submits an initial offer establishing a minimum purchase price, providing a baseline that other potential buyers must exceed at auction.
Question 5: Which term describes a plan of reorganization negotiated and voted on by key creditors BEFORE the bankruptcy filing?
- Pre-packaged plan (Correct answer)
- Pre-negotiated plan
- Cram-down plan
- Liquidating plan
Correct answer: Pre-packaged plan
A pre-packaged (or 'pre-pack') plan is drafted, negotiated, and voted on by creditors before the company files for Chapter 11, minimizing time in bankruptcy.
Question 6: What does a 'moratorium' on debt payments allow a distressed company to do?
- Permanently cancel all outstanding debt obligations
- Temporarily suspend debt service payments while restructuring out of court (Correct answer)
- Convert all debt to equity immediately without creditor consent
- Transfer debt obligations to a newly formed subsidiary
Correct answer: Temporarily suspend debt service payments while restructuring out of court
A moratorium is a temporary suspension of debt payments agreed upon with creditors, providing breathing room to develop a restructuring solution without filing bankruptcy.
CTP CTP Corporate Governance & Legal Compliance in Distress 2
A key employee retention plan (KERP) during Chapter 11 is governed by which provision of the Bankruptcy Code?