Court-supervised reorganisation
Also known as: Chapter 11, Debtor in possession, Protection
A company files for protection and keeps running. Enforcement stops on the day of the filing, which is the most powerful feature of the procedure.
1 · SnapshotThe one idea to remember
2 · BeginnerWhat actually happens?
Most of what this desk does happens in private, by negotiation, precisely to avoid a court. Sometimes that fails, or the situation is too complicated, and the company goes to court on purpose.
The moment it files, something powerful happens automatically: every creditor's right to enforce is suspended. Nobody can seize assets, nobody can demand payment, nobody can sue. That happens by law, on the day, without anybody agreeing to it.
What is bought with that is breathing space — the same thing a standstill is negotiated for, obtained instantly and applied to everybody including the creditors who would never have signed.
And unlike a liquidation, the company keeps trading. The same management keeps running it, under supervision, while a plan is put together. Employees are paid, suppliers are paid for what they deliver from now on, and customers mostly carry on.
- 1
Filing and stay1 day
Creditor enforcement is suspended immediately, which buys the breathing space every other route negotiates for.
- 2
First-day orders1–2 wks
The court authorises the company to pay wages, keep suppliers and draw new financing.
- 3
Operating in protection3–18 mths
The business runs while contracts are accepted or rejected, claims are quantified and a plan is built.
- 4
Disclosure and voting2–4 mths
Creditors receive a statement and vote by class on the proposed plan.
- 5
Confirmation1–2 mths
The court confirms the plan, including over dissenting classes where the statutory tests are met.
- 6
Emergencedays
The reorganised company exits, usually owned by its former creditors.
The automatic stay — The statute, on filing decides. It happens by operation of law rather than by negotiation, which is why some restructurings are moved into this jurisdiction deliberately.
New money approved — The court decides. Without financing to operate, protection is only a slower liquidation.
Confirmation — The court decides. Feasibility, best interests and fair treatment of dissenters — the tests a plan actually has to pass.
Who is on the deal
| Who | Side | What they are actually for |
|---|---|---|
| The debtor in possession | Neither | The existing management, continuing to run the company under court supervision rather than being replaced. |
| The creditors' committee | Buy side | Represents unsecured creditors, with its advisers paid out of the estate. |
| The rescue lender | Buy side | Provides the money to operate, with priority — and therefore sets the timetable. |
| The court | Neither | Authorises the important decisions, from paying wages on day one to confirming the plan at the end. |
| Secured creditors | Buy side | Have collateral and want it protected, which is a different objective from maximising the whole estate. |
- Desk
- Restructuring
- Who runs the company
- Existing management, under court supervision
- Enforcement
- Suspended automatically on filing
- Funded by
- New money with priority over existing claims
- Ends in
- A confirmed plan, a sale, or conversion to liquidation
What decides whether it completes
Not how hard this is, and not a rating — there is deliberately no total. It says which of five blockers decides whether this transaction happens at all, in the same order on all 70 transaction types so they can be compared. This publication's own reading; see the notice below.
- Pricematters
- Financingdecides it
- Approvaldecides it
- Diligencebarely applies
- Executionmatters
What decides it here. The stay stops enforcement on day one, which removes the immediate pressure and replaces it with two others: financing the business while it reorganises, and getting a plan confirmed by a court against classes that may vote no. Without new money, protection is only a slower liquidation.
3 · IntermediateHow it runs in practice
The first day
The company asks the court for a set of urgent orders that let it keep operating: paying wages, paying critical suppliers, keeping the cash management system running, and drawing new financing. These are heard immediately, because a business that cannot pay its staff on Friday does not survive to have a plan.
Rescue financing
New money lent during the process, with priority over existing claims. Existing creditors are being asked to accept somebody ranking ahead of them, and they usually agree because the alternative is worse for them too. Whoever provides it sets milestones, and therefore sets the timetable of the whole restructuring — see rescue financing.
Deciding which contracts to keep
One of the strongest features. The company can generally choose to keep a contract, in which case it must honour it fully, or to reject it, in which case the counterparty has a claim for damages that ranks alongside everybody else's. Leases, supply agreements and long-term commitments signed in better times can therefore be shed.
It is powerful and it falls on people who did not lend anybody anything, which is one of the reasons the procedure is criticised.
The plan, and the vote
Creditors are grouped into classes, receive a disclosure statement, and vote. A court can confirm a plan over a dissenting class provided the statutory tests are met — the same idea as a restructuring plan, arrived at through a different history.
4 · AdvancedThe numbers & the documents
Why management stays
The theory is that the people who know the business are better placed to preserve its value than an outsider appointed in a crisis, and that a management team which fears immediate removal will delay filing until it is too late. The counter-argument is that the people who created the situation should not be running the rescue.
Both are serious. Most systems compromise: management stays, with a court, a creditors' committee and frequently a chief restructuring officer supervising it.
What the procedure costs
A great deal. Professional fees for the company, the committee and often several creditor groups, all paid from the estate — that is, from the money creditors are arguing about. Long cases consume a meaningful share of the recovery, which is the strongest argument for the pre-negotiated version.
The pre-packaged version
Increasingly the plan is negotiated and locked up before filing, and the court process is a short confirmation of a deal already done. That captures the binding power of the court and the speed of a consensual deal, and it avoids months of value leaking away. It also means creditors who were not in the negotiation meet a fully formed plan, which is a real objection and one courts consider.
Where value actually goes
- Customers leave, because a company in a formal process is a risk to depend on.
- Suppliers shorten terms, which drains working capital exactly when there is none.
- Staff leave, and the ones who leave first are the ones with options.
- Management attention goes to the process rather than the business.
Every month of delay is paid for out of the recovery. That is the honest case for doing everything possible out of court first, and it is why the transactions earlier on this desk exist at all.
What emerges
Usually a company owned by its former creditors, with less debt and the same business — see the debt-for-equity swap. Sometimes a sale of the business to a buyer, with the proceeds distributed. And sometimes the conclusion that there is nothing worth reorganising, and the process converts into a wind-down.
The formulas above are standard textbook formulations, simplified for teaching. They explain the mechanism — they are not a valuation tool, and they will not reproduce a dealer’s price.
5 · Desk notesHow people on the deal think about it
Now say it back
Close the page and give Court-supervised reorganisation in four sentences. It takes a minute and it is the only way to find out whether reading it was enough.
- Who wants what — name both sides and what each one is actually trying to get.
- What has to happen, in order — the three or four stages, not the whole timetable.
- Where the money comes from — cash, new shares, or borrowed; somebody has to fund it.
- What kills it — the ordinary way, not the dramatic one.
Where this transaction shows up elsewhere
- EasyWind-downDealThe business stops and the assets are sold for whatever they fetch
- MediumDebt-for-equity swapDealCreditors give up debt and receive the company instead
- MediumDistressed exchangeDealBondholders are offered less than they are owed, and the alternative is not repayment