Chapter 11 Bankruptcy Filings Rise in 2024: Key Elements In-House Counsel Need to Know

After a two-year decline in Chapter 11 bankruptcy filings in the immediate post-COVID period, U.S. commercial bankruptcies have returned to a more normal level of activity, according to CFO Magazine. Economic uncertainty and technology disruptions in many sectors portend additional stress on bottom lines in the months ahead.

S&P Global Market Intelligence has recorded 275 corporate bankruptcies so far in 2024, roughly on pace with last year, in spite of a slowdown in inflation and cooling labor market.

“A confluence of economic factors is expected to challenge companies in 2024, with a range of industries under enough pressure to potentially see a rise in bankruptcies this year,” reported Law360.

In-house counsel need to be prepared for all of their potential options in the event of deteriorating business conditions. This includes the important steps that need to be taken to prepare for a possible Chapter 11 bankruptcy filing.

Gary L. Kaplan, a partner in the Business Restructuring & Reorganization Practice at Jones Day, contributed an insightful Practical Guidance article for LexisNexis, Contents of a Chapter 11 Plan. The article discusses the mandatory and optional provisions of a Chapter 11 plan, as well as the classification and treatment of claims and interests in a plan.

4 Key Elements of a Chapter 11 Bankruptcy Plan for In-House Counsel

1. Mandatory Provisions

The Bankruptcy Code sets forth seven provisions that must be included in every Chapter 11 plan other than a plan for an individual: Designation of classes of claims and interests; Specification of unimpaired classes; Specification of treatment of impaired classes; Equality of treatment of each claim or interest within each class; Adequate means for implementation; Voting powers; and Provisions consistent with public policy.

2. Optional Provisions

The Bankruptcy Code gives broad discretion as to the types of provisions that may be included in a plan after ensuring that the mandatory provisions are present, as long as such provisions are not inconsistent with the Bankruptcy Code. A non-exclusive list of optional provisions may include: Impairment of claims or interests; Assumption or rejection of executor contracts; and Appointment of representative.

3. Classification of Claims and Interests

A plan must also designate classes of claims, except certain priority claims, and classes of interests for purposes of voting on the plan. In formulating classes of claims and interests, the objective is to facilitate confirmation of the plan by ensuring that either each class will vote in favor of the plan or the plan may be confirmed over a dissenting class’s objection. Equity interests are typically separated into classes based on the type of interest, such as a class for preferred equity interests and a class for common equity interests. The plan should clearly establish the general rules for these classifications, how unsecured claims will be treated, how secured claims will be treated and provisions for subordination agreements.

4. Treatment of Claims and Interests

A Chapter 11 plan must specify the treatment of claims and interests under the plan. Treatment generally refers to whether a particular class of claims or interests will be unimpaired or impaired under the Chapter 11 plan and, if the class is impaired, what the class will receive on account of its claims or interests. The treatment of a claim or interest will depend on a number of factors, including the nature of the claim or interest, the value of the debtor and the value available for distribution to stakeholders. The plan should spell out general rules for how it will treat a class of secured/unsecured claims and interests, how it will treat non-recourse claims, and how it will provide for a class of claims or interests that are impaired under the plan.

In-house counsel need to stay informed of these key elements in a Chapter 11 bankruptcy plan so they are prepared to advise corporate executives and boards of directors in the event it becomes necessary. LexisNexis offers a number of Practical Guidance resources to assist with this review, including the Filing for Chapter 11 Bankruptcy Resource Kit and the Chapter 11 Plan Confirmation Resource Kit.

These resource kits assist in-house counsel by providing detailed practice notes, templates and checklists. Get a free trial of Practical Guidance from LexisNexis.

All of these news, analysis and Practical Guidance resources regarding Chapter 11 bankruptcy filings are accessible from Lexis+® General Counsel Suite. Lexis+ GC Suite provides in-house counsel with a vast collection of legal resources, breaking business and legal news, and practice resources.

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