A Chapter 11 bankruptcy involves creditor consent much more than in other chapters. At least one class of affected creditors is required to confirm a plan.
However, a class of affected creditors can also approve treatment which the Code would otherwise prohibit. For example, creditors and shareholders in a bankruptcy case are paid in order of priority. If there are not enough assets to pay the company’s debts in full, junior creditors and owners get paid only if all senior classes are paid in full. However, Chapter 11 allows debtors and creditors to get around the “absolute priority rule” IF the affected senior classes approve.
This frames the background for the Wall Street Journal’s recent article (click through to link in first paragraph) on Washington Mutual’s Chapter 11 bankruptcy case. Washington Mutual wanted its common shareholders to vote for the plan, so it offered them a piece of the reorganized company. The preferred shareholders could have gone along with this by a majority vote (counting by the number of shareholders) and a 2/3 vote (counting by amount). According to the article, the vote fell short of the second test, by a vote of 62.16% rather than 66.67%.
Washington Mutual may still be able to confirm the plan over the objections of the preferred shareholders, but it must now put on evidence and establish that its plan provides those shareholders everything to which they are entitled. (The Code requires preferred shareholders to receive a value equal to the greater of three tests.) Alternatively, the debtor could wipe out common shareholders, which would satisfy the absolute priority rule but may allow that class to raise other objections.
If you are considering requesting Chapter 11 bankruptcy protection, you should consult with an attorney familiar with Chapter 11 bankruptcies to discuss your options. For a free consultation, call (480) 719-1152.