Bankruptcy

Reorganization: Disclosure & Approval of Insiders

The reorganization plan is at the center of a Chapter 11 bankruptcy case. The plan generally must be approved by a majority of the creditors. After approval, it must be confirmed by the bankruptcy court.

The confirmation hearing focuses on 13 requirements. The fifth requirement requires the debtor to disclose the identity and affiliations of its post-confirmation management. The reason for disclosure is to let the creditors to know who will be running the debtor's business.

Defining Insiders

The post-confirmation management is often referred to as "insiders." Insiders are directors, officers or persons in control of the reorganized business. This group also includes any relatives of the insiders.

The court's job is to confirm disclosures are made and the insiders' service is in the interest of creditors and not against public policy.

Identity and Affiliations of Insiders

The scope of disclosure covers two items:

  • The identities of post-confirmation management
  • Affiliations of post-confirmation management

The identities are disclosed during the balloting stage of the voting process to approve the plan. Creditors can assess the character and history of the management in their vote. Disclosure also reveals the compensation of any insiders who will be retained after plan confirmation.

The debtor must also disclose the "affiliations" of the post-confirmation management. The affiliations in question are generally those that would be of interest to the creditors. The disclosure must meet the "adequate information" standard. This standard means the disclosure must contain enough relevant information to allow creditors to make an informed decision about the plan.

The Interest of Creditors and Public Policy

The court must find that service of the proposed management is consistent with the interest of creditors. Voting creditors, in approving or rejecting the plan, have already had a chance to decide if the plan is in their best interest. The court's role is to look out for the interests of creditors that didn't vote on the plan. Generally, the creditors who don't vote are those that are either unimpaired or who are to receive nothing under the plan.

Service of proposed management must also be consistent with public policy. The court must find that the reorganized business and its management won't take any actions against public policy.

Questions are likely to come up if the plan doesn't make any management changes. The reason? Management usually has at least some responsibility for the situation leading to the bankruptcy in the first place. The court has discretion to reject a plan in which the proposed management has shown incompetence or has a bad history.

Questions for Your Attorney

  • If I am an officer of my business and my uncle is a creditor of my business, is he an insider?
  • How are the affiliations of an insider relevant to the acceptance of a plan?
  • How wide is the definition of "insider" for disclosure purposes? Does it include an officer's distant relatives or in-laws?
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