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 eleventh confirmation requirement is the court must find the plan is feasible. Feasibility means once the plan is complete, it isn't likely the debtor will liquidate the business or need further reorganization.
Note that a plan may be confirmed if liquidation or further reorganization is contemplated under the plan.
Applying the Feasibility Standard
The court applies the feasibility standard as it carefully reviews the plan and decides if it has a reasonable chance of success. Success doesn't have to be guaranteed. The plan can't make promises that the debtor won't be able to keep. Factors in deciding feasibility include:
- The adequacy of the debtor's capital structure
- The earning power of the debtor's business
- Economic conditions
- The ability of the debtor's management
- The chance the business will continue with the same management
- Any other factors that indicate whether or not the debtor's operation will allow successful plan performance
How to Establish Feasibility
Feasibility is established through testimony by experts and those with knowledge of the business's future prospects. There needs to be a showing that the debtor can meet future obligations. The debtor must show:
- It has or can obtain needed financing to run its business and make the plan work
- Concrete evidence of sufficient cash flow to fund and maintain operations and duties under the plan
In general, feasibility is easier to prove when plan payouts are made over short periods. It's more difficult to prove long-term ability to pay debts than it is to show such ability in the short term.
There has to be some sort of basis for future predictions of the success of the debtor's business. The court prefers to look at the debtor's business results during the pendency of the case rather than prior results. If the plan provides for liquidation there will be less emphasis on future performance. However, the debtor still must show that the liquidation provided for in the plan is feasible.
Questions for Your Attorney
- If I am already having financial difficulty, won't it be difficult to prove that my business will have success in the future?
- What should I do to help show the court that my business will be successful under the plan?
- Why would liquidation be a part of a reorganization plan?