Question

Defend or challenge the following statement: “Chapter 11 is broken as it doesn’t provide meaningful opportunities to rescue a business.”

Answer 1

Chapter 11 refers to a form of bankruptcy in the US involving reorganisation of a debtor’s business affairs, debts and assets. As it represents the most expensive and most complex of all the codes, it must be understood that a company may opt for the Chapter 11 reorganization only after careful analysis that no other options do exist.

                                    A business, as in most of the cases run by the debtor is allowed to function even when a Chapter 11 is filed to consider for its reorganisation. But in cases involving fraud or dishonesty, the court appoints a trustee who runs the business and takes control of all the codes of the business. In this case, the business is not allowed to take many decisions without the permission of the court. These processes includes sale of a business other than inventory, managing rental agreements and maintaining business operations. Also a debtor cannot arrange a loan which cannot be done without the process being completed. In the process of it, the one who files the case is first given the opportunity to submit a reorganisation plan which may include downsizing of the business operations or reduction of the expenses. Sometimes they may consider to liquidate all the assets and repay the creditors.

                                    An analysis of the Chapter 11 reorganization process generally states that the success rates have been relatively low and delays are on the rise. But on further analysis, it can be seen that may companies prefers the Chapter 11 over Chapter 7. After the 2005 amendment, it has been identified that the courts are disposing these cases within 6 months. It is thus believed that the Chapter 11 represents a more systematic and factual enquiry and hence the given statement remains challenged.