New York Chapter 11 Corporate Reorganization Process

Corporations may file a voluntary Chapter 11 petition in the U.S. Bankruptcy Court for the Southern or Eastern District of New York. Alternatively, under certain conditions, creditors may initiate an involuntary petition.

To be eligible, a corporation must have domicile, residence, or business operations in the United States. There is no minimum debt threshold, but the company must show inability to pay debts as they become due or demonstrate insolvency on a balance sheet basis.

Upon filing a Chapter 11 petition, an automatic stay immediately halts most collection efforts, foreclosures, lawsuits, and repossessions. This legal protection gives the corporation breathing room to restructure its obligations.

In most cases, the debtor continues operating its business as a Debtor-in-Possession (DIP). The DIP retains control of day-to-day operations but must operate in the best interest of creditors and comply with court supervision. A court-appointed trustee replaces the DIP only in cases of fraud, dishonesty, incompetence, or gross mismanagement.

The DIP has an initial 120-day exclusivity period to file a reorganization plan. This plan outlines how the corporation intends to repay its creditors and reorganize its operations. The exclusivity period may be extended by the court but cannot exceed 18 months.

If the debtor fails to submit a plan during this period, creditors or equity holders may propose their own competing plans. However, such instances are rare and subject to strict conditions.

Claims in a Chapter 11 case are classified into categories, including:

• Secured Claims: Backed by collateral, such as mortgages or liens.
• Unsecured Claims: General obligations without specific collateral.
• Priority Claims: Claims given special status by law, including taxes and certain wages.
• Equity Interests: Stockholder claims, which are generally paid after all creditors.

Once the plan is submitted, the court must approve a disclosure statement before voting begins. Creditors then vote by class. For a class to approve the plan, it must meet the following criteria:

• More than one-half in number of the creditors in that class who vote must approve the plan; and
• At least two-thirds in amount of the claims represented in the vote must also approve.

These thresholds apply separately to each impaired class.

If all classes do not approve the plan, the court may still confirm it through a cramdown, provided the plan is fair and equitable and meets other requirements under 11 U.S.C. §1129(b).

Once confirmed, the plan becomes binding on all parties. The DIP is responsible for executing the terms of the plan, including debt repayments, asset sales, operational changes, and equity restructuring.

During implementation, the court retains jurisdiction and may hear disputes or motions related to plan execution, claim objections, or asset transactions.

The Chapter 11 case concludes in one of the following ways:

1. Case Closure: After successful implementation and substantial consummation of the plan, the court formally closes the case.
2. Conversion to Chapter 7: If reorganization becomes unfeasible, the case may be converted to liquidation under Chapter 7.
3. Dismissal: The court may dismiss the case if continuation is not in creditors’ best interests.

Only upon formal closure by the court is the bankruptcy case considered terminated.

Chapter 11 allows companies to maintain operations while negotiating with creditors. However, it imposes legal obligations, public disclosures, and significant administrative costs. Businesses must work closely with legal and financial professionals to craft a feasible and confirmable plan.