Business Reorganization Procedure New York

A company may file for reorganization if it can demonstrate any of the following:

• The business is under imminent threat of insolvency due to overwhelming debt.
• It has encountered a sudden liquidity crisis, despite stable sales or contracts.
• The burden of outstanding liabilities disrupts normal operations.
• Debt repayment has become unsustainable, jeopardizing continued business viability.
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These conditions reflect commercial hardship rather than permanent failure, justifying the court's intervention under Chapter 11 of the U.S. Bankruptcy Code.

A reorganization begins with the debtor’s voluntary petition or an involuntary petition from qualifying creditors. Once filed in the U.S. Bankruptcy Court for the Southern or Eastern District of New York, the court imposes an automatic stay, halting creditor actions and asset seizures.

The court examines whether reorganization is more beneficial than liquidation. If there's a reasonable prospect of restoring profitability, the court grants entry into reorganization proceedings.

The debtor, typically remaining in control as a debtor-in-possession (DIP), must submit a reorganization plan. In some cases—particularly where fraud, gross mismanagement, or concealment is suspected—the court may appoint a trustee instead.

The plan generally includes:

• A realistic business continuation strategy.
• Asset sales or operational changes to improve liquidity.
• Proposed repayment schedules for different creditor classes.
• A prioritization structure: tax claims first, followed by secured creditors, unsecured creditors, and shareholders.

Before implementation, the plan must secure approval from the majority of impaired creditors. According to Chapter 11 requirements:

• At least two-thirds (by dollar amount) and more than half (by number) of each creditor class must approve.
• The plan must also pass the "best interest of creditors" test, showing that each creditor receives at least as much as in a Chapter 7 liquidation.

Upon approval, the court confirms the plan, making it binding on all stakeholders.

There are two possible outcomes:

• Successful Completion (Closure): The court determines that the debtor has commenced payments and is capable of fulfilling the reorganization terms. The business regains autonomy, and the case is closed, though payment obligations remain until complete.
• Failure and Dismissal: If it becomes clear that the debtor cannot perform the plan or has violated its terms, the court dismisses the case or converts it to a Chapter 7 liquidation.

Reorganization generally spans 3 to 5 years, depending on the complexity of debt and feasibility of restructuring. However, Subchapter V of Chapter 11 allows small businesses to expedite the process with fewer procedural requirements, often resolving within 6 to 18 months.