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Disclosure Statements
LAWDOG is intended to assist in the understanding of basic concepts. See Disclaimer. Always obtain legal advice from legal professionals.
After the filing of the Chapter 11 case, an acceptance or rejection of a plan may not be solicited, from a holder of a claim or interest, unless, at the time of or before such solicitation, there is transmitted to such holder, the plan or a summary of the plan, and a written disclosure statement approved, after notice and a hearing, by the court as containing adequate information. The court may approve a disclosure statement without a valuation of the debtor or an appraisal of the debtor's assets. See Section 1125 (b) reproduced here for illustration purposes only.
"Adequate information" means information "of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor's books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan..."See Section 1125 (a) reproduced here for illustration purposes only.
Some of the factors which may be important in a determination of "adequate information" in a particular case include the history which lead to filing of the Chapter 11 bankruptcy, the description and value of assets, the future prospects of a business debtor, the present condition of debtor, and the estimated amount creditors would receive under a Chapter 7 . Other types of information found in disclosure statements may include sources of the information used in preparation of the disclosure statement, accounting methods, litigation which may affect the plan, and the collectibility of accounts receivable held by debtor.
The same disclosure statement must be transmitted to each holder of a claim or interest of a particular class, but there may be transmitted different disclosure statements, differing in amount, detail, or kind of information, as between classes. See Section 1125 (c) reproduced here for illustration purposes only.
Approval And Confirmation
A Chapter 11 bankruptcy may also involve issues of equity holders (rights of shareholders or bondholders), labor contracts or benefits, or large tort claims (liability lawsuits). These issues are beyond the scope of LAWDOG, but may play a substantial role in a case where a creditor holds a claim. Always discuss actual cases with your actual legal advisor or legal department.
Before the Chapter 11 plan may be implemented, the proponent of the plan must send the creditors a court approved disclosure statement, and obtain acceptance of the plan by creditors. If the plan proponent meets the requirements, and obtains necessary approvals after proper disclosure, the plan can be confirmed by the Court. Under certain circumstances, even with objections to the plan, the proponent may obtain approval through a "cram down" procedure. See Confirmation of Plan from the previous menu or here. Link does not return to this page. Small Business Debtors are treated below.
When the debtor qualifies and has elected to be treated as a "small business debtor", the court may conditionally approve a disclosure statement and combine the hearing for the approval of a disclosure statement with a hearing on the confirmation of a plan. The small business debtor may solicit the acceptance or rejection of a plan based upon a conditionally approved disclosure statement. The debtor must provide adequate information to each holder of a claim or interest that is solicited. A conditionally approved disclosure statement must be mailed at least 10 days prior to the confirmation hearing. See Section 1125 (f) reproduced here for illustration purposes only.
