Dorsey & Whitney Bankruptcy Team
As the COVID-19 pandemic continues to negatively impact the global economy, the recent surge in Chapter 11 bankruptcy filings in the United States is likely to continue for some time to come. If you are a foreign supplier, what do you do when a U.S. customer files for Chapter 11 bankruptcy protection? This Q&A series aims to provide practical advice to foreign trade creditors (including Chinese suppliers) of bankruptcy U.S. companies. The first in the series will address general questions and considerations, many of which will be addressed in greater detail in future series which will cover specific issues relating to claims of suppliers, protecting rights in a bankruptcy proceeding, how bankruptcy works, and the Chapter 11 bankruptcy plan process.
Question: What is Chapter 11 Bankruptcy and how is it different from other bankruptcy proceedings?
Chapter 11 bankruptcy allows businesses to reorganize their financial affairs in a court-monitored process whose primary goal is to facilitate businesses to continue operating into the future. Chapter 11 allows debtor businesses to remain “in possession”, that is, the company continues to be operated by the same management as before the bankruptcy case was filed.
The alternative is Chapter 7 which involves the appointment of a trustee and liquidation of the debtor, which ceases operating once the bankruptcy case begins. While relevant statistics reflect that many chapter 11 cases fail, the larger cases (i.e. companies with over $10 million in assets) tend to have better rates of success, particularly when various stakeholders support the reorganization, including vendors willing to continue dealing with the debtor.
Question: What are the significant transactions and events that occur in a Chapter 11 bankruptcy case?
A number of significant transactions will take place in any Chapter 11 bankruptcy case, and each case is different, but the following are likely to occur:
- 在破产案件的首日，债务人将提交“首日”动议，以寻求破产法院的授权，使其得以开展其在破产前的正常运营过程中可以开展、但在破产中需要法院许可才可以开展的各种活动。该等活动包括，向债务人提供货物和服务、持续向债务人提供维持其经营能力所必要的货物和服务的 “关键供应商”付款，以及举债向该等关键供应商付款。On the first day of the case, the debtor will file “first day” motions seeking authority to do a variety of things that it would have been able to do in the ordinary course of business outside of bankruptcy, but require court permission in bankruptcy. This includes paying “critical vendors” that supply goods and services to debtors and whose continued provision of goods and services is essential to debtors’ ability to operate, and borrowing money to be able to pay those critical vendors.
- 美国受托人（隶属美国司法部）可以任命一个无担保债权人委员会来代表案件中的所有无担保债权人。The U.S. Trustee (which is part of the U.S. Department of Justice) may appoint a committee of unsecured creditors to act on behalf of all unsecured creditors in the case.
- 债务人将提交详细的资产负债表。The debtor will file detailed schedules of assets and liabilities.
- 债务人将每月提交一份经营报告，详细列出所有收入和支出以及未偿债务。The debtor will file monthly operating reports detailing all receipts and disbursements, as well as outstanding liabilities.
- 根据《美国破产法》的规定，债务人可以寻求出售无任何留置权、权利主张和权利负担的财产。The debtor may seek to sell property free and clear of all liens, claims, and encumbrances, as provided by the U.S. Bankruptcy Code.
- 根据《美国破产法》的规定，债务人可以寻求承接或拒绝未完全履行的合同和未到期的租约。The debtor may seek to assume or reject executory contracts and unexpired leases, as provided by the U.S. Bankruptcy Code.
- 法院将规定提出权利主张的截止日期。在此之后，法院将禁止债权人对债务人提出索赔。The court will establish a deadline for filing claims, after which the creditor would be barred from asserting claims against the debtor.
- 债务人可以通过诉讼追回破产之前进行转移的某些资产。The debtor may commence litigation to claw back certain transfers made prior to the bankruptcy.
- 在某些情况下，债务人在申请破产时已经准备好了一项重组计划（称为“预先准备完毕的计划”）。但更常见的是，债务人将与利益相关方（例如有担保债权人和无担保债权人委员会）进行谈判，以制定一项重组计划。经法院批准，该重组计划将被分发给债权人，债权人将就是否接受该计划进行投票。如果该重组计划得到法院的认可，则该计划将规定所有当事人在未来的权利、如何处理各项主张，以及债权人的可追偿的百分比。In certain instances, debtors come into bankruptcy with a plan of reorganization already prepared (a “prepack”), but more commonly, debtors will negotiate with parties in interest, such as their secured creditors and the committee of unsecured creditors, to formulate a plan of reorganization. With court approval, the plan will be circulated to creditors who will get to vote on whether to accept or reject the plan. If the plan is confirmed by the court, it will dictate all parties’ rights going forward, how claims will be treated, and the percentage of recovery on creditors’ claims.
Question: What is the automatic stay?
Immediately upon the filing of any kind of bankruptcy case, the “automatic stay” comes into effect. The automatic stay prohibits taking any actions to collect debts owed by the debtor and applies to all property owned by debtors wherever located – in the U.S. or elsewhere in the world. The automatic stay only protects entities that have filed for bankruptcy protection. It does not protect non-debtor affiliates.
While the automatic stay may not always be recognized outside the U.S., it does apply the moment a bankruptcy case is filed. Parties that violate the automatic stay may be subject to sanctions by the bankruptcy court.
Question: How quickly does the Chapter 11 process play out?
It depends on the facts and circumstances of each case. A successful “prepackaged” Chapter 11 case, where a plan is negotiated prior to initiation of the case, can be completed in a matter of one or two months. Most non-prepackaged cases take at least four months and may last years.
Question: What are the biggest challenges to foreign trade creditors and what should we do to protect our rights in a Chapter 11 bankruptcy case?
You should contact trusted U.S. counsel promptly upon receipt of notice that a company that you supply has filed a bankruptcy petition. The court will set deadlines for filing claims and for objecting to relief that may affect your rights. If you miss those deadlines, you may not be able to receive a distribution on your claim or be heard on matters affecting your rights.
As a trade creditor, if you continue to do business with the debtor, you may be entitled to reclamation or priority claims on account of goods sold in the ordinary course of business which may entitle you to a full recovery of a portion of your claim.
Please keep an eye out for Series Two which will address questions relating to how suppliers and their supply contracts are impacted by a bankruptcy filing and how to safely keep doing business with a company in bankruptcy.
Dorsey & Whitney is a U.S. law firm with 107 years of history and 19 in the U.S., Canada, Europe and Asia, including Beijing, Shanghai and Hong Kong. As an AMLAW 100 firm providing full services to business organizations in a wide range of industries, Dorsey is recognized as a “Leading Firm” by Chambers USA and is ranked in U.S. News Best Law Firms.
Dorsey & Whitney Bankruptcy Team