Plan of Reorganization
A Plan of Reorganization is the Chapter 11 plan that sets the classification and treatment of claims and interests and establishes the transactions, distributions, governance and other steps through which the debtor will reorganize or otherwise resolve the bankruptcy case.
Section 1123 establishes the plan's core architecture
The plan must classify claims and interests as required, identify unimpaired classes, state treatment for impaired classes and provide the means of implementation.
Those requirements turn the restructuring proposal into a legally organized distribution and governance framework.
A plan can restructure both liabilities and ownership
Debt can be reinstated, modified, exchanged, repaid or converted into equity.
Existing equity can survive, be diluted or be canceled. New ownership can therefore emerge from the same plan provisions that restructure creditor claims.
Voting and confirmation are separate steps
Impaired voting classes decide whether to accept under Section 1126.
The court then applies Section 1129's confirmation requirements, including rules concerning class acceptance, feasibility, best interests and, when necessary, cramdown.
The confirmation order can control implementation
Current Chapter 11 plans commonly state that if the plan conflicts with the confirmation order, the confirmation order controls.
The final operative package can therefore include the plan, confirmation order and plan-supplement documents rather than one standalone file.
A plan can be understood as a four-part restructuring map
A useful way to read a Chapter 11 plan is to separate four questions.
1. Who is in each class? Which claims and interests share legal rights?
2. What does each class receive? Cash, reinstated debt, new debt, equity, warrants or nothing?
3. How is the transaction implemented? New financing, debt cancellation, asset transfers, governance changes and distributions.
4. What conditions must occur before effectiveness? Confirmation, financing, documentation, regulatory approvals or other specified events.
This method prevents the most common reading error: jumping directly to the recovery table without understanding how the plan creates the securities and cash used to fund that recovery.
The plan is both a distribution document and an implementation blueprint.
Common mistakes
Treating an RSA term sheet as the final plan The plan must be documented and confirmed.
Assuming creditor votes alone make the plan effective Court confirmation and effectiveness conditions remain.
Reading class treatment without the definitions Defined terms can materially change what a distribution actually includes.
Example
A plan provides that first-lien lenders receive new term loans and 70% of reorganized equity, unsecured noteholders receive 25% of equity, a management incentive pool receives 5%, ordinary trade claims remain unimpaired and existing common stock is canceled. The plan also specifies the new board and financing needed on emergence.
Example
A plan provides that first-lien lenders receive new term loans and 70% of reorganized equity, unsecured noteholders receive 25% of equity, a management incentive pool receives 5%, ordinary trade claims remain unimpaired and existing common stock is canceled. The plan also specifies the new board and financing needed on emergence.
Professional note
A plan is the operative restructuring architecture. Read the class treatment together with defined terms, plan supplement, restructuring transactions memorandum, new debt documents and confirmation order rather than relying on a summary table alone.
Related terms
- Restructuring Support Agreement (RSA)
A Restructuring Support Agreement, or RSA, is a contract among a financially distressed company and supporting creditors or other stakeholders that sets the agreed framework for a restructuring and requires the parties to support specified transactions, subject to the agreement's conditions and termination rights.
- Reorganization Value
Reorganization Value is the value attributed to a company or its assets upon emergence from a bankruptcy reorganization, used in plan valuation, creditor recoveries and, when applicable, fresh-start accounting.
- Cramdown
Cramdown is the Chapter 11 mechanism under Bankruptcy Code Section 1129(b) that can allow a court to confirm a plan despite rejection by an impaired class, if the statutory confirmation requirements are satisfied and the plan does not discriminate unfairly and is fair and equitable with respect to the rejecting class.
- Disclosure Statement
A Disclosure Statement is the Chapter 11 document that provides creditors and other voting stakeholders with information about the debtor, proposed plan, risks, recoveries and restructuring terms sufficient to satisfy the Bankruptcy Code's disclosure requirements for plan solicitation.
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