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Guidelines for Director Decision Making in Chapter 11

By Jonathan S. Henes and Lisa G. Laukitis

Chapter 11 is designed to enable a company in financial distress to preserve its business as a going concern and maximize the distributable value to creditors. This may be accomplished through the debtor's rehabilitation of its business and restructuring of its balance sheet through a stand-alone plan of reorganization or through the sale of its assets or businesses pursuant to section 363 of the Bankruptcy Code (or a Chapter 11 plan). The best course of action to preserve the debtor as a going concern and maximize value is dependent on the facts and circumstances of the Chapter 11 case and the interests of the relevant stakeholders.

During a Chapter 11 case, the interests of the debtor's main constituencies — eg, secured lenders, unsecured creditors, management and employees — often conflict. For example, the secured lenders may want a prompt sale of the business to assure that its value is maintained and they are repaid (partially or in full) as soon as practicable. On the other hand, the debtor's unsecured creditors and management team may be desirous of a longer Chapter 11 case. This desire is fueled by the hope that, as time goes on, the value of the business will increase (which would maximize distributions to unsecured creditors) and the Chapter 11 case may be effectuated through a stand-alone restructuring (which would increase the likelihood that the management team keeps its job).

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