Feasibility Opinions in Bankruptcy Plan Approvals
Pursuant to Chapter 11 of the United States Bankruptcy Code, a proposed plan of reorganization must be confirmed by the bankruptcy court in order for the debtor to emerge from bankruptcy protection. Such approval may only be granted only where the proposed plan meets certain statutory requirements, which are set forth in 11 U.S.C. § 1129. Among these requirements is the so called "feasibility" requirement, which holds that the court must determine that the debtor has a reasonable chance of surviving (i.e. remaining solvent) once the plan is confirmed and the debtor is out from under the protection of the court.
The feasibility requirement provides:
(a) The court shall confirm a plan only if all of the following requirements are met:
… (11) Confirmation of the plan is not likely to be followed by the liquidation, or the need for further financial reorganization, of the debtor or any successor to the debtor under the plan, unless such liquidation or reorganization is proposed in the plan.
11 U.S.C. § 1129(a)(11)
Accordingly, a feasible plan should allow the company to emerge from bankruptcy as a viable operating entity. The burden for establishing the feasibility of the proposed plan lies with its proponent.
One way to satisfy the feasibility requirement is through the use of feasibility opinions. Such opinions are issued in connection with a proposed plan of reorganization and are generally developed with the assistance of a valuation analyst or an expert knowledgeable in turnaround management. These opinions should reflect the expected financial operations of a company, including future cash-flow, profitability and assumption of debt, should the plan of reorganization be granted and the company emerge from bankruptcy.
In order to be persuasive, these forecasts must be established using credible assumptions in the analysis of the company’s future operations. Among other things, a feasibility analysis should consider:
- The market for the products or services the company provides;
- The company’s competitive advantages or disadvantages; and
- A pro forma financial analysis of the company’s anticipated financial operations when it emerges from bankruptcy.
In addition, a well-prepared projection of future operations should take into consideration the changes expected as a result of the confirmation of the plan. These assumptions can include improving profitability by increasing revenue or reducing expenditures and/or eliminating unprofitable products or services.
Furthermore, in order to arrive at reasonable assumptions used to project anticipated future performance, the financial expert needs to understand what factors caused the company to fall into bankruptcy. For example, are the company’s financial difficulties related to external matters – such as increased competition, product obsolescence, adverse regulatory actions, natural disasters, and adverse general economic conditions – or did they result from internal matters, such as undercapitalization, excessive debt, inadequate management, quality control problems, process inefficiencies, unprofitable product mix or fraud? External matters are usually contributing factors to financial distress rather than determinative ones. On the other hand, internal matters are often the proximate causes of a company’s financial deterioration.
Plans that contain unrealistic or aggressive assumptions or projections will generally not meet with court approval. Similarly, if the court finds that the underlying data used in the plan is unreliable or is an unrealistic gauge of the company’s future operations, the court may not confirm the financial reorganization plan. Examples of unrealistic factors can include the use of revenue growth rates that are not in line with the company’s expected industry growth rate or growth rates that are not sustainable over time, and debt repayment terms that are not realistic or are not considered a good business practice (i.e. repayment of an interest only loan, with negative amortization, with a large balloon payment at the end).
Courts do not need to determine a plan’s success will be a “sure thing” in order to make a feasibility finding, but courts also do not want to confirm a speculative plan just to find the company back in bankruptcy a second time. If the expert cannot provide a “feasible” financial plan to the court, its reorganization plan may not be approved and this failure can result in the liquidation of the company.
Obviously, a feasibility opinion should be much more than just a “rubber stamp” prepared by the financial expert engaged by the proponent of a plan of reorganization. The opinion should be credible and reliable, and should give a valid basis for its calculations, conclusions and opinions. Failure to secure a credible opinion – and the failure to choose a persuasive expert to issue that opinion – will be fatal to the passage of any plan, even if it meets all other elements necessary for its approval.
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