In the typical large chapter 11 case, the debtor’s going concern value is less than the sum of all debts that are competing for a recovery from the debtor. Because prepetition debt generally exceeds the debtor’s value, equity interests will be eliminated in the reorganization with the consequence that equity security holders are not welcomed to the bargaining table. This, of course, is bad news for the debtor’s owners.
If, on the other hand, there is some lingering doubts concerning the presence of positive equity value, equity security holders often asks the bankruptcy court to appoint a committee of equity holders to advance their interests in the proceedings.
This request raises at least two issues. First, the equity holders’ committee will inevitably hire professionals, with the expectation that the debtor’s estate will foot the bill. Administrative expenses, including professional fees, come first in priority. Accordingly, the appointment of equity is likely going to cost senior debt claimants some of their recovery. That result is not very popular when creditors are certain that there is no equity value.
Second, because equity has essentially nothing to lose in the process, equity security committees often take very aggressive positions that threaten the delicate negotiating process that takes place in the typical large chapter 11 case.
For these two reasons, among others, courts struggle when asked to appoint equity committees. Here is a recent article that highlights some of the key considerations.
If you’d like to learn more about chapter 11 bankruptcy, email me firstname.lastname@example.org for a free copy of my written summary.
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