The existing management team is preferred to lead the reorganization because the management team has pre-existing relationships with the creditors and key stakeholders, although the relationships may have deteriorated in recent months.Īssuming there is some degree of trust (or at least familiarity) amongst the management team and stakeholders from prior interactions, their existing history with the relevant claim holders could potentially lead to a more favorable outcome.Īt the very least, their judgment stemming from their years of experience could be more reliable than a complete stranger running the operations of a company, in which they lack any real working knowledge in running nor in which they have industry expertise. Benefits of Existing Management Leading Reorganization The independent trustee is not familiar with the troubled company yet would take charge of all business affairs (and data has shown that most end up becoming liquidated).Įxcluding fraud or gross ineptitude that caused complete erosion of trust in management’s integrity (and judgment), it is usually preferred for the existing management team to remain on board. However, creditors should carefully consider the situation before requesting the management team to be replaced. “Best Interests” Test: If the appointment would be in the best interests of creditors, equity security holders, and other claim holders, the trustee can be appointed. “Cause” Basis: The presence of any form of fraud, dishonesty, incompetence, or gross mismanagement.There are two rationales by which the appointee of a Chapter 11 Trustee could be justified: That being said, a Chapter 11 Trustee is appointed to take charge of the bankruptcy process only if the management team of the debtor has shown fraudulent behavior or gross negligence. If the debtor conducts fraud, gross mismanagement, or fails to comply with the required disclosure requirements, a Chapter 11 Trustee can be appointed. This changing fiduciary duty is an important consideration when it comes to legal risks because actions indicating preferential treatment and not abiding by the priority of claims waterfall is a direct violation of their legal obligation to look out for the interests of the debt holders. For example, part of the POR could be a debt/equity swap. This is not only because of their higher placement in the capital structure but also because many of the creditors could become the new shareholders post-restructuring. The debt holders, as part of the restructuring process, often become the post-bankruptcy equity shareholders as their debt was converted into equity as part of the recovery and form of consideration. Pre-petition debt holders participating in the reorganization often become the post-emergence shareholders – thereby, the protection of their interests must be prioritized. In the case of non-distressed companies, the fiduciary duties of management are owed to the equity shareholders (i.e., to maximize the firm value).īut once the corporation approaches or enters the “zone of insolvency,” the interests of creditors must become the priority for management. Fraudulent Conveyance refers to the preferential transfer of an asset under the intent to defraud other existing claim holders.Ī closely related concept based on a similar legal basis is termed “voidable preferences,” which is when the debtor made a transfer to a creditor right before filing for bankruptcy that was determined to be “unfair” and neglectful of the claims structure.įraudulent Conveyance Introduction Management Fiduciary Duties
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