Lesson 7 of 8
Chapter 11 in outline
One documented case end to end: 202 days from petition to a confirmation order, then 24 more to the effective date on which the old shares were cancelled.
By Javier Sanz
Founder of ValueScreener. Built Ninety Nine, a securities services provider, and sold it to a tier-one global bank; ran operations and internationalization at Alpaca, the brokerage API.
Who writes thisEditorial processLinkedIn (opens in a new tab)X (opens in a new tab)
In one minute
- Chapter 11 is a reorganisation under court supervision in which the company usually keeps running its own business.
- Claims are placed in classes, the classes vote, and the court confirms a plan that the absolute priority rule constrains.
- Every step is a public document, and the whole arc is visible in the company's own filings.
For an equity investor the process matters for one reason: it decides whether the shares survive, and the answer is usually visible in the first filing.
One case, filing to emergence
- 2020-06-28PetitionVoluntary petitions filed under Chapter 11. An 8-K carrying item 1.03 follows the next day.
- 2020-06-29Joint administrationThe court orders the cases administered together under one caption.
- 2021-01-13Confirmed from the benchThe court confirms the plan in a bench ruling.
- 2021-01-16Confirmation orderThe written order is entered. A second 8-K carrying item 1.03 follows.
- 2021-02-09Effective dateThe plan takes effect, old equity is cancelled and new shares are issued.
Debtor in possession
Between the petition and the effective date the company keeps operating and its existing management stays in control, which is what "debtor in possession" means. The court grants first-day relief so ordinary payments to employees, suppliers and royalty owners continue.
New money can be raised ahead of existing claims through debtor-in-possession financing, which is why that lender's claim ranks above almost everything else. Pre-petition obligations that the process can impair are reclassified on the balance sheet as liabilities subject to compromise, which is the line to look for in any interim filing during a case.
Classes, votes and confirmation
Claims are placed in classes of similar legal rights, and each class votes. A plan can still be confirmed over a dissenting class, provided the requirements for doing so are met, which is why the arithmetic of who recovers what is negotiated rather than simply computed.
The constraint underneath the negotiation is the absolute priority rule: a junior class cannot receive value while a senior class is not paid in full, unless the senior class agrees. That is why the ranked stack from the first lesson of this course is the map of the whole process.
What the accounts show afterwards
A 5.6 billion dollar gain in 40 days is not profit. It is debt being cancelled, and it appears in reorganisation items precisely so it is not mistaken for operations. Any ratio built on net income across that period is meaningless, which is the subject of the next lesson.
What an equity holder can read early
The petition is disclosed on an 8-K under item 1.03, and the plan and disclosure statement become public documents in the case. Those documents contain the proposed distribution by class, which is where the answer to "do the shares get anything" is written, usually months before the effective date.
In this case the answer was that existing common and preferred stock would be cancelled and released without any distribution, and the plan said so before it was confirmed.
Check yourself
What does debtor in possession mean?
- A trustee takes over the business
- The company keeps operating under its existing management while the case proceeds
- Creditors run the company
Show the answer
Answer: B.
Chapter 11 is a reorganisation, and it normally leaves management in place under court supervision, with first-day relief allowing ordinary payments to continue.What does the absolute priority rule constrain?
- The order in which classes vote
- A junior class receiving value while a senior class is not paid in full, unless the senior class agrees
- How long a case may last
Show the answer
Answer: B.
It is why the ranked stack maps the process, and why old equity usually receives nothing when the reorganisation value is below the claims.A company reports a 6,443 million gain on the settlement of liabilities subject to compromise. What is it?
- An unusually profitable quarter
- Debt cancelled by the plan, reported in reorganisation items so it is not read as operating profit
- An asset revaluation
Show the answer
Answer: B.
It is the accounting record of claims being extinguished. Any margin or earnings ratio spanning that period is not measuring the business.Sources
- Chesapeake Energy Corporation, Form 10-K, fiscal year ended 31 December 2021, filed 2022-02-24, accession 0000895126-22-000029: the case chronology, the reorganisation items table and the plan's treatment of existing equity.
- Chesapeake Energy Corporation, Forms 8-K filed 2020-06-29 and 2021-01-19, each carrying item 1.03.
- The US Bankruptcy Code, Chapter 11, including the absolute priority rule and the treatment of post-petition financing.
What this leaves out
- One case. Timetables vary enormously, and a prepackaged plan can run in weeks where a contested one runs for years.
- This is an outline of a legal process written for investors, not legal advice, and the requirements for confirming a plan over a dissenting class are more involved than one sentence.
- Reorganisation items are as reported by the company for a 40-day stub period and are not comparable with any full year.
- Nothing here is advice about any security.