A Chapter 11 filing is a voluntary action taken by a U.S. company to resolve financial problems, such as excessive debt or major liabilities. Chapter 11 is often used by companies that are faced with large numbers of product liability suits in multiple jurisdictions because it provides a practical way to address the potential liabilities in one place. A Chapter 11 filing immediately stops all lawsuits against a company and prevents creditors from taking action against a company to enforce claims or to collect any monies or property that might be owed.
Chapter 11 provides a process for a company to define and resolve its liabilities under a court-supervised process. Under a Chapter 11 bankruptcy filing — unlike a “Chapter 7” filing — a company continues its normal business operations.
Under a Chapter 11 proceeding, an operating company will immediately seek authority to continue to provide employees with the salaries and benefits that existed prior to the Chapter 11 filing. It is also able to do business with suppliers and customers in a routine manner so that it can continue to create funds to satisfy creditors. The court gives amounts owing to suppliers for material or services provided after a Chapter 11 filing preferential status so that they may continue to be paid under normal terms. Although a company generally cannot pay suppliers for materials or services provided before the Chapter 11 filing, in Federal-Mogul’s case this applies only to suppliers of the Federal-Mogul companies in the United States or the United Kingdom that have filed for Chapter 11 protection.
After a company files Chapter 11, one or more official committees that represent the interests of general unsecured creditors and/or other creditors may be appointed. Normally these committees are actively involved in the process to monitor and protect the interests of unsecured and certain other creditors during the Chapter 11 proceedings.
Another major step in the Chapter 11 process is providing notice to anyone who believes they have a claim, financial or otherwise, against a company. Notice procedures are established by the court and notice is given to people with claims alerting them that their claims must be brought forward by a certain date. By the end of the notice period, all claims must be submitted or they will be barred forever.
The Chapter 11 process will end when the court has approved a plan of reorganization for a company. This plan is usually developed by a company in conjunction with its creditors. In cases similar to Federal-Mogul’s with complex asbestos liabilities, it has taken several years to complete this process. The approved plan of reorganization establishes the amount, type and timing of payment that will be made to the holders of allowed claims, as well as the capital structure of the reorganized company.
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