5. Understanding reorganization in bankruptcy

Chapter 11 of the Bankruptcy Act has several features that can help a firm that is in financial distress.

As soon as the debtor files for Chapter 11, the debtor delay interest and principal payments until the reorganization plan is approved and use the cash generated from operations to sustain operations.

Filing for bankruptcy under Chapter 11 requires the debtor to submit a reorganization plan to the bankruptcy court. The courts responsibility is to scrutinize the proposed plan of reorganization. The court checks if the plan is fair and feasible.

Arjen Corp. filed for bankruptcy protection under Chapter 11. The following table describes certain actions the company plans to take as a part of its reorganization plan. Arjen submitted the plan to the bankruptcy court.

Determine whether the actions described comply with the bankruptcy code, and select the option identifying whether the bankruptcy court will consider or disregard the action in the plan based on the grounds of fairness and feasibility.

Description	Will the Court Consider This Action?
	Yes	No
Arjens reorganization plan calls for a reduction of debt from $2.8 billion to $1.5 billion by converting 80% of the debt into equity.
Arjens reorganization plan includes reduction in payroll costs expected to come from negotiations with labor unions to accept lower wages and less restrictive work rules.
In the reorganization plan, Arjen plans to pay its unsecured creditors about 88 cents for each dollar theyre owed, primarily in stock, and secured creditors will receive 17 cents for each dollar theyre owed.

Which of the following stakeholders have the first right, after the managements 120-day window, to file a reorganization plan?

Stockholders

Debtholders