Chapter 11

from Wikipedia, the free encyclopedia

Chapter 11 is a reorganization or reorganization process for US companies; it is named after a chapter of the Bankruptcy Act the United States ( English Bankruptcy Code , BC ), which regulates this process.


The Bankruptcy Code is Book 11 (Title 11) of the United States Code . Chapter 11 of this Titles regulates a court-supervised reorganization of the company finances. The correct long form is therefore: Chapter 11 of Title 11 of the United States Code .

If a company goes into bankruptcy, i.e. if the sum of its liabilities exceeds the sum of its values ​​or if it becomes insolvent, the company must report this to the federal bankruptcy court there under the bankruptcy law of the United States . There are then basically two options open to him:

  • the company submits its case under " Chapter 7 " ( liquidation ) ( to file under chapter 7 )
  • it applies for bankruptcy according to "Chapter 11" ( restructuring or reorganization, English to file under chapter 11 ).

The individual restructuring of debts is regulated in " Chapter 13 " . The procedures according to Chapter 7 BC and Chapter 11 BC differ significantly from each other. While a Chapter 7 BC bankruptcy procedure results in all company assets being sold immediately in order to use the proceeds to satisfy the creditors , Chapter 11 BC proceedings lead to supervised bankruptcy . With this variant, the company tries to stay in business and to save itself from bankruptcy. The majority of bankruptcy proceedings are conducted under Chapter 7.

A company filing for Chapter 11 bankruptcy will seek to reorganize and restructure its debts, leases, contracts, and capital and other financial obligations. The application for bankruptcy is intended to prevent the creditors from taking legal action against the debtor until the reorganization is complete. Many large US corporations have successfully implemented a Chapter 11 reorganization while maintaining their day-to-day operations. So lead z. B. Chapter 11 airlines continue to operate.

Chapter 11 thus provides relief and protection for the company restructuring. The creditors must immediately stop their foreclosure measures , which gives the company room for restructuring measures. Chapter 11 also serves to make an agreement with a creditor binding on all other creditors. If the company needs additional liquidity, a new financier can get a higher priority payback or an urgent security interest (lien). Chapter 11 secures the further financing of the company.

Often the shareholders of the insolvent company have to waive their rights in the company without compensation after the insolvency has ended, as the court cancels all of the company's old liabilities and rights to it ( rights and interests are being terminated ). The creditors then take the place of the previous owners proportionally, according to their share of the total liabilities. Often, the liabilities exceed the company's assets, so at the end of the bankruptcy proceedings the previous owners are left empty-handed while the previous creditors have become the new owners of the restructured company, hoping it will succeed financially to make up for their financial losses.

The bankruptcy court can also cancel some or all of the company's debts and suspend its contracts so it can "restart". Typically, unsecured claims by the court and, if this appears advantageous to the company, collective agreements and long-term building rents are also canceled. If the legal requirements are met, the company can reduce its debts as part of the reorganization plan, terminate unfavorable contracts and leasing contracts early and prevent judgments in pending or threatened legal proceedings. A Chapter 11 filing also means that the company's shares - if it is a public company whose shares were previously publicly traded on the NYSE - will now be traded on the NASDAQ . Such insolvent stock corporations can be recognized by a " Q " in front of the company abbreviation. A historical example of this is the bankruptcy of Penn Central (Penn Central Transportation Company, abbr .: PC, 1968-1970), which was subsequently traded as QPC.

The company doesn't have to be bankrupt to file for Chapter 11 bankruptcy. It is sufficient if it is potentially threatened by a large amount due, such as B. the asbestos producers in the United States. A company can predictively determine that it will not be able to pay a large amount of future damages even if it currently has sufficient funds to pay its current debt. The same is true when a company is unable to operate profitably given the fixed ongoing expenses. Another reason can be the re-evaluation of the company's assets. Example: In the context of the economic problems of the entire US steel industry (1985 to 1999), its revenues fell significantly.

The reorganization can take several weeks to years. That depends a lot on the relationship and cooperation of the company, creditors and shareholders before and after filing for Chapter 11 bankruptcy. A typical Chapter 11 case lasts two years. During this time, the company is run by the supervisory board and management. The company is required to pay all of its bills and expenses that became due after filing for bankruptcy. Most old claims, however, are not settled - not before the bankruptcy court has approved the restructuring plan.


It is generally assumed that the entire functioning company is worth significantly more than one would achieve by selling its individual parts (sole proprietorship, assets). Consequently, it is the most economical way to enable an over-indebted company to continue business operations. If new loans are taken out for this purpose, the new creditors have priority over other lenders. Old debts can also be waived by the state. Bondholders or other creditors often receive shares in the reorganized company as compensation for their lost claims.

With the operation, jobs will also be preserved. The interests of the creditors are best protected when the business generates profit by continuing to operate profitably. When a company is broken up (Chapter 7), the total loss is usually higher. According to empirical studies, restructuring is particularly successful when a particularly large company with a lot of fixed assets seeks bankruptcy protection under Chapter 11.

Not only the company can file for Chapter 11 bankruptcy. The company can also force the creditors to do so.

Bankruptcy court

Each state has one or more Federal Bankruptcy Court . These are specialized federal courts with full-time judges (see United States Federal Courts ). Note on full-time judges: In the lower jurisdiction of the United States, a judge often has multiple jurisdictions that he or she works in turn. B. holds court in one place for only one week a month.

The bankruptcy judge has to make all decisions in the event of bankruptcy - including approval of new loans to be taken out, settlement of claims between the company and the creditors, confirmation of the restructuring plan.

A company that is resident in several US states has a choice of where to file for bankruptcy - at the place of incorporation, at the company headquarters, at the location of its main business activity, at the location of its main assets, at the bankruptcy location of one of its subsidiaries. Large companies prefer filing for bankruptcy in courts where bankruptcy judges have ample experience with large, complicated bankruptcies - such as bankruptcies. B. New York or Delaware .

Restructuring plan

Usually, the company management designs a debt and equity structure that makes the company profitable again. This is followed by extensive meetings with a commission of representatives of creditors and shareholders to negotiate a restructuring plan. After the final submission of the restructuring plan to the bankruptcy court, the creditors and shareholders vote on the plan. The bankruptcy court must then give final approval to the restructuring plan.

If no agreement can be reached with all creditors or groups of creditors, the company can propose to the bankruptcy court to accept the restructuring plan against the votes of the creditors (cram down) . A cram-down restructuring plan must meet higher legal requirements than a mutually agreed restructuring plan.


Chapter 11 ensures that creditors who do not receive money or new debt from the bankrupt company receive shares in the company as "payment" instead. Under certain circumstances, the original shareholders can be completely replaced by the new shareholders.

One of the legal requirements of a cram-down restructuring plan is that none of the shareholders who voted against the restructuring plan receive any value before the creditors have been paid off (money, new bonds or goods). Therefore, the share value after a Chapter 11 bankruptcy mainly depends on the ratio of the company value to the sum of the debt claims.

Company work during bankruptcy

Under Chapter 11, the company may not settle any claims that arose prior to filing for bankruptcy without the consent of the bankruptcy judge. The approval of the bankruptcy judge is also required for all payments or transactions that are not part of the company's day-to-day business (“transactions that are not in the ordinary course of the company's business”).

The company will continue to operate as regularly as possible. However, the reputational damage that accompanies bankruptcy can negatively affect the company's relationships with business partners and customers.

Except in the rare cases in which the bankruptcy court appoints a trustee , the company continues to operate under the control of the board of directors. Many companies keep their old management. Occasionally the management is also exchanged. The creditors often make their approval of a restructuring plan dependent on the appointment of new management. Sometimes this new management - after negotiating with the creditors - is hired in anticipation of Chapter 11 bankruptcy.

Employee in the insolvent company

A company can settle employee claims that arose after filing for bankruptcy - wages and co-payments (benefits - including for retirement and medical care - 401 (k) plan ). The bankruptcy court can also decide that outstanding payments that were due before the filing of the bankruptcy petition are paid out to the employees - but only payments that arise in the ordinary course of business. In any case, the outstanding salaries have priority over unsecured creditors.

Most old contracts with employees can be terminated by the company.

Section 1113 of the US Bankruptcy Code contains criteria the company must meet in order to terminate or amend a group agreement. For example, the company must first try to negotiate changes with employees in good faith . The bankruptcy court must then determine that the union (union) rejected the company's proposal without good cause, that all of the company's proposals are necessary for the restructuring plan, and that other parties involved (such as non-union members and creditors ) also make sacrifices. If the company successfully terminates a contract with the employees, the employees have the right to self-help , including the right to strike.

Pension claims

Most of the assets of the employees in the pension plan (e.g. 401 (k) plan) are not affected by the bankruptcy. However, these retirement plans often contain company stocks. These can drop in value or become completely worthless.

Occupational pensions (defined benefit plan) are often lost in the bankruptcy. As part of the restructuring plan, the company treats the employee's pension claim as a claim that arose prior to filing for insolvency, and which therefore expires.

Some of the company pensions are covered by the Pension Benefit Guaranty Corporation - an agency of the US federal government.

Agreements on co-payments by the company for medical treatment after retirement can be terminated or changed by the company in the context of insolvency. A change is usually agreed with the trade unions.

Section 1114 of the US bankruptcy law places special requirements on the reductions in medical co-payments for retirees. The company must first try to negotiate changes in good faith with the unions or a court-appointed pensioner representative committee . Thereafter, the bankruptcy court must determine that the unions or the representative committee rejected the company's proposal without good cause and that the changes are necessary for the restructuring plan.


Critics complain that Chapter 11 is too lenient towards companies that are not worth restructuring. The economy suffers from poorly managed companies. Chapter 11 allows the unsuccessful management to continue their work. Usually, after the Chapter 11 bankruptcy is opened, management is not replaced because it is assumed that the old management knows the company and customers better than a new one.

Another point of criticism is that the Chapter 11 company is practically operated under the protection of the court. This often allows the company to come back with a big lead and competitive advantage in the market. This unfair advantage distorts the market, damages other competitive companies and threatens them with bankruptcy.

If one or more dominant companies file for Chapter 11 bankruptcy, then there can be considerable overcapacities in the affected market segment .

The most cited example of this is the US airlines. Half of the seating capacity offered in 2006 was provided by airlines operating under Chapter 11. These airlines no longer had to service their old debts , had the financial means to expand their route network and waged an aggressive price war against their competitors. All of this took place with the approval of the bankruptcy court. An airline usually has high fixed costs (fixed capital costs) for their aircraft and the debt lying on it.

Prominent companies in Chapter 11

By September 2008, Worldcom was the largest Chapter 11 bankruptcy ever filed. The company was valued at $ 103 billion as of July 21, 2002. This was far exceeded by the Lehman Brothers bankruptcy on September 15, 2008. The investment bank had total assets of $ 786 billion. In 2009, General Motors filed for Chapter 11 bankruptcy.

See also

Web links

Individual evidence

  1. ^ Insolvency law website Ernst and Linder LLC , accessed May 24, 2019
  2. Chapter 11. Bankruptcy Protection in the United States The Press , April 30, 2009
  3. Cf. Lukas Müller: The new restructuring law from an empirical perspective: What are the critical success factors of a restructuring? - What entrepreneurs, restructuring companies and courts can learn from "Chapter 11" of the US Bankruptcy Code for the revised DEBA. Current legal practice, 23 (2014) pp. 187-204
  4. Rainer Funke: The insolvency plan of the draft of the insolvency code in the light of experience with the American reorganization and debt regulation law. In: Klaus Letzgus (Ed.): For Law and State. Festschrift for Herbert Helmrich . Munich 1994, p. 627
  5. Mark Hinrichs: Coping with insolvency through options? A critical analysis of the US reorganization process according to Chapter 11 Bankruptcy Code, the German insolvency plan process and market-oriented reform models. Freiburg, Univ.-Diss. 2002
  6. Martin Kemper: The US-American experience with "Chapter 11" - A comparison with the insolvency plan of the new bankruptcy code. Regensburg, Univ-Diss. 1996
  7. Michael Leitl: Chapter 11? Harvard Business Manager , 3/2004
  8. Norbert Kuls, Carsten Knop: American Airlines: Chapter 11 is often the last lifeline in America FAZ , March 28, 2003
  9. US airline: American Airlines is insolvent Der Spiegel , November 29, 2011
  10. ^ Nina Naske: Insolvency under self-administration, August 29, 2017
  11. Chapter 11: GM files for bankruptcy to reorganize Handelsblatt , June 1, 2009