Restructuring support agreements | Nelson Mullins Riley & Scarborough LLP

The history of the practice of bankruptcy at the time of the Bankruptcy Code,[1] 1979 to the present day, has been that of eliminating chance and uncertainty. This was accomplished by consolidating jurisdiction over the most important issues in a few select jurisdictions and generally transforming the practice from a practice in which debtors and creditors regularly pleaded their disputes to a practice in which the bankruptcy court has become. the chosen forum for a consensual debt treatment agreement. This development changed the practice from a litigation-based practice to a transaction-based practice. The previously “extraordinary” relief of selling all of the debtor’s assets at the very outset of the case has become the “ordinary” course for many Chapter 11 proceedings.

An important tool for controlling the process is the Restructuring Support Agreement or Plan Support Agreement (“RSA”).[2] These agreements are written contracts generally between the debtor and one or more creditors (or fiduciary agents or ad hoc committees), which established an agreed framework for dealing with the debt and a timetable for completing the reorganization. While agreements can, subject to bankruptcy court approval, be made after the start of the case, they are most useful when deployed before the start of the case. Agreements typically differ from the more formal “prepackaged” or “prepack” bankruptcy process, the form of which is incorporated into the Bankruptcy Code by allowing for pre-filing preparation of a reorganization plan and disclosure statement.[3] The RSA is a tool that can play an important role in the more common and efficient “pre-negotiated” bankruptcy process that may or may not provide for the filing of a reorganization plan. The RSA allows the parties involved to negotiate and agree on the terms of the handling of claims and the conduct of the bankruptcy process before the start of the case and to memorize these agreements in the form of a written agreement. Negotiating the RSA goes a long way in reducing uncertainty for both debtors and creditors as to the conduct of bankruptcy proceedings.

Typically, the RSA will: a) accurately indicate the agreed treatment of claims from creditors signing the agreement (and may also include commitments to debtor financing in possession and the proposed treatment of non-signatories); b) incorporate promises from creditors not to support other plans or alternative plans and the debtor promises not to offer alternative plans; (c) establish time limits for the operational elements of the agreed “plan”, such as a time limit for filing a petition for sale or a reorganization plan; and d) allow the termination of the agreement by the parties generally in the event of failure to meet certain agreed deadlines (including the commencement of the bankruptcy case on a certain date).

The RSA almost always includes a “fiduciary exit”[4] which allows the debtor to refrain from taking any action (including those incorporated in the RSA) that would cause the debtor to “violate any fiduciary duty he has under applicable law”.

The RSA benefits the debtor by engaging creditors and others in a course of action in the context of the bankruptcy case and reducing uncertainty as to how they will react to the debtor’s reorganization proposals. It allows the debtor to negotiate with major creditors without the pressure and oversight that comes with it once bankruptcy proceedings are initiated.

Creditors who are parties to the RSA benefit from the agreed “plan” drawn up before the opening of the case and an agreed timeframe for the events to take place in the case and a deadline for opening the case. the case itself. The RSA reduces the uncertainty of what the debtor will or will not do once the bankruptcy case is filed.

For both debtors and creditors, the RSA is likely to result in a more efficient and less costly Chapter 11 process than a process in which parties resolve their disputes through an adversarial process in bankruptcy court. By reducing uncertainty about the path of the bankruptcy case, the RSA also allows the debtor and creditors who are parties to the RSA to insure the internal and external constituents on the most likely path of the case.

After the RSA is signed, some parties may be required under securities law to publish the agreement. Barring such pre-filing event, the RSA (or a description of its terms) will generally become public at the time of the opening of the case in accordance with the debtor’s obligations to disclose material facts to court and others.

The debtor may also at the time of the introduction of the case seek to “assume” the RSA as an enforceable contract, but this is not always the case. Creditors who are outside of the RSA may seek to challenge any assumption of the RSA or dismiss the issue of the debtor’s trustee. The RSA binds certain parties to a course of action, however, ultimately the bankruptcy court retains control of the process and decisions to enter or not to enter the various orders necessary for the reorganization. The bankruptcy process fosters consensus, however, and the RSA goes a long way in promoting this goal.

The RSA is an important and useful tool for all parties to the reorganization process and, in more important cases, should be strongly considered in any planned bankruptcy filing.