The disclosure statement and plan process is the heart of the reorganization process under Chapter 11. Generally, the debtor or proponent of a plan must file and get court approval of a written disclosure statement before there can be a vote on the plan of reorganization. The disclosure statement must provide “adequate information” concerning the affairs of the debtor to enable the holder of a claim or interest to make an informed judgment about the plan. In case of a small business, the court can determine that a separate disclosure statement is unnecessary if the plan contains adequate information.

After the disclosure statement is filed, the court holds a hearing to determine whether the disclosure statement should be approved. Bankruptcy courts exercise broad discretion when deciding whether to approve or reject a disclosure statement.  Generally, acceptance or rejection of a plan cannot be solicited until the court has first approved the written disclosure statement.  However, there is an exception to this rule if the initial solicitation of the party occurred before the bankruptcy filing like in a prepackaged bankruptcy plan where the debtor negotiates a plan with significant creditor constituencies before filing for bankruptcy.  In making a determination, courts often look at whether the disclosure statement contains the following types of information:

• the circumstances that gave rise to the filing of the bankruptcy petition;
• a discussion of assets available and their value;
• a summary of what the debtor anticipates to do going forward;
• where the information used in the disclosure statement came from;
• a disclaimer stating that no statements or information regarding the debtor, its assets or securities are authorized, other than those included in the disclosure statement;
• the debtor’s condition during its bankruptcy proceeding;
• claim information;
• an analysis showing what creditors would receive from the debtor were it liquidated under chapter 7;
• the accounting and valuation methods used in the disclosure statement;
• information regarding the debtor’s management going forward;
• a summary of the plan of liquidation or reorganization;
• a summary of the administrative expenses, including bankruptcy professional fees;
• a review of the debtor’s accounts receivables;
• financial information necessary to allow a creditor to decide whether to approve or reject the plan;
• information regarding the risks being taken by the creditors;
• the amount expected for recovery through avoidance actions;
• a discussion of non-bankruptcy litigation;
• tax consequences of the plan; and,
• the debtor’s relationship with any affiliates.

Once the court approves the disclosure statement, the debtor or proponent of a plan can begin soliciting acceptances of the plan, and the creditors can solicit rejections of the plan. Upon approval of a disclosure statement, the plan proponent must mail the following to the U.S. trustee and all creditors and equity security holders:

(1) the plan, or a court approved summary of the plan;

(2) the disclosure statement approved by the court;

(3) notice of the time within which acceptances and rejections of the plan may be filed; and

(4) such other information as the court may direct, including any opinion of the court approving the disclosure statement or a court-approved summary of the opinion.

Apart from the above, the debtor must mail to the creditors and equity security holders entitled to vote on the plan or plans:

(1) notice of the time fixed for filing objections;

(2) notice of the date and time for the hearing on confirmation of the plan; and

(3) a ballot for accepting or rejecting the plan and, if appropriate, a designation for the creditors to identify their preference among competing plans.