Restructuring and insolvency in the United States: overview

A Q&A guide to restructuring and insolvency law in the United States.

The Q&A gives a high level overview of the most common forms of security granted over immovable and movable property; creditors' and shareholders' ranking on a company's insolvency; mechanisms to secure unpaid debts; mandatory set-off of mutual debts on insolvency; state support for distressed businesses; rescue and insolvency procedures; stakeholders' roles; liability for an insolvent company's debts; setting aside an insolvent company's pre-insolvency transactions; carrying on business during insolvency; additional finance; multinational cases; and proposals for reform.

To compare answers across multiple jurisdictions, visit the Restructuring and Insolvency Country Q&A tool.

This Q&A is part of the multi-jurisdictional guide to restructuring and insolvency law. For a full list of jurisdictional Q&As visit

Evan D Flaschen and Ilia M O'Hearn, Bracewell & Giuliani LLP

Forms of security

1. What are the most common forms of security granted over immovable and movable property? What formalities must the security documents, the secured creditor or the debtor comply with? What is the effect of non-compliance with these formalities?

Immovable property

Common forms of security and formalities. In the US, immovable property is referred to as real property. Real property includes fixtures attached to real property.

Security over real property can take the form of a mortgage or a deed of trust. Mortgages are more common than deeds of trust. Mortgages give the lender (mortgagee) the right to pursue a judicial foreclosure of the property in the event the borrower defaults on the loan. In states that permit deeds of trust, foreclosure can be conducted by a sale without judicial involvement.

Generally, a valid mortgage or deed of trust must include:

  • The name of the secured party.

  • A legal description of the real property.

  • The terms and conditions of the security interest in the real property.

The borrower must sign the mortgage. A notary public or similar person authorised to take oaths must acknowledge the borrower's signature. Requirements vary by state, but the signatures of two witnesses may also be required or strongly recommended.

The local land registry where the real property is situated must record a mortgage or deed of trust. If the mortgage is not recorded in the register, it is ineffective against other creditors and subsequent purchasers of the real property.

Effects of non-compliance. Under state law, a legally defective mortgage may still be enforceable under certain legal principles, including:

  • Equitable mortgage.

  • Equitable subrogation.

  • Constructive notice.

  • Substantial compliance.

However, in a federal bankruptcy proceeding, the trustee or debtor-in-possession may avoid the defective mortgage under either section 544 or section 548 of the Bankruptcy Code (US Code Title 11).

Movable property

Common forms of security and formalities. In the US, movable property is referred to as personal property. It includes not only physical assets, but also bank accounts and other intangible assets.

Creditors take security over personal property by obtaining a security interest in the property under applicable state law. Federal law applies in some rare circumstances. All states have adopted Article 9 of the Uniform Commercial Code. Article 9 provides a set of standard rules governing secured transactions in personal property.

The security interest is created and becomes enforceable against the property when it attaches to it. Attachment generally requires all of the following:

  • The debtor has rights in the property.

  • That value has been given for the security.

  • The debtor has authenticated a security agreement that adequately describes the property. Alternatively, the secured party must be in possession or control of the property.

The security interest must be perfected to be effective against, and have priority over, third parties. Perfection is typically accomplished by filing and recording a financing statement or by taking possession or control of the property, as appropriate to the type of collateral. The financing statement (Form UCC-1) must contain:

  • The name of the debtor.

  • The name of the secured party (or its representative).

  • A description of the property.

The financing statement is filed in the office of the secretary of state of the state in which the borrower is located. This is the case even if the personal property is located in another state.

Effects of non-compliance. The secured party can enforce an unperfected security interest against the debtor, but its priority may be defeated by a subsequent third party with a perfected security interest.

In a bankruptcy proceeding, a trustee or debtor-in-possession may avoid an unperfected lien under sections 544 and 547 of the Bankruptcy Code.

In addition, the trustee or debtor-in-possession may avoid the security interest if the secured party did not provide reasonably equivalent value (sections 544 and 548, Bankruptcy Code).


Creditor and contributory ranking

2. Where do creditors and contributories rank on a debtor's insolvency?

The ranking of allowed claims under the Bankruptcy Code is the same whether the insolvency proceeding is a Chapter 7 liquidation or a Chapter 11 reorganisation. However, in certain circumstances involving creditor consent, a Chapter 11 plan of reorganisation can modify the strict priority rules.

Order of priority

The priority of claims is as follows, in descending order:

  • Secured creditors.

  • Expenses and claims with priority under the Bankruptcy Code.

  • Allowed claims of general unsecured creditors.

  • Subordinated claims.

Any surplus goes to equity holders.

Secured creditors. Allowed claims secured by liens valid under state law and unavoidable under bankruptcy law have the highest priority. State law determines the priority of competing liens against the same collateral. The amount of the allowed secured claim is determined under section 506 of the Bankruptcy Code. The secured claim may be satisfied with proceeds from the sale of the collateral or the secured creditor may bid the amount of its debt as a credit bid (section 363, Bankruptcy Code). Any excess proceeds from a cash sale of the collateral are used to pay lower ranking claims. If the value of the collateral is insufficient to satisfy the lien, the deficiency becomes a general unsecured claim.

Expenses and claims with priority under the Bankruptcy Code. These are allowed expenses and claims that have priority under section 507(a) of the Bankruptcy Code. In corporate insolvency cases, they rank in the order that follows:

  • Expenses relating to the administration of the case. These are sub-divided in three ranks in the following order:

    • super-priority claims under section 364(c)(1) of the Bankruptcy Code relating to debtor-in-possession financing in Chapter 11 cases;

    • super-priority claims under section 507(b) of the Bankruptcy Code. These claims compensate a secured creditor for the failure to provide adequate protection while the automatic stay is in effect and the trustee or debtor-in-possession uses the collateral; and

    • administrative expenses in the order of priority listed in section 503(b) of the Bankruptcy Code. Wages for services rendered after the bankruptcy case starts have first priority under this list (section 507(a), Bankruptcy Code).

  • Wages up to US$12,475 earned within 180 days before the bankruptcy filing (section 507(a)(4), Bankruptcy Code).

  • Unsecured claims for contributions to employee benefit plans arising from services rendered within 180 days before the bankruptcy filing. The limit for claims is US$12,475, minus any sums already paid to employees under section 507(a)(4) of the Bankruptcy Code (see above).

  • Certain unsecured tax claims of governmental units.

Wages and benefits exceeding the limits in the bullets above are general unsecured claims.

If a debtor borrows new money during a Chapter 11 proceeding (DIP financing), the DIP financing lender generally has a first right of recovery out of all assets, except where the lender agrees to be junior to existing liens.


Unpaid debts and recovery

3. Can trade creditors use any mechanisms to secure unpaid debts? Are there any legal or practical limits on the operation of these mechanisms?

A trade creditor can seek a statutory lien on both movable and immovable property to secure payment for services, labour or materials provided to the debtor. Statutory liens are subject to state law and include:

  • An artisan's lien.

  • A mechanic's lien.

  • A warehouseman's lien.

Statute prescribes the procedural requirements for obtaining a statutory lien and the requirements vary by state. Statutory liens are generally enforceable in a bankruptcy case if they are valid and perfected under applicable state law.

There are rights for creditors to reclaim goods they sold to the debtor within 45 days of the filing of the bankruptcy petition (section 546(c), Bankruptcy Code). Where the goods cannot be reclaimed because the debtor has already used them, the supplier can assert a priority claim ahead of unsecured creditors within 20 days of the bankruptcy filing in certain circumstances (section 503(b)(9), Bankruptcy Code).

4. Can creditors invoke any procedures (other than the formal rescue or insolvency procedures described in Questions 6 and 7) to recover their debt? Is there a mandatory set-off of mutual debts on insolvency?

Creditors can work together with the distressed company to restructure the debt in an out-of-court proceeding. There are different ways to implement an out-of-court restructuring, including:

  • Debt refinancing.

  • Debt for equity swap.

  • Exchange offers.

  • New capital infusions of debt or equity, such as rights offerings and second lien or convertible debt offerings.

Alternatively, creditors may bring a collection action against the debtor in accordance with the choice of law and venue provisions in the loan documents. However, if the debtor files for bankruptcy, any pending collection action is stayed.

In certain circumstances, creditors can also invoke rights of set-off (subject to court approval) and recoupment (where court approval is not required). There is no mandatory set-off of mutual debts under the Bankruptcy Code.


State support

5. Is state support for distressed businesses available?

State support for distressed businesses is generally not available. Although the government provided billions of dollars in loans to preserve employment in the automobile industry in the unprecedented circumstances of the General Motors and Chrysler Corporation Chapter 11 cases, it is highly unlikely that the government will provide similar support again.


Rescue and insolvency procedures

6. What are the main rescue/reorganisation procedures in your jurisdiction?

Reorganisation under Chapter 11 of the Bankruptcy Code

Objective. Chapter 11 provides a distressed company with the opportunity to preserve its business as a going concern. Under Chapter 11, a company can restructure its debt and equity interests to better reflect its current ability to service debt and retain or create equity value for its shareholders.

The debtor can seek to adjust its debt by reducing the amount owed or extending repayment terms. The automatic stay gives the debtor a breathing spell from creditors' demands. During that time, it can negotiate or seek to impose a restructuring of its capital structure that binds all existing creditors and shareholders.

The prospects for recovery will depend, subject to prevailing economic conditions, on the debtor's ability to generate sufficient cash flow to meet the costs of administering the case and to formulate and confirm a feasible business plan. At a minimum, creditors must recover value that is no less than they would have recovered in a liquidation.

Initiation. A Chapter 11 case starts with the filing of a voluntary or involuntary petition with a specialised US Bankruptcy Court. If the debtor files the petition (voluntary petition), the order for relief is entered automatically. There is no requirement for judicial approval of the filing or even for the debtor to be insolvent; this is different from the position in many other countries. If one or more creditors (involuntary petition) files the petition, and the debtor opposes the petition, the Bankruptcy Court must decide whether both of the following apply:

  • The creditors qualify to file an involuntary petition under certain statutory tests.

  • The debtor is generally not paying its undisputed debts as they become due.

An entity is eligible to be a Chapter 11 debtor if it has a domicile, a place of business, or property in the US. The definition of property includes a bank account or an unearned fee retainer held by a law firm.

Banking and insurance institutions are ineligible for relief under the Bankruptcy Code. Stockbrokers and commodity brokers can only file for Chapter 7 liquidation under the Securities Investors Protection Act.

Substantive tests. A business can be solvent and still obtain Chapter 11 relief. There is no requirement that its liabilities exceed its assets or that it is unable to pay its debts as they become due. Solvent companies can voluntarily file for Chapter 11 relief.

Conversely, there is no requirement that an insolvent company file for bankruptcy. Also, there are no wrongful trading laws if an insolvent company does not file for bankruptcy (see Question 9).

Consent and approvals. Chapter 11 debtors are reorganised under a plan of reorganisation, unless they are eventually liquidated. The debtor initially has 120 days in which only the debtor can file a plan. The debtor can, with reason, obtain limited extensions of this exclusive period. Any interested party can also file a plan of reorganisation after the end of the exclusive period. An interested party includes any creditor or shareholder.

Eligible holders of claims and interests are entitled to vote to accept or reject a proposed plan of reorganisation. Claims and interests are divided into classes and each class is comprised of substantially similar claims. Generally, each secured claim is placed in a separate class. All general unsecured creditors are placed in the same class.

Only classes of creditors or shareholders having claims or interests that are impaired under the plan are entitled to vote. An impaired claim is one that is not paid in full or is otherwise modified. Each impaired class represents a voting block:

  • Acceptance by a class of impaired claims requires consent by holders of claims equalling at least two-thirds in amount and a majority (more than one-half) in number of the voting claims in the class.

  • Acceptance by a class of impaired equity interests requires the holders of two-thirds of the allowed amount of interests to have voted in favour of the plan.

Classes of unimpaired claims or interests are deemed to accept the plan. Classes of claims or interests recovering no distribution are deemed to reject the plan. To confirm the plan, only one impaired class of creditors needs to accept the plan. This is known as "cramdown".

Supervision and control. In Chapter 11, the debtor entity and its management continue to operate the business as debtor-in-possession. The Bankruptcy Court supervises the proceedings, but is not involved in the debtor's routine management of its business. The Bankruptcy Court can appoint an independent trustee to take over management of the debtor's affairs for various reasons including, fraud, dishonesty, incompetence or gross mismanagement. However, the appointment of an independent trustee is rare.

The Office of the US Trustee, part of the Department of Justice, also has a role in Chapter 11 proceedings. The US Trustee's responsibilities include:

  • Monitoring the employment and compensation of estate professionals.

  • Appointing and monitoring the members of official committees in the case.

  • Monitoring the debtors' filing of required reports and the adequacy of disclosure statements.

  • Ensuring a proposed plan is fair and feasible.

The creditors' committee, if appointed, also serves as a watchdog with authority under the Bankruptcy Code to scrutinise the debtor's conduct during the proceedings.

Protection from creditors. The start of a bankruptcy case triggers an automatic stay, in effect, an injunction against all actions affecting the debtor or its property. The stay has extraterritorial reach as it operates regardless of the location of the debtor or its property. The stay lasts for the duration of the bankruptcy case.

During the stay, creditors are prohibited from collecting debts, enforcing liens, obtaining collateral, or otherwise improving the position they were in before the bankruptcy filing. However, the Bankruptcy Court can grant a creditor relief from the stay if the creditor gives notice and a hearing is held. Actions taken that violate the stay are generally void. Persons violating the stay can be held liable for damages.

Ipso facto or bankruptcy termination provisions are unenforceable under the Bankruptcy Code. Ipso facto clauses are contractual or non-bankruptcy law provisions under which the insolvency or bankruptcy of the debtor is treated as a default that permits the non-debtor counterparty to terminate the contract. If the contract or licence can be validly terminated for other reasons, the creditor must first seek relief from the stay. Certain financial contracts, such as forward contracts, are excepted from the stay and, consequently, the counterparty can exercise set-off rights and enforce existing contractual termination rights.

Length of procedure. Conventional Chapter 11 cases can be lengthy, lasting a year or more, especially when financial or operational restructuring is involved. Pre-packaged or pre-negotiated cases can take significantly less time, sometimes 30 days or less.

Conclusion. A Chapter 11 case concludes when either:

  • There is a confirmed plan of reorganisation that has become effective.

  • It has been converted to a Chapter 7 case, possibly due to an inability to reorganise (among other reasons).

The confirmed plan binds all interested parties and generally discharges a non-liquidating debtor of its original obligations. The debtor's former obligations may be replaced by new obligations, as provided in the plan. If the debtor fails to implement the plan, the case can be dismissed or converted to Chapter 7 liquidation.

7. What are the main insolvency procedures in your jurisdiction?

Liquidation under Chapter 7 of the Bankruptcy Code

Objective. The purpose of Chapter 7 is to implement an orderly, court-supervised liquidation of the distressed entity. The liquidation involves selling assets and distributing the proceeds to claimholders. The extent of a secured creditor's recovery depends on the value of its collateral. The extent of an unsecured creditor's recovery depends on the value and availability of unencumbered assets. If the estate has few unencumbered assets, unsecured creditors typically receive a small fraction of their claims since administrative expenses have a higher priority. Shareholders rarely recover anything.

Initiation. Chapter 7 cases can be initiated voluntarily or involuntarily. The rules for Chapter 11 petitions apply to Chapter 7 petitions (see Question 6).

Substantive tests. For business entities, Chapter 7 relief is available whether the debtor is solvent or insolvent. However, special tests can apply when the Chapter 7 case involves an individual.

Supervision and control. Once a Chapter 7 petition is filed, the US Trustee appoints a disinterested interim trustee to administer the case. A meeting of creditors is held within 40 to 60 days after the petition is filed. The creditors can elect a trustee at the meeting. Otherwise, the interim trustee becomes the trustee. The trustee's duties include the liquidation of estate's assets for distribution to claimholders. Unsecured creditors have the option to elect a committee of three to 11 creditors to advise the trustee about the administration of the case or consult with the US Trustee about how the trustee is performing its duties. The debtor's role is passive. The Bankruptcy Court supervises the proceedings.

Protection from creditors. See Question 6.

Length of procedure. Chapter 7 cases typically conclude within a few months unless there are complicated assets involved or complex litigation for the trustee to pursue.

Conclusion. To close the case, the trustee files a final report and final account and certifies that the estate has been fully administered. Interested parties and the US Trustee have 30 days to object. If no objections are filed, the estate is presumed to have been fully administered. After the estate is fully administered, the Bankruptcy Court discharges the trustee and closes the case.

Liquidation under Chapter 11 of the Bankruptcy Code

In certain circumstances, a Chapter 11 case can be used to facilitate an orderly liquidation of assets through a liquidating plan of reorganisation. This is sometimes simply referred to as a plan of liquidation. The debtor-in-possession remains in control and the administration of the case is generally the same as for a Chapter 11 reorganisation case (see Question 6).


Stakeholders' roles

8. Which stakeholders have the most significant role in the outcome of a restructuring or insolvency procedure? Can stakeholders or commercial/policy issues influence the outcome of the procedure?


In a Chapter 11 case, the debtor entity and its existing management continue to operate the business as debtor-in-possession.

Official Committee of Unsecured Creditors

In a Chapter 11 case, the US Trustee appoints a committee of creditors who hold unsecured claims. The committee usually comprises the seven largest unsecured creditors willing to serve on the committee. The creditors' committee monitors the debtor's ongoing operations, consults with the debtor on major business decisions, and can be very influential. The creditors' committee can, with court approval, hire attorneys, accountants, investment bankers, and other agents to perform work for the committee. The US Trustee has discretion to appoint committees representing other constituencies (for example, shareholders), although this rarely occurs in practice.

Secured creditors

A Chapter 11 debtor requires the consent of its creditor or the court's authority to use a secured creditor's collateral. This rule also applies to its cash collateral, which is primarily accounts receivable and bank accounts. The debtor must also adequately protect the secured creditor's interest in its collateral. This is to protect the creditor from the disposition of, or decline in value of, its collateral as a result of it being sold or used by the debtor.

DIP financing lenders

Financing lenders (see Question 2) usually have a very substantial role in Chapter 11 cases. They act in accordance with the terms of their loan agreements and the Bankruptcy Court order that approves the financing.

US Trustee

While not a true stakeholder, the Office of the US Trustee can also play a significant role in Chapter 11 cases (see Question 6).

Other parties in interest

Other creditors and shareholders can participate in the case and be heard on most issues as interested parties. Creditors in a similar position can form an ad hoc group and actively participate in the bankruptcy case. Ad hoc groups exercise more influence than individual creditors acting on their own. The Securities and Exchange Commission can also be heard on most issues. However, the Commission cannot appeal any decision. In some cases, governmental authorities, unions and retirees have the right to be heard on particular issues.



9. Can a director, partner, parent entity (domestic or foreign) or other party be held liable for an insolvent debtor's debts?

Directors and officers

A director or officer cannot be held liable for an insolvent debtor's debts. The wrongful trading provisions that are found in many other jurisdictions do not exist in the US. A director or officer can be liable for breach of fiduciary duties and similar causes of action under traditional corporate law, but this is an action for damages, not direct liability for a debtor's debts.


A general partner is liable for the debts of a partnership, subject to applicable state law. In Chapter 7 proceedings, the trustee has a claim against a general partner if both of the following apply:

  • There is insufficient estate property to pay all allowed claims against the partnership in full.

  • The general partner is personally liable for that deficiency under state law.

A limited partner who does not exercise control over the partnership is generally not liable for the debts of the partnership. Only the capital which the limited partner contributed to the partnership can be used to pay the partnership's debts under applicable state law.

Parent entity (domestic or foreign)

A parent entity can be liable for the debts of an insolvent subsidiary under a number of common law principles, including:

  • Alter ego.

  • Piercing the corporate veil.

  • Single business enterprise.

  • Agency.

The above legal principles generally apply if the parent has disregarded corporate formalities and actively participated in, and exercised control over, the operations of a subsidiary, so that the subsidiary is a mere instrument of its parent.

A parent entity can also be liable under:

  • State corporate and creditors' rights laws.

  • Federal bankruptcy laws for fraudulent or preferential transfers of subsidiary assets.

Both of these types of liability are rare.

Where affiliates are in bankruptcy, such as a parent and a subsidiary, the bankruptcy estates are treated as separate. However, the bankrupt estates of affiliates are usually jointly administered. The primary effect is that the same docket is used for convenience.

The assets and liabilities of affiliated debtors can be substantively consolidated and, in effect, treated as a single pool. This may occur in similar circumstances that allow the piercing of the corporate veil, although the test is less stringent. The consolidation is an equitable remedy. The Bankruptcy Court therefore considers the fairness to affected parties of substantive consolidation before deciding whether it is appropriate.

There are also "control group" state and federal liability statutes that hold a parent liable for certain claims against its subsidiaries. These include certain environmental, pension, labour and tax claims, including claims in bankruptcy.


Setting aside transactions

10. Can an insolvent debtor's pre-insolvency transactions be set aside? If so, who can challenge these transactions, when and in what circumstances? Are third parties' rights affected?

An insolvent debtor's pre-insolvency transactions can be avoided or set-aside by the trustee or debtor-in-possession under the following circumstances:

  • Preferences.

  • Fraudulent transfers.

  • Provisions of state law.


A preferential transfer is a transfer of the debtor's property to, or for the benefit of, a creditor within the 90-day period immediately before the bankruptcy filing that gives the creditor a benefit not shared by other creditors (Bankruptcy Code, section 547). The time limit is one year if the creditor is an "insider".

In certain circumstances, the debtor can undo the preferential transfer and recover the transferred property for the benefit of the estate. However, the preferential transfer cannot be undone where a transaction is in the ordinary course of a debtor's business, or where a debtor receives new value in exchange for the transfer.

Examples of preferential transfers include:

  • The late payment of trade debt.

  • Granting a security interest to a previously unsecured or undersecured lender.

  • Delayed perfection of a security interest granted by the debtor contemporaneously with the incurrence of debt.

The debtor is presumed to be insolvent during the 90 days before the bankruptcy filing. However, the transferee can present evidence to contradict that assumption. For insider transfers, the trustee or debtor-in-possession has the burden of proving that the debtor was insolvent between 90 days and one year before the bankruptcy filing.

Fraudulent transfers

The debtor can avoid any transfer that it made within two years of the bankruptcy filing if either (Bankruptcy Code, section 548):

  • It was made with actual intent to hinder, delay, or defraud its creditors.

  • The debtor received less than reasonably equivalent value for the transaction at a time when the debtor was:

    • insolvent on a balance sheet basis (either before, or as a result of, the transfer);

    • left with unreasonably small capital for engaging in its business; or

    • unable to pay its debts as they became due.

A party who acquired property from the debtor (the initial transferee) for value and in good faith has a lien on, or may retain, any interest transferred. This applies to the extent that the transferee gave value to the debtor in exchange for the transfer (Bankruptcy Code, section 548(c)).

Examples of potential fraudulent transfers include:

  • Where assets are transferred, or obligations incurred, that involve an affiliate or another person and reasonably equivalent value was not received in return.

  • Non-judicial foreclosures on real estate when the property is sold at a distressed sale bargain price.

  • Certain up-stream and cross-stream guarantees where a subsidiary guarantees the debt of its parent or sister company without receiving reasonably equivalent value.

State law

The debtor can also use applicable state law to avoid transfers that could be avoided under state law by an unsecured creditor. This is particularly useful with respect to fraudulent transfers, as all states have fraudulent transfer provisions and most states have a "look-back" period exceeding two years, sometimes as long as six years (Bankruptcy Code, section 544(b)).

Subsequent transferees safe harbours

The trustee or debtor-in-possession cannot recover an avoided transfer from a secondary transferee who acquired the property from an initial transferee for value, in good faith and without knowledge that the transfer is avoidable.

Additionally, the trustee or debtor-in-possession cannot recover from a subsequent transferee who acquired the property in good faith from the secondary transferee, whether or not it provided value (Bankruptcy Code, section 550(b)).


Carrying on business during insolvency

11. In what circumstances can a debtor continue to carry on business during rescue or insolvency proceedings? In particular, who has the authority to supervise or carry on the debtor's business during the process and what restrictions apply?

In Chapter 11 proceedings, the debtor is automatically authorised to operate its business without specific court approval. Ordinarily, existing management remains in place and runs the company. The conduct of the debtor's business operations is subject to certain constraints under the Bankruptcy Code. The Bankruptcy Court supervises the debtor and the US Trustee and the creditors' committee monitor the debtor. In rare cases, a Chapter 11 trustee can be appointed to take the place of management. In Chapter 7 proceedings, a trustee is always appointed (see Question 6).

Property transactions

The debtor can use, sell or lease most of its property in the ordinary course of business without special authorisation from the Bankruptcy Court.

The Bankruptcy Court must approve the sale of property (other than inventory) outside the ordinary course of business. Property subject to a security interest can be sold free of the security if the secured creditor consents, or other statutory criteria are met. In such a case, the security interest usually transfers to the proceeds of the sale. In Chapter 11 proceedings, the debtor is restricted from selling a substantial portion of its property outside a plan, unless it proves that a business justification exists to allow the sale.

Cash collateral

The debtor cannot use cash collateral without court authorisation, unless the secured party consents to the use. If the debtor does not have the consent of the secured party, it must provide the secured creditor with adequate protection. The protection must ensure that the secured creditor does not receive less when it finally realises its interest than it would have received had the collateral been surrendered or liquidated immediately. Common forms of adequate protection are interest payments or replacement liens on other property.

Executory contracts

The debtor can accept (assume) or reject the obligations of an executory contract. Both parties have material performance obligations remaining under an executory contract (for example, unexpired leases or supply agreements) (Bankruptcy Code, section 365). A debtor is likely to accept a contract which has either favourable terms, or which is likely to prove difficult or impossible to replace.

If the debtor wishes to assume or accept a contract, it must fulfil any outstanding obligations and provide adequate assurance that it can perform future obligations under the contract. Conversely, the debtor can reject a contract with onerous terms. Rejection constitutes a breach as of the petition filing date. Any proven damages as a result of the breach are general unsecured claims.


Additional finance

12. Can a debtor that is subject to insolvency proceedings obtain additional finance both as a legal and as a practical matter (for example, debtor-in-possession financing or equivalent)? Is special priority given to the repayment of this finance?

A Chapter 11 debtor can continue to obtain unsecured credit and incur unsecured debt in the ordinary course of business unless the Bankruptcy Court orders otherwise. One example is post-petition trade debt. Credit obtained in this way has priority over all pre-petition unsecured claims. Post-petition trade debt is categorised as an administrative expense.

A Chapter 11 debtor can also obtain DIP financing with court approval (see Questions 2 and 6). The court can authorise the DIP financing as either:

  • Having super-priority over all administrative expenses.

  • A lien on unencumbered property of the estate.

  • A junior lien on property that is already subject to a lien.

  • In special circumstances, an equal or senior lien on property that is already subject to a lien.


Multinational cases

13. What are the rules that govern a local court's recognition of concurrent foreign restructuring or insolvency procedures for a local debtor? Are there any international treaties or EU legislation governing this situation? What are the procedures for foreign creditors to submit claims in a local restructuring or insolvency process?


The US has adopted the UNCITRAL Model Law on Cross-Border Insolvency 1997 (UNCITRAL Model Insolvency Law) (with modifications) in the form of Chapter 15 of the Bankruptcy Code. Chapter 15 provides the criteria for recognition of foreign main and non-main proceedings that relate to a local debtor.

Chapter 15 applies in any of the following circumstances:

  • A foreign court or foreign representative seeks assistance in the US with a foreign proceeding.

  • A US court or party in interest in a US proceeding seeks assistance in a foreign court with the US proceeding.

  • A foreign proceeding and a US proceeding are pending concurrently.

  • Creditors or other interested persons in a foreign country request the commencement of, or participation in, a US bankruptcy proceeding.

The foreign representative must apply to the Bankruptcy Court for recognition of the foreign proceeding by filing a petition for recognition. The Bankruptcy Court grants recognition if the relief would not be manifestly contrary to US public policy. This means that the applicable foreign insolvency law should be consistent with applicable US bankruptcy law.

Once the foreign proceeding is recognised, the foreign representative has full access to courts in the US concerning the debtor. The US court typically grants comity and recognises and enforces foreign court judgments made in foreign proceedings. If recognition is denied, the foreign representative's access to a US court is limited to its right to sue the debtor to collect or recover a claim against, or an account receivable of, the debtor.

Concurrent proceedings

A Chapter 15 case is ancillary to a main or non-main proceeding pending in a foreign jurisdiction. However, a debtor or creditor can also commence a plenary Chapter 7 or Chapter 11 case to run concurrently with a foreign proceeding. Chapter 15 requires the Bankruptcy Court to communicate, co-operate and co-ordinate with the foreign courts and foreign representative so that any relief granted in the foreign proceeding is consistent with relief granted in the US proceeding. US courts can enter into protocols with foreign courts for the efficient administration of concurrent proceedings. In concurrent proceedings, a creditor who received payment in a foreign proceeding cannot receive payment for the same claim in the US proceeding provided that the payment to other creditors of the same class is proportionately less than the payment the creditor has already received (Bankruptcy Code, section 1532).

International treaties

The US has not entered into any special insolvency treaties. It is also not subject to any multinational regimes of the type in place in the EU.

Procedures for foreign creditors

In a Chapter 11 or Chapter 7 case, foreign creditors have the same rights as US creditors, and are treated in the same way. Foreign creditors are also subject to the US automatic stay, although whether this is realistically enforceable often depends on whether the foreign creditor does any business in the US or is seeking any recovery out of the US case.



14. Are there any proposals for reform?

On 1 December 2014, the US House of Representatives passed the Financial Institution Bankruptcy Act of 2014 (H.R. 5421) (FIBA). If FIBA becomes law, it will allow "too big to fail" financial institutions to re-organise using the Chapter 11 bankruptcy process. FIBA adds a subchapter to Chapter 11 which applies only to "covered financial corporations", such as bank holding companies and financial institutions with consolidated assets of at least US$50 billion, whose failure would pose a significant risk to the financial stability of the US. Currently, the "too big to fail" are subject to federal receivership proceedings under Title II of the Dodd-Frank Act, which provides for an orderly liquidation of the failing entity under the direction of the Federal Deposit Insurance Corporation (FDIC) as receiver.

FIBA will not override present law but will provide failing large banks with a preferable restructuring option under the Bankruptcy Code. FIBA adopts the current law "single point of entry" approach, where the holding company enters Chapter 11 proceedings while its operating subsidiaries are transferred to a new bridge company to continue operating outside the bankruptcy process. The equity securities in the bridge company are estate property to be held in trust for the sole benefit of the estate. A special trustee will manage the trust under an agreement approved by the Bankruptcy Court. Trust assets will be distributed by the special trustee under a plan confirmed by the Bankruptcy Court. For this Bill to become law, it must first be approved by the US Senate and then by the President.

Additionally, the American Bankruptcy Institute (ABI), a private organisation of insolvency professionals and a member of INSOL International, released a report and recommendations for broader Chapter 11 reform in December 2014 that will be presented to Congress in due course. From there, it may take several years before new laws, if any, are enacted. According to ABI, the potential need for reform is due to the new environment in which financially distressed companies operate, with more complex debt and capital structures than what existed in 1978 when the Bankruptcy Code was enacted.


Online resources

Legal Information Institute



Description. The Legal Information Institute's website is hosted by Cornell University Law School and contains up-to-date versions of the Bankruptcy Code and the Uniform Commercial Code.

United States Court


Description. This website is maintained up-to-date by the United States Courts and provides an overview of the bankruptcy laws and the bankruptcy system in the US.


Contributor profiles

Evan D Flaschen, Partner

Bracewell & Giuliani LLP

T +1 860 256 8537
F +1 860 760 6310

Professional qualifications

  • Bar Admissions: New York, Connecticut.
  • Registered Foreign Lawyer, The Law Society of England and Wales.
  • Court Admissions: US District Court Connecticut; US District Court for the Southern District of New York; US Court of Appeals for the 1st, 2nd, 3rd, 5th and 11th Circuits.
  • Adjunct Professor, University of Connecticut School of Law, teaching an annual seminar, "International and Comparative Corporate Insolvency Law", since 1994.

Areas of practice. Representing many of the world's largest institutional investors, private investment funds, borrowers and financial services companies in out-of-court restructurings and in-court proceedings, both domestically and internationally.

Professional associations/memberships. Elected fellow of American College of Bankruptcy; American College of Investment Counsel; American Law Institute; International Insolvency Institute (Founding Member); and James W Cooper Fellowship.

Publications. More than 100 articles and book chapters in several different countries on workout, restructuring and international insolvency topics; his legal writings have been cited by courts around the country and in more than 100 scholarly journals and treatises globally, including Australia, Brazil, Canada, Cayman Islands, China, England, Germany, Israel, Japan, Malaysia, The Netherlands, New Zealand, Norway, Peru, Slovenia, South Africa, Spain and Sweden. They have also been required reading in a number of graduate school courses.

Ilia O'Hearn, Associate

Bracewell & Giuliani LLP

T +1 860 256 8536 3-596-3425
F +1 860 760 6664

Professional qualifications

  • Bar Admissions: Connecticut, New York.
  • Court Admissions: US District Court Connecticut; US District Court for the Southern District of New York; US Court of Appeals for the Fifth Circuit.
  • Certified Public Accountant: Connecticut.

Areas of practice. Financial restructuring and bankruptcy

Non-professional qualifications. Elected 40 under 40, Hartford Business Journal, 2008. Elected 40 under 40, Exceptional University of Connecticut Alumni. Medal of Excellence in Bankruptcy awarded by the American Bankruptcy Institute, 2003.

Recent transactions

  • Counsel to ad hoc group of second lien lenders in Chapter 11 of CCS Medical.
  • Counsel to noteholder group in restructuring of CEMEX.
  • Counsel to Omega Navigation Enterprises in Chapter 11 proceedings.
  • Counsel to TMT in Chapter 11 proceedings.
  • Counsel to second lien lenders in Chapter 11 of DURA Automotive.
  • Counsel to ad hoc group of subordinated bondholders in Pliant Corporation.
  • Counsel to Chapter 11 Trustee in Refco.
  • Counsel to ad hoc noteholder group in restructuring of Scotia Pacific.
  • Counsel to second lien lenders in Chapter 11 of TOUSA.
  • Advising on structuring issues concerning acquisition of energy production assets.

Languages. Spanish

Professional associations/memberships. American Bankruptcy Institute; Connecticut Bar Association; Connecticut Hispanic Bar Association; Connecticut Society of Certified Public Accountants; Fellow, Connecticut Bar Foundation.

Publications. Breaking the Chapter 11 Tsunameter, Who's Who Legal, May 2009.

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