Disclosure Statements
Debtors must report assets, liabilities, contested claims, and other business affairs. The purpose of these disclosures is to allow creditors an opportunity to evaluate proposed plans. Disclosure statements must contain “adequate information.” The specific information required is determined on a case by case basis by the court and may include any information which the court deems reasonable and necessary for parties in interest to reach informed decisions before voting on plan confirmation.
After a Chapter 11 case is filed, an acceptance or rejection of a plan may not be solicited from a holder of a claim or interest unless there is a plan or summary of a plan and a written approved disclosure statement. The court may approve a disclosure statement without a valuation of the debtor or an appraisal of the debtor’s assets.
“Adequate information,” according to the Bankruptcy Code, means information “of a kind, and in sufficient detail, as far as is reasonably practicable in light of the nature and history of the debtor and the condition of the debtor’s books and records, that would enable a hypothetical reasonable investor typical of holders of claims or interests of the relevant class to make an informed judgment about the plan.”
Some of the factors that are in a determination of “adequate information” in a particular case include the history which lead to filing of the Chapter 11 bankruptcy, the description and value of assets, the future prospects of a business debtor, the present condition of debtor, and the estimated amount creditors would receive under a Chapter 7 bankruptcy. Other types of information found in disclosure statements may include sources of the information used in preparation of the disclosure statement, accounting methods, litigation that may affect the plan, and the collectability of accounts receivable held by debtor.
Before a Chapter 11 plan may be implemented, the proponent of the plan must send the creditors a court-approved disclosure statement and obtain acceptance of the plan by creditors. The same disclosure statement must be transmitted to each holder of a claim or interest of a particular class, but there may be transmitted different disclosure statements, differing in amount, detail, or kind of information, as between classes. If the plan proponent meets the requirements, and obtains necessary approvals after proper disclosure, the Court can confirm the plan. In a small business case, the court may determine that the plan itself provides adequate information and that a separate disclosure statement is not necessary.
When a debtor qualifies and has elected to be treated as a “small business debtor,” the court may conditionally approve a disclosure statement and combine the hearing for the approval of a disclosure statement with a hearing on the confirmation of a plan. The small business debtor may solicit the acceptance or rejection of a plan based upon a conditionally approved disclosure statement. The debtor must provide adequate information to each holder of a claim or interest that is solicited. A conditionally approved disclosure statement must be mailed at least 10 days prior to the confirmation hearing.
