“Best Interests” Test: If the appointment would be in the best interests of creditors, equity security holders, and other claim holders, the trustee can be appointed.“Cause” Basis: The presence of any form of fraud, dishonesty, incompetence, or gross mismanagement.There are two rationales by which the appointee of a Chapter 11 Trustee could be justified: That being said, a Chapter 11 Trustee is appointed to take charge of the bankruptcy process only if the management team of the debtor has shown fraudulent behavior or gross negligence. If the debtor conducts fraud, gross mismanagement, or fails to comply with the required disclosure requirements, a Chapter 11 Trustee can be appointed.
This changing fiduciary duty is an important consideration when it comes to legal risks because actions indicating preferential treatment and not abiding by the priority of claims waterfall is a direct violation of their legal obligation to look out for the interests of the debt holders. For example, part of the POR could be a debt/equity swap. This is not only because of their higher placement in the capital structure but also because many of the creditors could become the new shareholders post-restructuring. The debt holders, as part of the restructuring process, often become the post-bankruptcy equity shareholders as their debt was converted into equity as part of the recovery and form of consideration. Pre-petition debt holders participating in the reorganization often become the post-emergence shareholders – thereby, the protection of their interests must be prioritized. In the case of non-distressed companies, the fiduciary duties of management are owed to the equity shareholders (i.e., to maximize the firm value).īut once the corporation approaches or enters the “zone of insolvency,” the interests of creditors must become the priority for management. Fraudulent Conveyance refers to the preferential transfer of an asset under the intent to defraud other existing claim holders.Ī closely related concept based on a similar legal basis is termed “voidable preferences,” which is when the debtor made a transfer to a creditor right before filing for bankruptcy that was determined to be “unfair” and neglectful of the claims structure.įraudulent Conveyance Introduction Management Fiduciary Duties
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