Chapter 11 Trustee Appointment Process
Appointing a trustee is one of the options you can choose if you have a debtor who filed for Chapter 11 Bankruptcy. There are several considerations you should be aware of in this case. Find out more about the Chapter 11 trustee appointment process in this guide.
What Role Does the Appointed Trustee Have?Under Chapter 11, the appointed trustee has extensive powers over the debtor's company. The trustee replaces the company's manager. After being appointed, the trustee has the right to administer the business and its processes as they consider appropriate. The purpose of the trustee is to solve the company's crisis by replacing the former manager who brought the company at an impasse. This puts the debtor in a position known as 'debtor in possession,' where they keep their ownership despite the reorganization procedure.
A trustee will require some time in order to get familiarized with the company before they start planning the business strategy and organizing day-to-day activities. This period's length depends on the complexity of the company's affairs. After the appointment, all the rights and responsibilities of the debtor will go to the trustee.
When Is the Trustee Appointed?Typically, four causes trigger a trustee appointment: gross mismanagement, dishonesty, fraud, and incompetence. Nonetheless, a trustee may be appointed only because it's in the best interest of the creditors, even if the current manager can't be accused of negligence or fraud. A trustee can also be appointed when Chapter 11 bankruptcy is dismissed or converted into Chapter 7.
Who Appoints the Trustee in Chapter 11 Bankruptcy?The court will assess each company's case before they decide whether a trustee should be appointed or not. The court is responsible for the appointment, and it can choose the trustee during the period ranging from the bankruptcy filing day and the date when the bankruptcy plan is confirmed.
What Are the Benefits of a Trustee Appointment?This form of business reorganization can bring benefits both to the creditor and the debtor. On the one hand, the debtor can continue his or her operations under the trustee's leadership, instead of liquidating the assets to cover the debts. On the other hand, the creditor has more chances of recovering money if business continuity is guaranteed. Furthermore, they have no obligation of covering the expenses incurred by appointing the trustee whose expenses are covered by the debtor's estate. The trustee aims to provide better management in order to help the business reorganize efficiently and make the business profitable again.
What Are the Disadvantages of Appointing a TrusteeThere are circumstances when a trustee can be detrimental both to the debtor in possession and the creditors. The trustee might require a lengthy period to get to know the business and implement the new reorganization plan. During this time, the business stagnates, and no steps are taken to repay the creditors.
The trustee can easily opt for liquidation, especially if they are not familiarized with the business profile of the company they have to manage. Through liquidation, the assets are often sold at a price which is below their market value.
The debtor's secured creditors are affected by the trustee's appointment. They have an interest on the debtor's assets and therefore, bear part of the expenses related to the trustee.
Can the Debtor Appeal the Court's Appointment Decision?Once the trustee is appointed, there's little chance of appealing this decision because all the debtor's rights are now passed to the trustee, including the right to appeal. However, by acting promptly and consulting an experienced bankruptcy lawyer, the debtor might have a chance to reverse the decision.
All in all, a Chapter 11 trustee appointment is not a very common option in bankruptcy. Whether you are the company's owner or one of its creditors, you should discuss with a bankruptcy attorney if you take into account this solution.