What is the Best Interests of Creditors Test?
Best Interests of Creditors Test:
Bankruptcy Code Section 1129(a)(7) is known as the “Best Interests of Creditors” or “Best Interests” test. 11 U.S.C. § 1129(a)(7). It is one of thirteen requirements that a plan proponent must satisfy in order to obtain confirmation of its plan of reorganization, guaranteeing that unless it otherwise agrees, each creditor or interest holder will receive at least as much under the plan as it would in a liquidation of the debtor in a chapter 7 case. In other words, it establishes a “floor” with respect to the level of recovery to which creditors and interest holders are entitled pursuant to any confirmed plan of reorganization. The test only applies to creditors in impaired classes of creditors.
The point of a Chapter 11 is that it was the tool created by Congress to allow businesses to continue operating if its creditors believed it could pay more by continuing to operate than if it was liquidated. In other words, the company was “worth more alive than dead.”
Bankruptcy Code § 1129(a)(7) provides, in part:
With respect to each impaired class of claims or interests – (A) each holder of a claim or interest of such class . . . (ii) will receive or retain under the plan on account of such claim or interest property of a value, as of the effective date of the plan, that is not less than the amount that such holder would so receive or retain if the debtor were liquidated under chapter 7 of this title on such date.
This is the “best interest of creditors” test in that it is a condition that the plan provides a better result than a liquidation, ergo, it is in the “best interest of creditors” for the plan to be confirmed rather than liquidating the debtor.
The Firm has prepared a short entertaining video regarding the point of Chapter 11: