The Solicitation Process

The disclosure statement is only the first step in the bankruptcy process. After the solicitation statement has been approved by the court, the ground is set for the negotiations to begin. This is a complicated stage. This is where stakeholders often form groups to connive against the others, and horse-trading takes place.

The solicitation process often tends to be long drawn out. There are many stakeholders who base their strategy on stretching the length of the solicitation process. By doing so, they are able to wear out other participants. This happens because of a process called creditor fatigue, where the creditors become tired because of rising professional and legal expenses and agree to a settlement.

Let’s understand the solicitation process in detail in this article.

What is meant by Solicitation?

After a company files for bankruptcy, it can only exit that phase after it receives written confirmation from its creditors that they have agreed to a common reorganization plan.

In order to receive the confirmation of this acceptance and to prove to the bankruptcy court that they are all on the same page, the debtor firm has to “solicit” approval from the various creditor groups. This process is called solicitation.

The process begins by getting the information out to the creditors. This part of the process has been covered in detail in this article.

Getting the Information to the Creditors

After the disclosure statement is filed and approved with the bankruptcy court, the debtor firm has to send out details informing the creditors about the details of the plan.

This is usually sent to the creditors using registered mail. Registered mail is used so that the company has proof that the material was sent to the creditors. There are companies that specialize in printing and sending these “solicitation packages.” They can make the entire process hassle-free for a pretty reasonable amount.

This solicitation package contains details such as the last audited financial statements as well as the future projections which the company is making with regards to cash flow. Other side deals with creditors are often included.

Along with the solicitation package, a planned ballot is also sent along. This plan ballot is where the creditors express their consensus or lack of consensus with the proposed reorganization plan. It has to be mailed across to the debtor organization by a certain date in order to be valid.

The Plan Ballot Process

The third-party agents employed during the process play an important role in the plan ballot process. Firstly, they have to prepare a database which will be used to send out plan ballots during the reorganization process. They are the ones who are continuously coordinating with all the creditors as well as their agents. They have to first ensure that all the plan ballots have been mailed to the creditors within a certain date. They then need to respond to the various queries that the creditors may have. Finally, they need to collect the responses and tabulate them. Often, these third party agents are called upon by the bankruptcy courts to act as a witness to the reorganization process.

Notifying Other Creditors

Not all creditors are allowed to vote under the solicitation process. The details about who is allowed to vote and who isn’t have been discussed in the next article. However, it needs to be understood that there should not be any ambiguity about the process. Even creditors who are not allowed to vote under the process need to be notified. They need to be informed that there is voting happening and that they will not be allowed to vote because of certain reasons.

Special Cases

The solicitation process is not completely straightforward. In many cases, the creditors are not exactly known. For instance, in the case of public debt or public equity, it is not easy to find out the list of creditors. In such cases, the responsibility of the third party only extends to providing the solicitation package to the depository or the central institution. This institution then has an obligation to further ensure that the ballot receives the intended recipients.

Also, there are many creditors who owe relatively small and frivolous amounts. They want to be treated as an administrative convenience claims. This is a special type of claim which is considered to be petty in nature. Hence, it is paid out without too many encumbrances and early on in the process. Plan ballots have certain fields that are marked for this classification. The creditors can choose to classify themselves as an administrative convenience claim, and based on the definition decided by the debtor company, they may or may not be included in the class.

The bottom line is that the solicitation process is the actual heart of the reorganization process. This is the part where companies try to woo their creditors. This is also the part when the reorganization plan and the intention of the company become public, and creditors receive clarity about the expected duration of time that they will be paid in.