Plan Support Agreement

A Brief Introduction About the Plan Support Agreement

Chapter 11 bankruptcy is a complex and expensive process. Companies file this so that they can stay afloat while continuing the business during the bankruptcy process. However, in certain circumstances, the court appoints a trustee to run the business.

Usually this form of bankruptcy is used to restructure the debt and to promise the lenders and investors about the solvency of the business. However, such filing requires proposing a plan that the creditors must approve. Instead of the complex negotiating process after filing bankruptcy, debtors enter into this agreement to make the process smoother

Who Takes the Plan Support Agreement?

This agreement is drafted between a debtor and significant creditors of a company to propose restructuring plans at the time of filing chapter 11 bankruptcy.

Purpose of the Plan Support Agreement

The purpose of this agreement is to assure the investors and the lenders about the solvency of the business. Chapter 11 proceedings are complex and require significant resources and expenses. To expedite this process, debtors and creditors enter into an agreement for restructuring debt in a way that the company remains solvent and maintains a significant part of its goodwill and trust the investors and the creditors have put in it.

Contents of the Plan Support Agreement

standard debtor plan support agreement form contains the following content:

• Effective date of commencement of the agreement and its validity
• Agreement of the significant noteholders or stockholders beyond a certain holding amount
• Term sheet and amended plan
• Rights of the consenting noteholders
• Transfers of the noteholders with regard to their holding
• Agreements by the company
• Termination of the notice by consenting noteholders beyond an aggregate noteholding
• Automatic and mutual termination
• Effect of termination
• Representation and warranties
• Governing law and jurisdiction
• Waiver of trial by jury
• Sections of the agreement that are still valid after termination
• Successors and assignment
• Severability
• Notices
• Reservation of rights and no admission
• Representation by counsel
• Joint and several liability
• Specific performance
• Disclosures

How to Draft the Plan Support Agreement?

When drafting an agreement, certain points would have to be kept in mind

• The term sheet and amended plans
• Assignments and successors to the agreement
• Sections of the agreement that would still be valid after the termination date
• Transfers of the stock by the creditors and noteholders
• Consent and withdrawal of consent by such noteholders
• Nature of specific performance

Negotiation Strategy

Before filing for chapter 11 bankruptcy, the company will seek binding support of the creditors in the form of this agreement. Since, according to the code of chapter 11, there must be at least impaired accepting class of voters that are in favour of the agreement.

The other part of negotiation is the obligations of both the parties in the contract. Negotiations will also happen with regard to the flexibility of operations in case the value of the company changes during the course of operations and the creditors that are the fulcrum here might not change their holding. There are also other parts with regard to specific performance, continued practice of the banks among all

Benefits & Drawbacks of the Plan Support Agreement

• The plan may not delay the confirmation of the creditors
• Support and vote will be in accordance with the PSA
• Claims related to PSA might not be assigned further
• Specific performance and fiduciary arrangements as a remedy for breach
• Provides creditors with important milestones regarding the Chapter 11 provisions
• Payment rates and interests could be favorable to the creditors

What Happens in Case of Violation?

In case of violation of the contract, the chapter 11 proceedings will ensure that the provisions take on the form of gross negligence or fraud. So a court appointed trustee would takeover the operation of the business which will prohibit the business from entering into any contracts or taking any loans. All the provisions pertaining to breach of contract under chapter 11 would be applicable here

A PSA will help the company stay afloat even when it files for bankruptcy. This way, the financing it will receive can help the business survive and restructure the debt into more favorable terms.

[ Also Read: Loan Agreement ]

Sample for Plan Support Agreement

A sample of the agreement can be downloaded from below.

Download this USA Attorney made Original Agreement for only $9.99