Rolta International- Alabama bankruptcy Court rejects Chapter 11 bankruptcy petition

In a recent judgment[1], the United States Bankruptcy Court for the Northern District of Alabama, Northern Division, passed a judgment in favor of creditors, by denying a petition of Rolta International, an information technology company, seeking Chapter 11 protection. The Court believed that Rolta International, “did not have a realistic ability to effectively reorganize”. The judgment is surprising as the purpose of Chapter 11 bankruptcy is to give an opportunity to the debtor to reorganize its assets and liabilities in order to be able to repay its debts. Chapter 11 filing enables a company to avoid complete closure of the company and instead discharge certain debts, thus giving a chance of fresh start and to continue functioning with a revised structure of debts and assets. Procedure of bankruptcy under Chapter 11 includes convening of creditor’s committees, negotiating plan proposals, and reporting requirements. However, success of the Chapter 11 filing depends on confirmation of the reorganization plan. While confirming the plan, a court generally considers few factors which includes, a) feasibility; b) good faith; c) interest of creditors; and d) being fair and equitable. Chapter 11 filing results in either, a) confirmation of plan of reorganization; b) confirmation of plans which results in liquidation of the debtor’s business; c) conversion of bankruptcy filing to another chapter of the Code; and d) dismissal of the case.

In the present case, Rolta International, the debtor claimed that it had estimated assets of $50,000 or less and estimated liabilities between $500 million and $1 billion. However, its creditors, including Pinpoint Multi-Strategy Master Fund, Value Partners Fixed Income SPC, Value Partners China High Yield Income Fund, and Value Partners Credit Opportunities Fund SP, raised objection against the petition. They hold bonds issued by the debtor and are owed more than $200 million by the debtor. Therefore, the creditors requested the Court to dismiss the petition. They alleged that the petition under Chapter 11 was filed in bad faith and was a last resort to protect itself from the deadline issued by a New York court for the company to turn over its assets and interests of subsidiaries to Pinpoint and Value Partners funds.  It is pertinent to note that the Code does not define “good faith”. However, the United States Court of Appeals, Third Circuit in In re Integrated Telecom Express, Inc., 384 F.3d 108 (3d Cir. 2004), held that “to be filed in good faith, a petition must do more than merely invoke some distributional mechanism in the Bankruptcy Code. It must seek to create or preserve some value that would otherwise be lost—not merely distributed to a different stakeholder —outside of bankruptcy.” Also, in In re Rent-A-Wreck of America, Inc., 580 B.R. 364 (Bankr. D. Del. 2018), the U.S Bankruptcy Court for the District of Delaware stated that, “chapter 11 is open only to debtors that file for bankruptcy in “good faith.” The court dismissed a Chapter 11 case as having been filed in bad faith because the debtor was not in financial distress and had filed for bankruptcy solely to reject a franchise agreement that it had been unable to terminate outside bankruptcy.

Further, the creditors also established the fact that debtors had no reasonable chance at reorganizing and emerging from Chapter 11. Therefore, the Court dismissed the debtor’s petition, stating that “because the Debtor does not have a realistic ability to effectively reorganize”.

[1] In re Rolta International, Inc, 20-82282-CRJ-11 (N.D. Ala. 2020)

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