Cramdown is a court’s discretionary power to uphold or modify a recovery plan despite objections from some creditors. The court mediates the situation to approve a plan in the best interests of all parties involved, and if the company fails to comply, further action may be taken.
Cramdown is a slang term that refers to the discretionary powers that may be employed by a bankruptcy court when a business is attempting to file a reorganization plan. Basically, roundups are situations in which the court chooses to uphold or modify a recovery plan even though some of the creditors involved have serious objections to the final draft of the plan. A crackdown may be employed when the court determines that the company seeking bankruptcy protection is making a sincere effort to do its best to recover from a financial setback and continue operating.
While cramdown is not uncommon, most courts choose to use this ability sparingly. Often, the court will entertain detailed explanations from creditors as to why a particular plan is not acceptable to one or more classes of creditors. At the same time, the court will hear from the company seeking bankruptcy protection, in an effort to ascertain all factors relevant to the reorganization. In general, the court will try to mediate the situation so that the company and the creditors are both able to support the plan. However, if this is not possible, the court may choose to initiate a prosecution and settle the matter.
The crackdown can be in favor of the plan presented by the company, or an alternative plan that is presented by a class of creditors. It is also possible that the court will rule on the adequacy of a third recovery plan that includes elements of previously submitted plans. Ultimately, the court will attempt to approve the plan which is in the best interests of all parties involved.
Once the court issues a cramdown, the reorganization plan is approved and the bankruptcy process will proceed. In the event that the company fails to comply with the terms outlined in the approved plan, the court may also take further action that will help protect the rights of creditors even if the company has entered a default situation.
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