In re Exide Technologies

To understand this case and the importance of valuation in bankruptcy, you need to know 11 U.S.C. 1129(a)(8)/(b)(1). This provision contains the key condition under which a judge can accept a bankruptcy plan without the consent of a class of impaired claimants. First, no junior claim can be paid unless all senior claims are paid in full ("absolute priority"). Second, however, senior claims cannot be paid more than in full. The only way to ensure both of these is to value the business and hence the equity of the reorganized business exactly. If it is valued too high, senior claims will get too little. If it is valued too low, junior claims will get too little. Not surprisingly, senior claimants always argue for a low valuation of the business, while junior claimants including shareholders argue for a high valuation A numerical example For example, imagine that the bankrupt company has $50 of senior debt and $50 of junior debt. For simplicity, consider an all-equity reorganization, i.e., a reorganization in which all of the claims to be allocated are equity (the reorganized company will not have any debt). If the judge values the business at $50, section 1129 requires that she allocate all the new equity to senior claimants and wipe out juniors and old equity. By contrast, if the judge values the business at $125, section 1129 requires that she allocate $50/$125=40% of the equity to each of the senior and junior groups, and the remaining 20% to the old shareholders.