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Simple English definitions for legal terms
fair-and-equitable requirement
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A quick definition of fair-and-equitable requirement:
Fair-and-Equitable Requirement: A rule in bankruptcy that says if a company wants to force a plan on its creditors, the plan must be fair to everyone who is owed money. The court will look at the plan and decide if it treats each group of creditors fairly. The plan must also be accepted by at least one group of creditors and not unfairly favor one group over another. This is called a "cramdown" plan.
A more thorough explanation:
Definition: The fair-and-equitable requirement is a standard in bankruptcy law that requires a Chapter 11 plan to adequately provide for each class of interests that has not accepted the plan. This is necessary for a forced, nonconsensual Chapter 11 plan (also known as a "cramdown" plan) to be confirmed by the court.
Example: If a company files for bankruptcy and proposes a Chapter 11 plan that does not adequately provide for a certain class of creditors, such as bondholders, the court may not confirm the plan unless it meets the fair-and-equitable requirement. The court will consider the plan as a whole and weigh all the circumstances surrounding the treatment of each impaired class of interests to determine if it is fair and equitable.
The Chapter 11 cramdown plan must also be accepted by at least one impaired class of claims and not unfairly discriminate among impaired classes that have not accepted the plan.
Example: If a company proposes a Chapter 11 plan that is accepted by one class of creditors but unfairly discriminates against another class, such as giving preferential treatment to shareholders over bondholders, the court may not confirm the plan. The plan must treat all impaired classes fairly and equally.
Overall, the fair-and-equitable requirement is an important standard in bankruptcy law that ensures all classes of interests are adequately provided for in a Chapter 11 plan.