Can a financially distressed be “forced” into bankruptcy by its creditors? In other words, is it possible for creditors to subject a distressed entity into an involuntary bankruptcy proceeding?
The answer is yes. Under Section 303 of the Bankruptcy Code, a debtor can be “forced” into an involuntary bankruptcy. 11 U.S.C.§ 303(b)(1). If a company has 12 or more creditors, an involuntary petition requires three or more creditors whose claims are not contingent as to liability or subject to a bona fide dispute as to either liability or amount to file the petition.
If the company timely objects to the involuntary filing, for the company to be placed in bankruptcy, the company also must: generally not be paying its debts as they become due unless those debts are subject to a bona fide dispute as to liability or amount, or have had a custodian appointed within the past 120 days to take possession or control of substantially all of its assets.
Stay tuned for additional posts regarding involuntary bankruptcy proceedings under Section 303 of the Bankruptcy Code.
Carl D. Neff is a bankruptcy attorney with the law firm of Fox Rothschild LLP. Carl is admitted in Delaware and regularly practices before the United States Bankruptcy Court for the District of Delaware. You can reach Carl at (302) 622-4272 or at firstname.lastname@example.org.