American Apparel Shop Front
A man walks past an American Apparel store in New York June 19, 2014. Reuters/Brendan McDermid

Known for its basic clothing staples, sweatshop-free status, and racy advertisements, US fashion retailer American Apparel has had its bankruptcy plan approved in court on Monday.

The US Bankruptcy Court for the District of Delaware confirmed American Apparel will undergo an amended prearranged plan of reorganisation, which include the company’s lender converting US$230 million of secured debt into equity, provision of US$40 million of exit financing, and provision of a US$40 million asset-backed loan.

American Apparel’s CEO Paul Schneider said confirmation of the bankruptcy plan was “a new day for the company” and a positive outcome for its customers, vendors and employees.

“With this milestone behind us, we are now fully focused on executing our turnaround strategy as we continue working to drive revenue across our wholesale, retail and e-commerce businesses; create innovative, new and relevant products; launch new design and merchandising initiatives; and continue to deliver innovative and inclusive award-winning marketing campaigns.

"We would like to thank our investors, our customers, and our employees for their loyalty and support during our restructuring. I know we can work towards a new future for the Company and concentrate on what matters: making and selling great clothing, with a social conscience."

American Apparel’s founder and former CEO Dov Charney said he was disappointed by the judge's decision to hand ownership of American Apparel to its bondholder.

The US Bankruptcy Judge Brendan Shannon rejected Charney’s US $320 million takeover plan and claims the company would fail without him.

“I have been working tirelessly for nearly two years to avoid this outcome in an effort to protect value for the company's various stakeholders. Now all stockholders will have their shares and value extinguished,” said Charney.

“Many of the company's loyal vendors will recover only cents on the dollar of what the company owes them. And the company's workers, given current management's inability to generate profits, face a highly uncertain future.

“It is without question that the debtors, Standard General and the bondholders carefully orchestrated a strategy to pass the Company over to the bondholders without exposing it to fair market test or bidding.

"This is a transfer of wealth from artists, creators and vendors - from Main Street to Wall Street hedge funds."

Following his departure from American Apparel, Charney claims he tried to buy the company back five times.

Since its establishment in 1989, the Los Angeles-based retailer has opened 218 retail outlets in 19 countries around the world, including five in Australia. American Apparel employs approximately 8,700 people and sells its goods online to over 50 countries.

American Apparel first began posting losses in 2010, and filed for bankruptcy in October 2015.

Some media outlets have reported that American Apparel ousted Charney in 2014 for using ethnic slurs against workers and keeping videos on a company server of himself engaging in sex acts with models and employees.

However, Charney has told International Business Times was fired in December 2014 for allegedly misusing company funds and failing to stop a subordinate from defaming former employees. He has denied the allegations.