Are We There Yet?Going Bankrupt:
It all starts by defaulting on an obligation: Money owed to creditors or to suppliers is not paid on time, interest payments due on bank loans or on corporate bonds issued to the public are withheld. It may be a temporary problem - or a permanent one.
As time goes by, the creditors gear up and litigate in a court of law or in a court of arbitration. This is a technical or equity insolvency status.
But this is not the only way that a company can be rendered insolvent. It could also run liabilities which will outweigh its assets. This is bankruptcy insolvency. True, there is a debate raging as to what is the best method to appraise the assets and the liabilities. Should these appraisals be based on market prices - or on book value?
There is not one decisive answer. In most cases, there is strong reliance on the figures in the balance sheet.
If the negotiations with the creditors of the company (as to how to settle the dispute arising from the company’s default) fails, the company itself can file (=ask the court) for bankruptcy in a "voluntary bankruptcy filing".
Enter the court. It is only one player (albeit, the most important one) in this unfolding, complex drama. The court does not participate directly in the script. To say its lines - court officials are appointed. They work hand in hand with the representatives of the creditors (mostly lawyers) and with the management and the owners of the defunct company.
They face a tough decision: should they liquidate the company? In other words, should they terminate its business life by (among other things) selling its assets?
The proceeds of the sale of the assets is divided (as "bankruptcy dividend") among the creditors. It makes sense to choose this route only if the (money) value generated by liquidation exceeds the (money) the company as a going concern, as a living, functioning, entity.
The company can, thus, go into "straight bankruptcy". The secured creditors will receive the value of the property which was used to secure their debt (the "collateral", or the "mortgage, lien"). Sometimes, they will receive the property itself - if it not easy to liquidate (=sell) it.
Once the assets of the company are sold, the first to be fully paid off will be the secured creditors. Only then will the priority creditors be paid (wholly or partially).
The priority creditors include administrative debts, unpaid wages (up to a given limit per worker), uninsured pension claims, taxes, rents, etc.
And only if there is any money left after all these payments, it will be proportionally doled out to the unsecured creditors. A mechanism called "reorganization", it must be approved by two thirds of all classes of creditors and then, again, it could be voluntary (initiated by the company) or involuntary (initiated by one to three of its creditors),to provide a fair and equitable treatment to the holders of various classes of securities of the firm (shares of different kinds and bonds of different types)
To eliminate burdensome debt obligations, which obstruct the proper functioning of the firm and hinder its chances to recover and ever repay its debts to its creditors.
To make sure that new claims received by the creditors (instead of the old, discredited, ones) equal, at least, to what they would have received in liquidation.
Examples of such new claims: owners of debentures of the firm can receive, instead, new, long term bonds (known as reorganization bonds, whose interest is payable only from profits).
Owners of subordinated debentures will, probably, become stockholders and stockholders in the insolvent firm will receive no new claims.
The chapter dealing with reorganization allows for "Arrangements" to be made between debtor and creditors: an extension or reduction of the debts.
If the company is traded in a stock exchange, the Securities and Exchange Commission advises the court as to the best procedure to adopt in case of reorganization.
A more in-depth study of the bankruptcy laws shows that they allow for three ways to tackle a state of malignant insolvency which threatens the well being and the continued functioning of the firm:
Liquidation:
A District court appoints an "interim trustee" with broad powers. Such a trustee can also be appointed at the request of the creditors and by them.
The Interim Trustee is empowered to do the following: Liquidate property and make distribution of liquidating dividends to creditors
Make management changes
Arrange unsecured financing for the firm
Operate the debtor business to prevent further losses
By filing a bond, the debtor (really, the owners of the debtor) is able to regain possession of the business from the trustee.
Reorganization:
Unless the court rules otherwise, the debtor remains in possession and in control of the business and the debtor and the creditors allowed to work together flexibly. They are encouraged to reach a settlement by compromise and agreement rather than by court adjudication.
Maybe the biggest legal revolution is the relaxation of the ages old ABSOLUTE PRIORITY rule, that says that the claims of creditors have categorical precedence over ownership claims. From now on, the interests of the creditors have to be balanced with the interests of the owners and even with the larger good of the community and society at large.
And so, it allows the debtor and creditors to be in direct touch, to negotiate payment schedules, the restructuring of old debts, even the granting of new loans by the same disaffected creditors to the same irresponsible debtor.
It allows for reorganization under court appointed independent manager (trustee) who is responsible mainly for the filing of reorganization plans with the court - and for verifying strict adherence to them by both debtor and creditors.
I put my faith in Tom when he stepped in through the door and I refuse to believe that a man of his knowledge would just walk in this company and..........2+2= keeps adding up to 5,... Something wrong here................2+2=5???