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ch25 - Chapter 25 Bankruptcy Reorganization and Liquidation...

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Chapter 25 Bankruptcy, Reorganization, and Liquidation ANSWERS TO BEGINNING-OF-CHAPTER QUESTIONS 25-1 Bankruptcies occur in firms of all sizes. Small firms, with fewer creditors, are often able to work out informal settlements and thus avoid the time and expense of formal bankruptcy. Ross Corporation, described in Question 3, is probably too large, and it has too many creditors, to work out an informal settlement. If Ross attempted to resolve its problems informally, the attempt would probably fail, and then it would have to resort to the federal bankruptcy court. Note that if there had been fewer creditors, and particularly if most of the debt were owed to a few banks, then the chances of an informal resolution would be better. But with many holders of the publicly traded bonds, 15 banks, and 250 unsecured creditors, there would probably be too many holdouts to reach an informal resolution. 25-2 The judge in a federal bankruptcy proceeding can abrogate all contracts, including labor contracts. If a contract requires payments greater than the company’s cash flows can support, then the judge can order that payments be scaled back to a level the company can afford. Labor contracts were abrogated for a number of firms that were hit with asbestos suits, notably Johns Manville, and currently several airlines are in bankruptcy proceedings under which labor contracts will likely be changed. 25-3 a. As noted above, is probably too large, and it has too many creditors, to work out an informal settlement. For a company this large and complex, the federal bankruptcy system will almost certainly have to be used. b. The two key chapters are Chapter 11, which spells out how a company can be reorganized and thus allowed to continue in existence, and Chapter 7, which spells out the procedures for liquidation. c. Management generally initiates bankruptcy proceedings. One of its creditors whose debt is in default might be threatening to get a court order attaching the company’s bank account or foreclosing on a piece of property, and this action might put the company out of business. However, the company could head this off by filing for protection under the Bankruptcy Code. That filing would stop the creditors from taking action to seize the company’s property, and the bankruptcy court would hold hearings designed to determine the best course of action. d. The company could file for liquidation under Chapter 7, but managements generally try to save the company, and that means reorganizing under Chapter 11. If management cannot come up with a feasible reorganization plan as judged by the Court, then it will be ordered to liquidate under Chapter 7. Managers have 120 days in which to file a plan of reorganization. They can take longer than 120 days, but after that time other parties, especially creditors, can also file plans, and creditors Answers and Solutions: 25 - 1
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might file a plan that called for a liquidation or a reorganization under a new management.
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