Chapter 27 - Chapter 27: Bankruptcy and Insolvency Business...

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Chapter 27: Bankruptcy and Insolvency Business Failures in order to ensure that both the business in difficulty and its creditors are treated fairly, a body of law, generically called insolvency law, has evolved Debtor Options if a business is no longer able to cope with a specific debt or its obligations, there are several possibilities to be explored – ranging from informal negotiations to bankruptcy Informal Steps before thinking about bankruptcy, a business may first try to solve their financial distress by way of a negotiated settlement if they can convince the creditors that the business can be salvaged, they may be willing to make concession in terms of payment Proceedings before Bankruptcy trustee in bankruptcy: the officer assigned legal responsibility for administering the affairs of bankrupt corps or individuals trustees are practicing professionals whose decision to take on cases is based on two factors: (1) is there any conflict of interest – perhaps the creditor is an existing client (2) does the client have sufficient assets in the estate to pay for the trustee’s services? At the first meeting the trustee begins assessing the estate and prepares a preliminary statement of assets and obligations Proposal: a contractual agreement b/w the debtor and creditors that allows an insolvent debtor to reorganize and continue in business if successful the debtor will benefit and creditors will receive a greater portion of their debts than they would if the business ceased an alternative to the proposal is an arrangement under the companies’ creditors arrangement act (CCAA) which is used for corps that have debts over $5M and have considerable impact on the broader business community both procedures enable the debtor to seek bankruptcy protection while the proposal is under development DIP (dent-in-possession): when the debtor seeks new bank financing A proposal is designed to achieve three purposes: (1) reduce the amount to be paid to creditors while debtor retains assets to carry on business (2) extend the time for payment claims
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(3) arrange for the trustee to control assets for the benefit of the creditors for the period of the proposal Because of the risk of proposals being used as delaying tactics, they operate under rigid time lines For approval purposes, credits are divided into classes with common interests Within each class, a majority of creditors who hold 2/3 of the debt in that class must approve the proposal If any class does not approve then there is a deemed assignment in bankruptcy by the debtor If the proposal is approved by creditors it must be approved by the court New debts are not covered by the proposal and typically must be paid in full Any default on the proposal terms can lead to bankruptcy Bankruptcy If the proposal option does not work then the business can attempt to carry on, cease the business, or make an assignment in bankruptcy, which means the
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Chapter 27 - Chapter 27: Bankruptcy and Insolvency Business...

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