If the firm has fewer than 12 creditors any creditor

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Unformatted text preview: tary petition against a firm can be filed if one of three conditions is met: 1. The firm has past-due debts of $5,000 or more. 2. Three or more creditors can prove that they have aggregate unpaid claims of $5,000 against the firm. If the firm has fewer than 12 creditors, any creditor that is owed more than $5,000 can file the petition. 3. The firm is insolvent, which means that (a) it is not paying its debts as they come due, (b) within the preceding 120 days a custodian (a third party) was appointed or took possession of the debtor’s property, or (c) the fair market value of the firm’s assets is less than the stated value of its liabilities. Procedures Hint Some firms, particularly those in the airline industry, have used the bankruptcy laws to prevent technical insolvency. The courts have allowed them to nullify labor contracts on the basis that to force the firm to continue to conform to the contract would cause the firm eventually to become insolvent. debtor in possession (DIP) The term for a firm that files a reorganization petition under Chapter 11 and then develops, if feasible, a reorganization plan. A reorganization petition under Chapter 11 must be filed in a federal bankruptcy court. Upon the filing of this petition, the filing firm becomes the debtor in possession (DIP) of the assets. If creditors object to the filing firm being the debtor in possession, they can ask the judge to appoint a trustee. After reviewing the firm’s situation, the debtor in possession submits a plan of reorganization and a disclosure statement summarizing the plan to the court. A hearing is held to determine whether the plan is fair, equitable, and feasible and whether the disclosure statement contains adequate information. The court’s approval or disapproval is based on its evaluation of the plan in light of these standards. A plan is considered fair and equitable if it maintains the priorities of the contractual claims of the creditors, preferred stockholders, and common stockholders. The court must also find the reorganization plan feasible, which means that it must be workable. The reorganized corporation must have sufficient working capital, sufficient funds to cover fixed charges, sufficient credit prospects, and sufficient ability to retire or refund debts as proposed by the plan. Once approved, the plan and the disclosure statement are given to the firm’s creditors and shareholders for their acceptance. Under the Bankruptcy Reform Act, creditors and owners are separated into groups with similar types of claims. 11. Firms sometimes file a voluntary petition to obtain temporary legal protection from creditors or from prolonged litigation. Once they have straightened out their financial or legal affairs—prior to further reorganization or liquidation actions—they will have the petition dismissed. Although such actions are not the intent of the bankruptcy law, difficulty in enforcing the law has allowed this abuse to occur. CHAPTER 17 FOCUS ON PRACTICE Mergers, LBOs, Divestitures, and Business Failure Picture This The year 2001 was anything but...
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This document was uploaded on 01/19/2014.

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