Lecture-11-Bankruptcy+Liquidation+and+Reorganization

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Unformatted text preview: s for their acceptance. Under the Bankruptcy Reform Act, creditors and owners are separated into groups with similar types of claims. In the case of creditor groups, approval of the plan is required by holders of at least two­thirds of the dollar amount of claims, as well as by a numerical majority of creditors. In the case of ownership groups (preferred and common stockholders), two­thirds of the shares in each group must approve the reorganization plan for it to be accepted. Once accepted and confirmed by the court, the plan is put into effect as soon as possible. 22 Reorganization in Bankruptcy­Advantages Avoids holdout problems ­When the claimants are unable to find an agreement, they might not approve the restructuring plan, even when this will produce a sub­ optimal outcome such as a liquidation (which will waste the value of the firm as an on­going­ concern) or a formal bankruptcy procedure (which is more expensive and possibly leads to more inferior results for creditors), this is called the hold out problem. Due to automatic stay provision (is one of the provisions that mitigates the common pool problem by forcing all creditors to cease and desist attempts to collect money from the bankrupt firm until after a bankruptcy court has decided on the best course of action) avoids common pool problem. 23 Reorganization in Bankruptcy­Advantages The “common pool problem” refers to a situation where creditors are owed more than the value of the firm’s assets. Here each individual creditor might try to collect what was owed to him or her quickly, knowing that there was not enough to satisfy all creditors. It might be that the company would be worth more, hence creditors in total would receive more, if the firm were reorganized, but if one creditor seized some vital property, the company might be put out of business and forced to liquidate. Interest and principal payments may be delayed without penalty until reorganization plan is approved. 24 Reorganization in Bankruptcy­Advantages Permits the firm...
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