Lecture-11-Bankruptcy+Liquidation+and+Reorganization

Inpurelegal termsthisiscalleddissolution 18

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Unformatted text preview: nt or fraud is suspected. Used only in unusual circumstances. 17 (More... ) Voluntary/involuntary bankruptcy and Liquidation Voluntary bankruptcy: A bankruptcy petition filed in federal court by the distressed firm’s management. Involuntary bankruptcy: A bankruptcy petition filed in federal court by the distressed firm’s creditors. When all the assets of the company are completely realized and all liabilities are completely settled, and affair of the company are fully wound up, the company is liquidated. This is the end of the company's life. After liquidation, the company dies; it has no legal existence, no assets, no liabilities, no management, and nothing else. In pure legal terms, this is called "Dissolution" 18 What are the major differences between an informal reorganization and reorganization in bankruptcy? Informal Reorganization: Less costly Relatively simple to create Typically allows creditors to recover more money and sooner. (More...) 19 Reorganization in Bankruptcy­Procedure A reorganization petition under Chapter 11 must be filed in a federal bankruptcy court. On 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. 20 Reorganization in Bankruptcy­Procedure 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, enough funds to cover fixed charges, adequate credit prospects, and the ability to retire or refund debts as proposed by the plan. 21 Reorganization in Bankruptcy­Procedure Once approved, the plan and the disclosure statement are given to the firm’s creditors and shareholder...
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