BANKRUPTCY
REORGANIZATION
AND LIQUIDATION
P R E S E N T E D B Y :
K I M B E A R L Y C H E N G , M B A
MAJOR TYPES OF
BUSINESS FAILURE
01 02 03 04
MISMANAGEMENT POOR ECONOMIC COMPANY
FINANCIAL ACTIVITY MATURITY
ACTIONS
BANKRUPTCY VS. TECHNICAL INSOLVENCY
BANKRUPTCY TECHNICAL
INSOLVENCY
WHAT IS IT? WHAT IS IT?
A determination of insolvency a situation where a company is
made by a court of law with not in a position to honor its
resulting legal orders intended current Liabilities including short-
to resolve the insolvency. term borrowings which may
arise even in the case of
profitable companies.
WHAT IS IT?
An arrangement between technically insolvent
or bankrupt firm and its creditors, enabling it
VOLUNTARY to bypass many of the costs involved in legal
bankruptcy proceedings
SETTLEMENT
NOTES:
TO SUSTAIN THE FIRM
By sustaining, the creditor can continue to receive
business from it.
Extension - Creditors receive payment in full, but not
immediately.
Composition - Pro-rata (proportional) cash settlement
of creditor claims by the debtor firm. A uniform
percentage of each dollar owed is paid.
Creditor Control - Creditor committee replaces the
firm's operating management and operates the firm
until all claims are settled.
MAY RESULT TO LIQUIDATION
Private - Debtor is willing to accept liquidation. May
have quicker and higher settlements.
Legal - Legal procedures as provided by the
bankruptcy law
PRIVATE LIQUIDATION
VOLUNTARY VOLUNTARY LIQUIDATION
SETTLEMENT Objective of the voluntary liquidation process is to
recover as much per dollar as possible.
Common stockholders can't receive any funds un til all
the other claimants have been satisfied.
Common Procedure:
1. Creditor meeting to make an assignment by passing
power to liquidate the firm's assets to an adjustment
bureau, trade association, or third party (designated
as an ASSIGNEE/TRUSTEE)
2. Once assets are liquidated, the trustee distributes the
recovered funds to creditors, and then the owners (if
there's any left over).
3. Creditors will sign a release attesting to a satisfactory
settlement of their claims.
REORGANIZATION
IN BANKRUPTCY
voluntary reorganization
A petition filed by a failed firm on its own behalf
for reorganizing its structure and paying its
creditors
involuntary reorganization
A petition initiated by an outside party,
usually a creditor, for the reorganization and
payment of creditors of the failed firm.
01 02
INVOLUNTARY
REORGANIZATION
If a firm has past-due Three or more creditors can
debts of $5k or more prove that they have
aggregate unpaid claims of
$5k against the firm. If the
firm has fewer than 12
creditors, any creditor that's
owed more than $5k can
03 file the petition.
THe firm is insolvent, which means that (a) it's not paying its
debts as they come due, (b) within the preceding 120 days a
custodian (3rd 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 The Fair, Equitable, and Feasible Plan
A plan is considered such if it:
Maintains the priorities of the contractual claims of the
1. A reorganization petition is filed in court (a creditors, preferred stockholders, and common
"Chapter 11" in the USA). The filing firm will then stockholders.
become the Debtor in ossession (DIP) of the It must be workable.
The reorganized corporation must have sufficient working
assets.
capital, enough funds to cover fixed costs, adequate credit
2. If creditor object, a Trustee will be appointed. porspects, and ample ability to retire or refund debts.
3. After reviewing the situation, the DIP submits a
reorganization plan and a disclosure statement
summarizing the plan to the bankruptcy court.
4. A hearing will commence to judge whether the
plan is fair, equitable, and feasible, apart from For Acceptance
whether or not the disclosure statement has
adequate info. Creditors and Owners are separated into groups with similar types
5. Judge will make a ruling based on the plan's of claims:
value. CREDITOR GROUPS - Approval is required by holders of at
6. Once approved, the plan and disclosure least 2/3 of the dollar amount of claims. Majority of the
atatement will be given to the creditors and creditors must approve as well.
shareholders for acceptance. OWNERSHIP GROUPS - Preferred and Common Stockholders.
7. After gaining approval and acceptance, it will be 2/3 of the shares in each group must approve of the plan
accepted and confirmed by the court. before it is accepted.
8. The plan is put into effect as soon as possible.
DIP ROLE GOING CONCERN
A company's ability to make enough
Valuation of the firm - to determine whether money to stay afloat or to avoid
bankruptcy.
reorganization is appropriate.
DIP must estimate both the liquidation value
of the business and its value as a "going
concern". DIP must establish a plan for exchanging
Recommends liquidation if the value of outstanding obligations for new securities after the
the firm as a going concern is lower than revised capital structure is determined.
its liquidation value. Reminder: OBSERVE PRIORITIES. Here is order of
Recommends reorganization if otherwise, satisfaction:
and will draw a reorganization plan. Senior Claims (higher legal priority) - must
Since most firms' financial difficulties come from receive a claim on new capital equal to their
high fixed charges, the capital structure is previous claim
recapitalized to reduce them. Here, debts are Junior Claims
exchanged for equity or the maturities of debts Common stockholders - Don't necessarily
are extended. have to get the same type of security held
When recapitalizing, the DIP seeks to build a mix before. Can receive a combination of
of debt and equity that will allow the firm to securities.
meet its debts and provide a reasonable level of Once the DIP has determined the new capital
earnings for the owners. structure and distribution of capital, it will submit the
reorganization plan and disclosure statement to the
court.
LIQUIDATION
IN BANKRUPTCY
WHAT IS IT?
Occurs once the bankruptcy court has
determined that reorganization isn't possible.
((The "Chapter 7" in the USA)
A petition for reorganization must
be filed first!
If there's no petition, if one is filed and
denied, or if the reorganization plan is
denied, liquidation will commence.
PROCEDURES PRIORITY OF CLAIMS
The trustee ahs to liquidate the firm's assets and distribute the
1. When a firm is judged "BANKRUPT", the judge proceeds to the holders of PROVABLE CLAIMS (based on
ay appoint a Trustee to perform duties required standards provided by the court).
in administering bankruptcy. The priority of claims must be maintained by the Trustee when
2. Trustee takes charge of the property of the firm distributing the funds from liquidation.
and protects the interest of the creditors. Any secured creditors have specific assets pledged as
3. Meeting of creditors must be held betwee 20- collateral and, in liquidation, receive proceeds from the sale of
40 days after the judgment. Here, creditors are those assets. If they are inadequate to fully satisfy their claims,
made aware of the prospect of liquidation. they become unsecured or general creditors for the
4. Trustee is given the responsibility to liquidate unrecovered amount because the specific collateral no longer
the firm, keep records, examine creditor claims, exists.
disburse cash, furnish info if required, and make These and all other unsecured creditors will proportionally
final liquidation reports. divide the remaining funds after all previous claims have been
5. Occasionally, the court will call for subsequent paid. If the proceeds from sale of usecured assets are in
creditor meetings, but one final meeting for excess of the claims, the excess funds become available to
closing the bankruptcy is required. meet the claims of the unsecured creditors.
SECURED > UNSECURED > PREFERRED STOCKHOLDER > COMMON STOCKHOLDER
ORDER OF PRIORITY OF CLAIMS OF A FAILED FIRM
(CHAPTER 7 - USA)
PERSONAL FINANCE
WAGE EARNER PLAN STRAIGHT BANKRUPTCY
"WORK-OUT" LEGAL PROCEDURE SIMILAR TO
SIMILAR TO REORGANIZATION LIQUIDATION
CREDITORS MUST AGREE AND ALLOWS THE DEBTOR TO "WIPE
ALL INTEREST PAYMENTS AS THE SLATE CLEAN AND START
WELL AS FEES ARE WAIVED ANEW"
DURING THE DEBT-REPAYMENT DOES NOT ELIMINATE ALL
PERIOD DEBTOR OBLIGATIONS.
IF APPROVED, THE PERSON WILL DEBTOR DOES NOT LOSE ALL OF
RETAIN THE USE OF AND TITLE HIS/HER ASSETS.
TO ALL ASSETS, MAKES
PAYMENTS TO THE COURT,
WHICH THEN PAYS OFF ALL
CREDITORS
NOW IT'S REALLY
ENDE
T H A N K Y O U F O R O U R J O U R N E Y T O G E T H E R T H I S S E M E S T E R .
H O P E F U L L Y Y O U A L L L E A R N E D F R O M O U R L E C T U R E S A N D
E X E R C I S E S . D O U S E E V E R Y T H I N G Y O U ' V E L E A R N E D I N T H E
F U T U R E .
G O O D L U C K I N A L L Y O U R E N D E A V O U R S !
U N T I L W E S E E E A C H O T H E R A G A I N !