Bankruptcy and Reorganization

Bankruptcy and Reorganization 2 Bankruptcy: 1.) you decide to go 2.) or are thrown into bankruptcy by creditors • • • • • • • • • • • • • • • • • • • reorganization track or liquidation track basics on how chapter 11 works is crucial lender has mortgage on building, he can push you to bankruptcy how do you reorganize your business? o Building worth greater than loan bankruptcy judges are former lawyers o specialized jurisdiction. They usually handle routine liquidations. cram down a plan o In bankruptcy you must provide an affirmative vote from a class creditor for the plan. The first 120 days in bankruptcy: when debtor has exclusive right to the plan o This can be extended, never shortened. If one creditor sells loan on a discount, then one party may lose out. Unsecured: usually on 14 cents on the dollar. Unless the manager puts in more money, he won’t get a higher equity stock. Usually creditor’s get lion share of the equity. Most bankruptcy has a lot of debt. They have to convince creditors that in the future they will be viable and that they should NOT liquidate. There are facets to this negotiation. A small business with few creditors who see that your success going forward is likelyÆ if you got 90% of creditors to agree then you can weather a storm. If not, you can do a prepackaged Ch. 11 plan: a good plan in creditors’ eyes: approved by bankruptcy court: takes 2 or 3 months. It must have force of creditors and then you can give it to the opposing creditors (chapter 11 forces t his on the minority). What if the building is worth less than the debt? o Secured creditor is not secured o Dismiss bankruptcy case Now you go into Ch. 11 First day orders Who will you deal with? o Representatives of your secured debt. • • • • • • • • • • • • • • • • • • • • • If they are at least creditors willing to serve on the creditors’ committee o They are authorized to hire their own council ƒ Paid as expense if administration ƒ This could be expensive. Key players: Chairman of committee; committee council; creditor’s council Negotiation process then proceeds after the committees are formed. Creditors want to pay the smallest amount for negotiation. A lot of equipment is financed on a lease: the debtor must meet the terms of the lease. You can have true lease or finance lease of equipment Bankruptcy: you can sell assets in Chapter 11, before the plan, or you can do it after. You can reject stores that are dong badly, and then deal later with the unsecured debtors. 90 days before bankruptcy is when you can give preferences. The court can appoint a trustee in a Chapter 7. “examine”: does not have power of trustee o he reports facts, wrong-doings value of companies assets o the creditors can make up with their own plan if they want to after the 120 day period. This is rare. ƒ “competing plans.” “Stalking horse bidder”: a bidder who comes in as the initial bidder who may realize that they are not the highest bidder; the court may help them if he does not succeed. o Stalking horse premiums: make it less economical for others, because now they have to pay that premium. When you buy assets in an auction, you get them free of leans. A sale for less than fair value is a fraudulent conveyance. Role as a manager when your company is sliding into bankruptcy. If a company is insolent, shareholders have little interest in company—now only creditors care. o Duty shifts to the creditors. o Need to minimize loss to creditors. LBO: when management raises money to buy the company (pay off existing shareholders) Before: company has no debt, but lots of equity. After: company with debt and some equity. In order for fraudulent conveyance to succeed, the court needs to be convinced that the reasonable creditors couldn’t make it work from the get-go.