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MCS 3040 (220)
Chapter 26

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University of Guelph
Marketing and Consumer Studies
MCS 3040
Joseph Radocchia

Chapter 27 Bankruptcy & Insolvency Business Failure  When a business or economy experiences downturn, even healthy businesses run into difficulties  To ensure both the business in hard times and its creditors are treated fairly, s body of law, generically called insolvency law, has evolved.  Law provides several options for debtors & creditors as well as a framework for the ultimate financial failure - bankruptcy Debtor Options  If a business isn’t able to cope with a specific debt or its obligations in general, there are several possibilities to be explored – ranging from informal negotiations to bankruptcy. Informal Steps  Before considering bankruptcy, many business may 1 try to solve their financial distress by way of negotiated settlement  Could try to convince creditors that business can be saved  A settlement can be formal/informal depending on the circumstances  Creditors may meet with debtors sometimes with a facilitator to try to reach an agreement that is acceptable to both parties, and allows business to keep operating/terminate without expensive legal proceedings  One danger is that some creditors will attempt to push through an agreement that is unfair to others or that simply ignores them  Good to have facilitator b/c they are trained to identify these risks  In hopeless cases, negotiations may not be a good option or may fail Proceedings before bankruptcy  If informal negotiations fail to produce a settlement with creditors and pressure continues from cr editors, formal proceedings may be required  Debtors should seek advice from a lawyer or accountant with insolvency expertise and will eventually need a trustee in bankruptcy who has legal authority to administer legal proceedings. Trustee in bankruptcy: The officer assigned legal responsibility for administering the affairs if bankrupt corporations or individuals  Trustees choose to take on cases based on (1) is there any conflict of interest (maybe an existing client) & (2) does the client have sufficient assets in the estate to pay for the trustee’s services?  If a debtor cant find trustee to accept appointment (which is common) the debtors only recourse mastbe some form of debt counseling services  The 1 meeting of the trustee and the debtor, the trustee outlines the nature of the services offered  Trustee starts assessing the estate and prepares a preliminary statement of assets and obligations Estate: The collective term for the assets of the insolvent or bankrupt Insolvent: Unable to meet financial obligations as they become due or having insufficient assets to meet obligations Proposal: A contractual agreement between the debtor & creditors that allows an involvement debtor to reorganize and continue in business  If proposal is successful, the debtor will benefit and the creditor will receive a greater portion of their debts then they would if the business ceased  An alternative to a proposal is an arrangement under the Companies’ creditors arrangement act (CCAA) which is used for corporations that have debt over 5 million $ and have broader impact on greater business community  Both paths allow debtor to seek new bank financing to cover wages and other operating expenses during the period of bankruptcy protection  While the goal of a proposal is to allow the business to continue, this can occur only if the recovery is feasible and creditors agree to such an arrangement  A proposal is designed to achieve 3 purposes… 1. Reduce amount paid to creditors while the debtor retains assets to carry out business 2. Extent the time payment of claims 3. To arrange for the trustee to control assets for the benefit of the creditors for the period of the proposal  B/c of the risk of proposals being used as delaying tactics, they operate under rigid timelines  Proposals are contracts between debtor & creditors and can come in variety of forms  Creditors are divided into classes w/ common interests & within each class, a majority of creditors who hold 2/3 of the debt in that class must approve the proposal  If any class doesn't approve, there is a deemed assignment in bankruptcy by the debtor  If approved by creditors it must then be approved by the court  Business will function in accordance w/ terms of proposal under the supervision of the trustee  All creditors are now bound  New debts aren’t covered by proposal  Any default on proposal terms can lead to bankruptcy Assignment in bankruptcy: The debtor’s voluntary assignment to the trustee in bankruptcy of legal title to the debtor’s property for the benefit of creditors Bankruptcy  If proposal doesn't work, business can attempt to carry on, cease business or make an assignment in bankruptcy (which means debtor assigns all property for the general benefit of his creditors, to the trustee in bankruptcy Bankrupt: The legal status of a debtor who has made an assignment or against whom a bankruptcy order has been made Creditor Options  If a debtor is late paying creditor, they have options  Creditor should 1 try to determine the extent of the businesses financial health o Find out if it temporary lapse or serious difficulty o Do they owe other creditors  A supplier can assert pressure and say they'll stop supplying if they aren’t paid  Creditors can negotiate ad create a formal proposal  Each creditor must then decide whether its proposal arrangement is likely to produce greater recovery of debts in the long run than exercising legal remedies Creditors may take formal action…  Any creditor can sue based on debt  A secured creditor can take private action against specific assets  Creditors may petition the debtor into bankruptcy Action Taken by secured creditors against specific assets  Most common action taken by secured creditors since what happens to the balance of the estate really is no concern to them  Contract may entitle the creditor to
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