REMEDIES FOR A

FAILING COMPANY
DEGREE’S OF FAILURE

Equitable Insolvency - debtor’s general inability to pay debts as

they become due.

Legal insolvency - liabilities of a company exceed its assets

“at a fair valuation.”

Financial failure - includes the entire range of situations between

these two extremes

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Voluntary Settlements

Legal Proceedings

Liquidation

Reorganization

Negotiated Settlements
VOLUNTARY SETTLEMENT

➜ Extension - involves creditors postponing the maturity

of their obligations.

➜ Composition - involves a pro rata settlement of

creditors’ claims in cash or in cash and promissory
notes.

➜ Voluntary Liquidation - represents an orderly private

liquidation of a company away from the bankruptcy
courts.

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LEGAL PROCEEDINGS

➜ Legal procedures undertaken in connection with a

failing company fall under bankruptcy law as decreed
through bankruptcy courts.

➜ Bankruptcy law concerned with only two pertain to

business failure which is liquidation and rehabilitation.

➜ To give the debtor breathing space to propose a solution

to the problem.

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Liquidation

➜ Only feasible alternative.

The order of distribution

➜ 1. Administrative expenses associated with liquidating the property, including the
trustee’s fee and attorney fees
➜ 2. Creditor claims that arise in the ordinary course of the debtor’s business from the
time the case starts to the time a trustee is appointed
➜ 3. Wages earned by employees within 90 days of the bankruptcy petition (limited to
$2,000 per employee)
➜ 4. Claims for contributions to employee benefit plans for services rendered within 180
days of the bankruptcy petition (limited to $2,000 per employee)
➜ 5. Claims of customers who make cash deposits for goods or services not provided by
the debt or (limited to $900 per customer)
➜ 6. Taxes owed
➜ 7. Unsecured claims either filed on time or tardily filed if the creditor did not know of
the bankruptcy
➜ 8. Unsecured claims filed late by creditors who had knowledge of the bankruptcy
➜ 9. Fines and punitive damages
➜ 10. Interest that accrues to claims after the date of the petition

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Reorganization

➜ Recasting of the capital structure of a financially troubled

company.
➜ In a reorganization, the plan should be fair, equitable, and
feasible.
➜ Reorganization Plan
• the total valuation of the reorganized company must
be determined.
• to formulate a new capital structure for the company
to reduce fixed charges, so that there will be an adequate
coverage margin.
• involves the valuation of the old securities and their
exchange for new securities.

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Negotiated Settlements

➜ Avoids the uncertainty that comes with a trial and/or an

appeal. In order to obtain the best settlement possible,
you must first accurately and objectively assess the
risks of not settling. 

➜ Prepackaged bankruptcy (prepack) - A reorganization

that a majority of a company’s creditors have approved
prior to the beginning of a bankruptcy proceeding.

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Thankyou!