Question

Is a business bankruptcy a legitimate tool to be used by the company to improve the value of the company? Why this opinion?

Answer 1

When You hear bankruptcy you feel that company is finished , it going under and there is no coming back , but this is not the case always , there are different types of bankruptcy depending on the situation of the company, its creditors and shareholders, the most common are chapter 7 in which there is liquidation of assets and that doesn't improve the value of the company but when we talk about chapter 11 i.e large scale re-organisation of the company that will surely improve the value of the company to a great extent . Suppose for example company is not able to breakeven because of finance expenses such as interest paid on debt , filing under chapter 11 allows company to reduce this expenses for some time , as after filing under chapter 11 , there is a automatic stay that keep creditors from attempting to collect repayment from the company . A re-organisation plan is developed with main aim to stay profitable and pay back the debt , So mainly leases , contracts are re negotiated so they can be reduced or discharged , creditors find it better than chapter 7 because they will get more favourable terms under this bankruptcy . So Different creditors are placed in different classes and are sequentially discharged according to priority and the order.
This type of bankruptcy improves the value because its main aim is to be profitable by managing expenses and increasing profitable , its not liquidating its assets but using those assets to earn profit , so it can retire its debt. This outlook helps the company increases it value .