Question

Incorporation: Clients considering structuring their new business as a corporation are aware that there are complex issues to consider when accounting

for an incorporated entity. The clients often want information about the following key areas:

A. Differentiate between various forms of bankruptcy and restructuring that the clients should understand.

1. Summarize the key points of interest if the company fell on hard times and had to file voluntary bankruptcy. What ethical implications

should be considered when debating whether or not to file bankruptcy?

2. Identify the key areas of concern if the company fell on hard times and their creditors forced them into bankruptcy. What defenses are

available in this situation?

provide at least two academic sources

Answer 1

A.) Various forms of bankruptcy and restructuring that the client should understand:

Chapter 7 : Chapter 7 is all about liquidation. This is known as a settlement failure , sometimes called “straight bankruptcy ”. The precept advantage is that the debtor comes out without any future responsibility on his discharged debts. However, bankruptcy does not wipe out most mortgages or lien . If a debtor wants to keep an item (Ex: house or land ) which is security for a loan , he/she must continue these payments . If the debtor wants to discharge that land loan, then he/she must give up the land to the creditor that holds the lien.

One of the primary winding reasonableness that people choose a chapter 7 bankruptcy if they qualify under bankruptcy law of nature and if they can afford the monthly payments on the items that they want to keep is the fact that a person can bring his/her credit mark up much more quickly than if that same person filed a chapter 13 type , because he/she completes the bankruptcy case so quickly.

Chapter 13:

In a Chapter 13 proceeding, the debt or must pay all or part of his debt from the future tense income over a period of three to five years through his chapter 13 programme . For some people, the time period must be five years. If the court approves the programme of payment, the debts will be wage in full or partially by the chapter 13 regent . Most of the debt that is not remuneration as set forth by the programme of reorganization will be discharged or wiped out. In other words, if your program only provides for payment of 20% of the unsecured debt, then the remaining 80% plus any accrued interest will be discharged or wiped out upon culmination of your plan. If your plan provides for payment of no money to unsecured creditors, then the entire unsecured debt is discharged upon completion of the plan.

Chapter 11:

Chapter eleven is available to companies ( partnership or sole proprietary ) that are suffering from severe financial distress. Permission for filing Chapter 11 bankruptcy is given, if debt repayment can be abated or postponed. The private company is protected by an machine automatic stay that is initiated upon approved filing of the petition. As a result, creditors cannot take any action against the debtor . The stay eases the financial load of the debtor, during which negotiations can also take place to try to firmness the difficulties in the debtor’s financial situation.

Chapter 12:

Chapter 12 is the chapter used by farmers or commercial fishermen to reorganize their debts and continue operating their farms or fishing operations. The benefit of Chapter 12 is the reorganization plan will allow payments to be branded seasonally, when the farmer or fisherman earns his money . The limit of only being able to restructure loans in a five yr period in chapter 13 suit is not a limitation in chapter 11 or chapter 12 cases.

Restructuring is the vital form which can be discussed as:

Recapitalization:

Recapitalization requires that the private society take on another debt or lessen their equity by repurchasing share and it is usually done to alter the ownership of the private company.

Special Dividend:

A Special Dividend is a capital distribution to stockholder . Even if private troupe do or do not pay fixture dividend s, a special dividend can be issued to reconfigure the private ship's company ’s balance sheet or alter the private company’s purchase ratio

Internal Restructuring:

A private organization examines its internal process, capital structure organization , and strategic priorities. The private company then refocuses its care and resources on areas that will maximize operating performance. This can include reallocating capital to grow key sense of asset or entering new markets.

Leveraged ESOP-

An ESOP is an employee stock ownership plan where employee own a piece of music of equity in the private company. Leveraged ESOP are initiated by borrowing capital to capture a absolute majority of the equity at one fourth dimension . This equity can then be vested over a period of time to the employees.

Sale-

In this case, Cut-rate sale represents a direct divestiture of a division or subsidiary of a larger private company through a private sale of assets or its equity. This sale represents a taxable transaction. Return of the sale can be used to pay down debt, reinvest in core growth, or can be pay out as a special dividend to shareholders.

1.) According to the Securities and Exchange Commission, federal bankruptcy rules govern how companies recover from serious debts. A company might use Chapter 11 of the Bankruptcy Code to reorganize their business to try to become profitable again. Or, the company stops all operations and go completely out of business under Chapter 7 of the Bankruptcy Code. If the action is considered detrimental to the creditors, the bankruptcy court can reject the voluntary petition. If it is accepted, an order of relief is granted which halts all actions against the debtor

2.)We have some statutory defenses in favor of it, which I have listed down before:

An suffering debtor can raise any number of defenses found in 11 U.S.C § 303 to contest the involuntary petition. The following are the most common statutory defenses:

1. If there is existence of twelve or more eligible creditors.
2. Petitioning creditor’s claim is contingent or disputed as to liability or amount.
3. Debtor needs to generally pay debts as they become due.

All of the above are available as defenses to defeat the petition and must be asserted in an appropriate responsive pleading, such as a motion to dismiss or answer. If they fail to do so it will result in an immediate order of relief for the petitioning creditor or creditors.