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cfortunato
cfortunato, Attorney
Category: Bankruptcy Law
Satisfied Customers: 8023
Experience:  Bankruptcy professor.
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A company with big plans that didnt work out is reduced to

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A company with big plans that didn't work out is reduced to a profit of $50,000/year with no reasonable prediction of more. Unfortunately they owe $1,000,000 split among five different creditors which are all private loans now in default. The company has about $500,000 in cash asset value. The creditors see no chance of every getting paid so they wish to put the company into involuntary bankruptcy so as to recover $500,000 or whatever that final amount might be. However, the owner of the company will be angry and might well pusue a scorched earth policy, i.e. use the company's money to finance his legal bills and ask the court to give him many months to run the business based on some hokey claim that some speculative project will hit big and he will be able to pay off the debts in default. What would actually happen if he was allowed to do this is that the company would run at a constant loss and that $500,000 in redeemable value (marketable inventory and liquid assets) that is there now may be depleted to zero which would probably make that owner quite pleased he got even. Is this a possible scenario? Can this owner be prevented from doing this? How? Any other reflections on this matter you may have would be very appreciated.

Hi Customer,

Are the creditors planning on filing an involuntary Chapter 7 or Chapter 11?

Customer: replied 6 years ago.
I know the difference between Chapters 7 and 11 but not enough to quite have a strategy. The creditors would gladly have this company to own and run but I suspect (and your opinion would be good to know) that Chapter 11 wouldn't do that. I think it would only give current ownership a chance to right the ship, but there is no righting the ship where the creditors can get paid because the business model doesn't produce that kind of money even if successful. So I think a dissolution is called for (Chapter 7?). Either a new group including the creditors can make an offer to the court for the company in tact, or the creditors would be okay with assigning the assets to the creditors for perhaps 50% on the dollar at the end of the day. So I guess I have these questions: 1. Is Chapter 7 the right course based on thisd situation? 2. Can the owner still maintain control and run down the company for spite? 3. How do we thwart that if we can? 4. Is there a strategy or way for a new group to take over the company (leaving the old owner out) like General Motors I assume? 5. If number 4 is possible then how could this happen quickly enough or how could a new group (with new capital it is willing to use) control things so while the company goes through a bankruptcy transition to the new group the customers continue to be served and the employees have jobs? The old owner may want to do anything he can to see things crash and burn. How do you see handling this?

1) Given the information provided, including the concern for depletion of assets, it does make sense to submit a petition for an involuntary Chapter 7 - which means liquidation.

2) Chapter 7 means immediate liquidation, so there is no more running of the company.

3) see #2

4) If an involuntary Chapter 11 is filed, the company will continue to run - for the benefit of the creditors - and under the supervision of the Bankruptcy court. Because of this supervision, it will be difficult for the owner to deplete the assets.

5) The solution to this problem is to file an involuntary Chapter 7. The creditors decide which Chapter to file. If it appears that a Chapter 7 will be more beneficial to the creditors, that is obviously the one to choose.

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Customer: replied 6 years ago.

In respect to Chapter 7, I was under the impression that current ownership can submit a plan which it claims it will execute and that the court will often grant many months to the owner to do that. Is this just rumor I heard and unlikely to happen or is it credible?

 

In Chapter 7 liquidation, would an offer be entertained by the court from the new group to pay all of the company's debts and take all the assets bundled in tact as opposed to liquidating individual assets? If so, how long might this take. You say there is no running of the company while the court processes the liquidation. Is it your experience that the court will be receptive to a new group of the main creditors who are maximizing every creditor's rights and claims?

 

Or can this takeover of the company only happen when Chapter 11 is what is filed for?

 

But isn't it true of Chapter 11 that the current ownership still exists? If true then that is a deal breaker for these creditors so are we only left with Chapter 7; and again, can the whole company be taken over that way in tact or do the creditors have to take assets piecemeal and try to put Humpty-Dumpty back together again.

 

All knowledge of Chapter 11 is from textbooks - no practical experience - so will opt out of this question so someone else can help you further.

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