Cram Down in Bankruptcy Proceedings
February 12, 2025
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After a firm has filed for bankruptcy, the court provides relief against creditors and even further lawsuits. However, this is a temporary situation. According to the court, the next step for the business is to re-organize itself. Now, reorganization is a broad term that could mean different things to different people. There have been bankruptcy cases wherein only the secured creditors have got paid after the reorganization process, and everybody else lost their money. Similarly, there have been cases where none of the creditors lost their money, and even the equity shareholders gained in the form of increases share prices.
The stark differences in the outcomes of bankruptcy cases have perplexed many shareholders. This is the reason why they insist on the debtor organization defining the objectives that they hope to achieve right at the outset. These objectives can be varied and numerous. In this article, we will list down some of the common objectives set by debtor organizations facing bankruptcy.
Some of the objectives behind the reorganization initiated by bankruptcy courts have been mentioned below.
If the bankruptcy is not filed and the reorganization does not happen publicly, then there is always a chance that certain creditors with better connections to the insiders will get paid faster at the expense of everyone else. As soon as the bankruptcy is filed, the court takes control of the cash flow of the debtor company. This means that every penny that leaves the cash flow of the company only does so after the court has verified that it does not harm the needs and vested interests of any existing creditors.
From the creditors’ point of view, achieving fair remuneration for all creditors should be the objective. This fair remuneration should happen regardless of whether the company continues to stay in operation or is sent into liquidation.
The fact of the matter is that creditors nowadays insist that the company declare its reorganization objectives before a plan is created. These objectives have to be measurable. At the end of the exercise, the results are measured with the expectations to check whether or not the exercise was successful.
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