Dealing With Special Claims during Bankruptcy

The bankruptcy process takes a long period of time to resolve. During this time frame, the company takes the protection of the legal system. The legal system makes provisions for discharging the previous claims on the assets of the company in a fair and equitable manner.

However, the bankruptcy process is quite complex. It has been observed that a number of claims arise during the bankruptcy process. These claims were not present when the bankruptcy was first filed. However, they do arise later during the process of bankruptcy.

These claims are sometimes referred to as special claims. In this article, we will understand what these special claims are as well as how the companies deal with it.

Utility Companies

Whenever a company files for bankruptcy, many of its creditors stop extending further credit to these companies. They are well within their rights to do so. However, there are certain classes of creditors whose participation is imminent for the revival of the company. For instance, no management can turn around a bankrupt company, if the company does not receive any electricity or water supply!

Services provided by the utility companies form the basis for production. Hence, they cannot be unilaterally stopped. In the United States, the bankruptcy court does not allow immediate suspension of utility services to companies who have filed for bankruptcy. However, this does not mean that bankrupt companies can delay the payments of utility bills indefinitely. Instead, these payments have to happen within a given time frame in order to ensure that the services remain in operation.

The bankruptcy law considers suppliers of utilities to be a special class and hence has created a separate set of rules for them.

Securities and Exchange Commission

The Securities and Exchange Commission also has a vested interest when a company declares bankruptcy in the United States. This is particularly the case when the company is a public limited entity. In such cases, the Securities and Exchange Commission is very interested to know about when the idea of filing for bankruptcy was discussed internally within management meetings.

This is because if the company has planned the bankruptcy for a long time, it has also falsely lead on other creditors to extend credit. This has been done under false pretenses and can be considered to be a type of security fraud. It is for this reason that if the Securities and Exchange Commission does determine that the bankruptcy was pre-planned and that certain class of investors was indeed misled during the process, it can cancel the rights of the firm to list securities on any exchange in the United States.

Protection from the Judiciary

Whenever a company files for bankruptcy, it is almost imminent that the directors of the company will be litigated against. There have been many cases wherein the directors and officers of the company in question have seen several lawsuits against them. The filing of bankruptcy prevents more lawsuits from being filed against the company as a whole. However, it does not prevent lawsuits from being filed against key individuals who run those companies.

These lawsuits are filed by creditors and sometimes even government authorities. Most of the time, these lawsuits do not have any substance. Instead, they are used as pressure tactics by creditors to get the company to cede more favorable terms to them.

As a result, many companies have already started purchasing insurance policies in the names of their key personnel. However, if such a policy is taken out in suspicious circumstances just before the bankruptcy of the company, then the claim might actually get rejected. Also, many companies have started categorically asking for an injunction against lawsuits aimed at their key personnel.

Pension Funds

Companies are supposed to fund the pension plans of their employees. These plans are guaranteed by the government. Hence, even if the employer fails to meet the requirements made by such plans, the employees will still be paid.

The payment of pension to the employees becomes the responsibility of the government. However, the government has to then recover the funds from the bankrupt company. This can become quite a pain for both the government as well as the bankrupt party. The process can be difficult for the government since companies that stop contributing to pension funds generally have no assets left. As such, recovering money is difficult. Also, the process is difficult for the company since the government starts recovering money based on very conservative assumptions. For instance, the government assumes that the average age of the pensioners will be very long, and the existing fund will provide a very low rate of return.

The pension fund is under the control of the government. As such, it is not fazed by legal costs. As a result, it continues to litigate the matter in different forums, which causes grave financial damage to the firm in question.

To sum it up, the list of claims which are filed on the petition date is not final. During the process of bankruptcy, a wide variety of new special claims may arise. There is a clear process in place to deal with such claims.

Authorship/Referencing - About the Author(s)

The article is Written and Reviewed by Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.