Cram Down in Bankruptcy Proceedings
February 12, 2025
In the previous article, we learned about the three financial statements. We also learned how income statements and balance sheets are backward-looking financial statements. We also understood that the budget is the only forward-looking financial statement in the personal finance domain. It is the only statement that can be used to prevent economic mistakes from […]
In the previous articles, we have learned about what subscription-based banking is. We also know the various advantages that this revenue model brings for banks as well as for corporate customers. However, there are several commercial banking experts who believe that the subscription banking model also has its own fair share of problems. Hence, in […]
It is common practice for businesses to prepare financial statements. This is because they need to get these financial statements audited. Once these statements are audited and found to be correct, they become an official record that can be used in loan applications as well as for tax purposes. However, since individuals do not need […]
Alibaba is a Chinese online retail company. This company started as an Amazon wannabe in the Chinese economy. However, today it would be fair to say that Alibaba is equivalent to, if not bigger than its American counterpart. Alibaba’s rise to economic power is filled with many stories. One of them is the story of […]
The fixed-income security market is mostly composed of financial instruments which offer a fixed stream of income to investors. In other words, this means that the possible downside that investors may face is protected while at the same time investors can have only a limited upside. This is exactly opposed to stocks wherein the possible […]
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.
Your email address will not be published. Required fields are marked *