Chapter 10: Insolvency - Liquidation and reorganization. The last nine chapters have discussed various aspects of business combinations, assuming they’ll all be successful. The reality is that many businesses today face financial difficulties and must seek relief, either formal or informal, in order to survive. This chapter will discuss various ways companies try to deal with insolvency, either through contractual or formal bankruptcy proceedings. | Insolvency—Liquidation and Reorganization 1 Learning Objectives Distinguish between a Chapter 7 and a Chapter 11 bankruptcy. Describe the five priority categories of unsecured claims and list the order in which they are settled. Distinguish between a voluntary and involuntary bankruptcy petition. Distinguish among fully secured, partially secured, and unsecured claims of creditors. Describe contractual agreements that the debtor and its creditors may enter into outside of formal bankruptcy proceedings to resolve the debtor’s insolvent position. Describe the ways debt may be restructured in a reorganization. 2 Insolvency Insolvency refers to the inability of a debtor to pay its obligations as they become due. Although the Bankruptcy Reform Act provides for relief of all types of insolvent debtors, including individuals, our discussion will concentrate on the provisions of the act dealing with insolvent business entities. 3 Insolvency When a business becomes insolvent, it generally has three possible courses of action: Debtor and its creditors may enter into a contractual agreement, outside bankruptcy; Debtor or its creditors may file a bankruptcy petition, after which the debtor is liquidated under Chapter 7 of the Bankruptcy Reform Act; or Debtor or its creditors may file a petition for reorganization under Chapter 11 of the Bankruptcy Reform Act. 4 Insolvency Review: True/False: Insolvency means that a debtor has more current liabilities than current assets. 5 False Contractual Agreements A business that is unable to pay its obligations may reach an accommodation with its creditors. Possibilities generally include: An extension of payment periods. Composition agreements. Formation of a creditors’ committee. Voluntary assignment of assets. 6 LO 5 Contractual agreements. Contractual Agreements Extension of Payment Periods FASB ASC paragraph 470-50-40-6: Where a debt restructuring involves only a modification of terms of payment, the debtor should account for the . | Insolvency—Liquidation and Reorganization 1 Learning Objectives Distinguish between a Chapter 7 and a Chapter 11 bankruptcy. Describe the five priority categories of unsecured claims and list the order in which they are settled. Distinguish between a voluntary and involuntary bankruptcy petition. Distinguish among fully secured, partially secured, and unsecured claims of creditors. Describe contractual agreements that the debtor and its creditors may enter into outside of formal bankruptcy proceedings to resolve the debtor’s insolvent position. Describe the ways debt may be restructured in a reorganization. 2 Insolvency Insolvency refers to the inability of a debtor to pay its obligations as they become due. Although the Bankruptcy Reform Act provides for relief of all types of insolvent debtors, including individuals, our discussion will concentrate on the provisions of the act dealing with insolvent business entities. 3 Insolvency When a business becomes insolvent, it generally has
