The Objectives of Reorganization
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.
Common Objectives of Reorganization
Some of the objectives behind the reorganization initiated by bankruptcy courts have been mentioned below.
- Stabilize and Re-focus on the Business: In many cases, the promoters of the business really want the business to survive. However, there are some creditors who act like vultures and make it impossible for the business to survive and grow. When a company files for bankruptcy, it gains protection from such creditors.
- Such it receives the breathing space which it needs to stabilize the business operations. When a company files for bankruptcy, it gets a breather. Creditors are no longer able to pester or dominate the firm. In such scenarios, the firm can take a look at the basic business of the firm, determine if there is a viable core, and deploy the entire business around that viable core. There are many companies that have come out of bankruptcy leaner and stronger. Therefore, the ideal objective of a company filing for bankruptcy should be to stabilize its business and organize it better. The firm has to focus on competing in the market instead of fending off vultures.
- Level the Playing field with Creditors: When a firm is approaching bankruptcy, it generally has a lot of debt. This generally means that the firm is at the mercy of the creditors. Sometimes, the creditors needlessly pressurize the company because they have more bargaining power than the firm. If the firm finds itself under undue pressure despite its best intentions, then it can file for bankruptcy in order to level the playing field.
- A bankruptcy is filed, the balance of power shifts from the creditors to the debtors. Bankruptcy law protects companies from certain kinds of debts, including unsecured credit. It also needs to be understood the creditors are no longer able to set the pace or hasten the debtors. This is because average bankruptcy lasts for as long as 22 months. Therefore, as soon as the bankruptcy is filed, most creditors will realize that they are now in it for the long haul regardless of whether they like it or not. These creditors will also realize that they would be better off if they align their interests with that of the debtor organization. Hence, gaining leverage over creditors before bringing them to the negotiation table could be one of the objectives of the reorganization plan.
- Centralize the Disputes: The objective of the reorganization plan is to prevent the onslaught of external parties. In many cases, firms are under legal threat from external parties. If the external parties file more cases, then the debtor company may not be in a position to defend itself.
- In such cases, the bankruptcy proceedings are used to delay the filing of legal cases. As soon as a firm is under a reorganization plan, any additional cash flows will have to be approved by the courts. The courts do not look favorably at demands for more cash outflow from bankrupt companies. When a company files a reorganization plan, it only has to litigate on one forum. This frees up resources to focus on reviving the business rather than fending off lawsuits.
- Prevent Prioritizing of Debts: From the creditors’ point of view, reorganization is important to ensure that the debts of certain creditors are not prioritized over the debts of the others.
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.
Authorship/Referencing - About the Author(s)
The article is Written By “Prachi Juneja” 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.
- The Stages of Descent into Bankruptcy
- The Conceptual View of Organizational Decline
- External Causes of Organization Decline
- Internal Causes of Organization Decline
- Predicting Bankruptcy in Organizations
- Shortcomings of the Bankruptcy Prediction Models
- Bankruptcy: From a Legal Standpoint
- Bankruptcy as a Strategy - Part 1
- Bankruptcy as a Strategy - Part 2
- Types of Bankruptcy Frauds
- How Bankruptcy Affects Personnel Contracts
- The Deepening Insolvency Theory
- Costs Associated With Bankruptcy
- Cutting Costs during Bankruptcy Proceedings
- How to Choose a Venue for Filing Bankruptcy
- How does DIP Financing work?
- Sources of DIP Financing
- What Different Stakeholders want from a Bankruptcy?
- Dealing With Special Claims during Bankruptcy
- The Objectives of Reorganization
- Exit Strategy in Bankruptcy
- Stabilizing the Business after Filing for Bankruptcy
- The Role of Creditors Committee in Bankruptcy
- The Disclosure Statement
- The Solicitation Process
- The Voting Process
- Confirming the Bankruptcy Plan
- Sale of Assets during Bankruptcy
- Debt to Equity Conversions
- The Impact of Bankruptcy on Shareholders
- Reporting Requirements in Bankruptcy
- Why Investors and Banks Must be Protected When Firms and Tycoons Go Bankrupt
- Cram Down in Bankruptcy Proceedings
- How a Cram Up Works in Bankruptcy?
- Cross Border Bankruptcies
- Investing in a Bankrupt Company
- The World without Bankruptcy Laws