finally equity is at the bottom. All credi- tors in the same class of creditors must be treated the same way: entitled to get paid in full (up to the value of their collateral) or to get their collateral back; payments, but they all have to be dealt with the same way. For example, if the plan calls for the unsecured creditors to get 50 cents on the dollar in monthly payments over a two- year period, they must all be given the same terms. The calculation of how much will be paid to unsecured creditors will often be the result of negotiation with the creditors' committee taking into account how much the company can reasonably be expected to set aside in the future to pay creditors after paying expenses for operations; unless the unsecured creditors are paid in full, the equity holders cannot participate and retain their ownership of the company. As a practical matter, the creditors of a smaller company are usually not interested in operating that company and if they stand any hope of seeing a recovery after the Chapter 11, it typically is because the current ownership continues ownership and operation of the company after bankruptcy. Creditors do, however, often use this "absolute priority rule" as leverage to make sure that the company pays them the most that can reasonably be expected as part of the reorganization plan that is negotiated by the parties and approved by the court. cannot survive the Chapter 11 process either because it cannot obtain financ- ing or for other strategic reasons. The value to a third-party buyer. Buyers are often very cautious about buying the assets of a troubled business because of the concern that the company's creditors could pursue the acquired business on various legal theories including "succes- sor liability." The sale through a Chapter 11 bankruptcy offers the buyer a means to acquire the assets without concern that a creditor of the seller will pursue the buyer. It also offers the creditors of the seller a way to maximize the value of the assets by selling them to a buyer rather than simply liquidating the company. Such a sale is called a "section 363" sale, as the process takes place under section 363 of the Bankruptcy Code. In a section 363 sale the assets which may be subject to bank and other judgment liens can be sold free and clear of liens so that the buyer receives the assets lien free. The cash proceeds paid by the buyer for the assets then attach to the liens in the same order and priority as the liens previously attached to the assets. This process allows the assets to be sold for the maximum price, leaving the disputing parties to litigate over the cash paid. the debtor in possession in a Chapter 11 bankruptcy have what are called "avoidance powers" to recover moneys paid out prior to the bankruptcy. One of the purposes of bankruptcy is to treat creditors of the same class equally. Sometimes when a business is in trouble and is about to file bankruptcy, it pays to creditors who scream the loudest, or those creditors whom the owner has personally guaranteed. These payments may be considered a "preference." While a preference is not illegal, the payment may be recoverable in the bankruptcy. Since the bankruptcy system is designed to treat creditors fairly and equally, if one creditor has been preferred, the funds may be recovered and divided among all like creditors. whether voluntary such as a payment to a creditor, or involuntary such as a judgment obtained by a creditor; the bankruptcy, or in the case of a payment to an insider (such as a relative or a director), it is paid within one year prior to the bankruptcy; debt (i.e. a debt that is not current). So for example, payment of a current bill even if paid within 90 days is not a preference. The result may be different if the bill is past due; (liabilities exceed the assets); recipient creditor receives more money than it would have as a result of a liquidation of the company in a Chapter 7. There are several defenses to a preference, including that the payment was made in the ordinary course of business of the company, or that the payment is for a contemporaneous exchange for new value, for example a COD payment and delivery of goods. avoidance powers is a fraudulent transfer recovery. It sometimes occurs in the life of a business that is in financial distress that there are transactions by which the owner either intentionally caused the business to transfer assets in order to remove the assets from the grip of creditors (called an intentional fraudulent transfer), or where assets are transferred but without "reasonably equivalent" value (called a constructive fraudulent transfer). In both of these cases the trustee in bankruptcy or the creditors' committee can seek to recover such assets which are transferred within four years prior to the bankruptcy. |