The Corporates Going Bankrupt:
Every year, many corporate bodies declare themselves bankrupt
across the globe. The reasons for declaring bankruptcy are many
but one of the main reasons why the corporate declare them bankrupt
is their inability to repay the funds that it has borrowed from
other parties or financial institutions from which the loans
Whatever is the reason, once the bankruptcy is declared; all
the further proceedings takeplace as per the provisions of the
bankruptcy law or the other laws pertaining to bankruptcy. There
are different bankruptcy law related to the bankruptcy of corporate
bodies in the different countries and it is not possible
to discuss them all here. Though the laws are different in the
different countries, the rational behind the various laws is
essentially the same. Let us discuss the various bankruptcy
laws related to the corporate bodies as applicable in the United
The U.S Bankruptcy Law:
Let us discuss what are the chapters under which the various corporate in the United States can file the application for the bankruptcy and what are the various provisions of the U.S bankruptcy law related to the corporate bankruptcy.
The various questions that are related to the corporate
What are the federal laws under which a public company can file the bankruptcy protectCorporate Bankruptcy Law ion and what happens to the company once the application for the bankruptcy protection is filed
What will happen to the investors of the company i.e. how the interests of the investors are protected In case the company is reorganized, what will happen to the previous securities issued by the company
These entire questions are required to be cleared so that we can understand the topic in a better way. We shall be discussing these all in our next part of discussion.
Bankruptcy Laws Related to Corporate Bodies:
The federal laws have provisions under which the companies can file the application
for the bankruptcy, in case they are unable to recover from
the ever-increasing debt. The company can use the chapter 11
of the U.S bankruptcy code if it wishes to reorganize itself
and try to earn the profits again. In such a situation, the
management can easily continue its operations and strive for
growth, but its all the decisions related to the various activities
has to be approved from the bankruptcy court, where the application
has been filed under the chapter 11.
Alternatively, the company can also file the application for the bankruptcy under the chapter 7 of the U.S bankruptcy law. This chapter is used by the companies that wish to stop all its operations at once and shut down the business. There is a person called as the bankruptcy trustee that is appointed by the bankrupt court to sell all the assets of the company and the proceeds are of course realized for repaying the money of the various creditors of the bankrupt company. The various investors of the company are also compensated from such proceeds.
As there are many investors of the company, it is very important to discuss the fate of the investors in such situations. The investors that are paid first are once that took the least risk. Thus, all the secured creditors of are repaid first as they have secured their amount by way of mortgage or any other collateral. The bondholders of the company are also given preference as compared to the shareholders because the company has agreed to pay a certain percentage of interest to the bondholders. The shareholders of the company are the ones that are affected the most when the company goes bankrupt. This is because the shareholders are the owner of the company and they get the more benefits too when the company makes profit. It is a well-known fact that the owners of the company are the last ones to be paid in case the company fails. This order or the preferences for the payment is recognized by the bankruptcy law of U.S and almost all the other countries of the world.
The next question that required our attention is that what would happen to the securities of the company that are traded in the stock exchanges As per the bankruptcy law in the United States, the securities of the company can continue to be traded even after the company files the application for the bankruptcy under chapter 11. But it has been found on many occasions that the company that files the application for bankruptcy is not able to fulfill the listing norms of the various exchanges and thus, get de-listed. But the shares are allowed to be traded on other platforms. For example, if the company is de-listed on Nasdaq or New York exchange, the shares of the company can be traded on OTCBB or the Pink Sheets. Thus, the federal bankruptcy law in the U.S does not prohibit a companys securities from trading.
Now, let us discuss what happens when the company comes out of the bankruptcy. In those circumstances, there would definitely be two stocks that would be there. The first one would be the old one that used to be traded before the filing of the application for the bankruptcy. The other would be the new one, which is issued by the company when it was reorganized as per the plan in the chapter 11 of bankruptcy. In such circumstances, the old stock ticker would end with the symbol Q whereas the new stock of the company would end with the symbol V. The point that should be noted here by the reader is that once the company has come out of the bankruptcy by following the reorganizing plan, the old shares of the company would have no value and the new one would be traded in the normal way at the exchanges. Thus, a person should be very careful while purchasing the shares of such companies.
It is also quite obvious that when a company files the bankruptcy under the chapter 7, there would be no reorganizing plans and all that has been discussed above has no relevance.
For the benefit of the investors, the U.S Stock and Exchange Commission circulate the information about such companies at regular intervals.
So, There are Enough Provisions:
After reading the above article, it can be rightly said that the bankruptcy
law has enough provisions for the filing of application for
bankruptcy under the various chapters by the corporate bodies.
The interests of the investors and the creditors are also taken
care of in the circumstances a company declares itself bankrupt.
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