Question

16. Potential problems in reorganization and their solutions Aa Aa Reorganization through workout plans are informal and less costly than formal bankruptcy filings, but informal reorganization also leads to certain problems Consider the following case: Klose Corp. is worth $15 million as an operating company. The company is in financial distress, and if it were liquidated, the company's value would only be $8 million. To avoid liquidation, an adjustment bureau prepared a reorganization plan that needed the approval of Klose's 10 creditors. Each creditor currently has a claim of $1.5 million toward Klose's assets. The workout plan proposes that each creditor accept a settlement of $1 million in exchange for the $1.5 million outstanding debt. The equity holders will be entitled to a claim of $5 million [$15 million-(10 x $1 million)]. However, 2 of the 10 creditors did not agree to the workout plan and refused to tender their bonds for $1 million when the actual face value of the bonds is $1.5 million for each creditor. Considering that two creditors still have a claim of $1.5 million each against Klose's assets, the remaining 8 creditors also rejected the workout plan. Klose Corp.'s situation represents the: O Holdout problem O Common pool problem Fraudulent conveyance problem Federal bankruptcy law helps deal with the problems mentioned in the preceding case. Chapter 11 of the Bankruptcy Act limits the ability of creditors in a bankruptcy to foreclose to collect their individual claims through

Answer 1

Klose Corp.'s situation represents the:

Holdout Problem

Explanation:

When is company is unable to pay its creditors or is near default, it starts negotiating with creditors for restructuring the debt. But when some of the creditors withhold their consent for this, a problem arises which is called Holdout Problem.