Question

1. Which of the following statements is most CORRECT?

a.	Federal bankruptcy law deals only with corporate bankruptcies. Municipal and personal bankruptcy are governed solely by state laws.
b.	All bankruptcy petitions are filed by creditors seeking to protect their claims against firms in financial distress. Thus, all bankruptcy petitions are involuntary as viewed from the perspective of the firm's management.
c.	Chapters 11 and 7 are the most important bankruptcy chapters for financial management purposes. If a reorganization plan cannot be worked out under Chapter 11, then the company will be liquidated as prescribed in Chapter 7 of the Act.
d.	"Restructuring" a firm's debt can involve forgiving a certain portion of the debt, but it cannot call for changing the debt's maturity or its contractual interest rate.
e.	Our bankruptcy laws were enacted in the 1800s, revised in the 1930s, and have remained unaltered since that time.

2. Which of the following statements is most CORRECT?

a.	The primary test of feasibility in a reorganization is whether every claimant agrees with the reorganization plan.
b.	The basic doctrine of fairness states that all debtholders must be treated equally.
c.	Since the primary issue in bankruptcy is to determine the sharing of losses between owners and creditors, the "public interest" is not a relevant concern.
d.	While a firm is in bankruptcy, the existing management is always allowed to retain control, though the court will monitor its actions closely.
e.	To a large extent, the decision to dissolve a firm through liquidation versus keeping it alive through reorganization depends on a determination of the value of the firm if it is rehabilitated versus the value of its assets if they are sold off individually.

Answer 1

Solution

1.The most correct statement is statement 'C'.

Since under Chapter 11,a reorganization plan is submitted by the firm and if that is rejected,the firm is liquidated under Chapter 7

Option A is incorrect,since all the bankruptcy cases are governed by the Federal bankruptcy law.

Option B is incorrect because bankruptcy petitions are first filled by the debtor and then after expiratory period,the creditor can file the bankruptcy petition.

Option D is incorrect because in debt restructuring,some amount of debt can be reduce by the lender but the terms of loan cannot be changed.

Option E is incorrect,since bankruptcy laws are updated from time to time.

2.The correct statement is statement 'E'

Option A is incorrect, since the primary test of feasibility in a reorganization is whether the fixed charges after reorganization can be covered by cash flows.

Option B is incorrect because The basic doctrine of fairness states that claims must be recognized in the order of their legal and contractual priority.

Option C is incorrect,since public interest is also considered,while deciding the procedure under bankruptcy.

Option D is incorrect because Firstly a trustee may appointed by the court if that is deemed to be in the best interests of the creditors and stakeholders,otherwise the existing management will retain control.Hence the existing management is not always allowed to retain the control.