Question

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: Fraudulent conveyance problem Common pool problem Holdout problem

Answer 1

Klose Corp.'s situation represents the Holdout problem. This problem arises with in a voluntary reorganization plan, when all creditors are not agreeing for the proposed voluntary plan. Here to avoid liquidation; the creditors getting their bonds for $1 million when the actual face value of the bonds is $1.5 million for each creditor. Two creditors are not agreeing to the workout plan therefore creating a holdout situation.