Multiple-Choice Questions on Chapter 11 Reorganizations [AICPA Adapted]Select the correct...

Multiple-Choice Questions on Chapter 11 Reorganizations [AICPA Adapted]

Select the correct answer for each of the following questions.

1. A client has joined other creditors of Jet Company in a composition agreement seeking to avoid the necessity of a bankruptcy proceeding against Jet. Which statement describes the composition agreement?

a. It provides for the appointment of a receiver to take over and operate the debtor’s business.

b. It must be approved by all creditors.

c. It provides that the creditors will receive less than the full amount of their claims.

d. It provides a temporary delay, not to exceed six months, in the debtor’s obligation to repay the debts included in the composition.

2. Hardluck Inc. is insolvent. Its liabilities exceed its assets by $13 million. Hardluck is owned by its president, Blank, and members of her family. Blank, whose assets are estimated at less than $1 million, guaranteed the loans of the corporation. A consortium of banks is the principal creditor of Hardluck, having lent it $8 million, the bulk of which is unsecured. The banks have decided to seek reorganization of Hardluck, and Blank has agreed to cooperate. Regarding the proposed reorganization:

a. Blank’s cooperation is necessary since she must sign the petition for a reorganization.

b. If a petition for bankruptcy is filed against Hardluck, Blank also will have her personal bankruptcy status resolved and relief granted.

c. Only a duly constituted creditors’ committee may file a plan of reorganization of Hardluck.

d. Hardluck will remain in possession unless a request is made to the court for the appointment of a trustee.

3. Among other provisions, a Chapter 11 plan of reorganization must

a. Rank claims according to their liquidation priorities.

b. Not impair claims of secured creditors.

c. Provide adequate means for the plan’s execution.

d. Treat all claims alike.

4. A condition that must exist for the filing of an involuntary bankruptcy petition is

a. The debtor must have debts of at least $10,000.

b. If the debtor has 12or more creditors, a majority of the creditors must sign the petition.

c. If the debtor has 12or more creditors, only one creditor need sign the petition, but that creditor must be owed at least $5,000.

d. If the debtor has 12or more creditors, the required number of creditors signing the petition must be owed at least $5,000 in total.

5. The plan of reorganization must be approved by

a. At least one-third of all creditors who hold at least half of the total debt.

b. At least half of all creditors who hold at least half of the total debt.

c. At least half of all creditors who hold at least two-thirds of the total debt.

d. At least two-thirds of all creditors who hold at least two-thirds of the total debt.