discuss the following items: (5) Fraudulent conveyance

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discuss the following items: (5) Fraudulent conveyance

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Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What are the major differences between an informal reorganization and reorganization in bankruptcy? In answering this question, be sure to discuss the following items:
(1) Common pool problem

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What are the major differences between an informal reorganization and reorganization in bankruptcy? In answering this question, be sure to discuss the following items:
(2) Holdout problem

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What are the major differences between an informal reorganization and reorganization in bankruptcy? In answering this question, be sure to discuss the following items:
(3) Automatic stay

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What are the major differences between an informal reorganization and reorganization in bankruptcy? In answering this question, be sure to discuss the following items:
(4) Cramdown

Kimberly MacKenzie—president of Kim’s Clothes Inc., a medium-sized manufacturer of women’s casual clothing—is worried. Her firm has been selling clothes to Russ Brothers Department Store for more than 10 years, and she has never experienced any problems in collecting payment for the merchandise sold. Currently, Russ Brothers owes Kim’s Clothes $65,000 for spring sportswear that was delivered to the store just 2 weeks ago. Kim’s concern arose from reading an article in yesterday’s Wall Street Journal that indicated Russ Brothers was having serious financial problems. Moreover, the article stated that Russ Brothers’ management was considering filing for reorganization, or even liquidation, with a federal bankruptcy court.
 
Kim’s immediate concern is whether her firm will collect its receivables if Russ Brothers goes bankrupt. In pondering the situation, Kim has also realized that she knows nothing about the process that firms go through when they encounter severe financial distress. To learn more about bankruptcy, reorganization, and liquidation, Kim has asked Ron Mitchell, her firm’s chief financial officer, to prepare a briefing on the subject for the entire board of directors. In turn, Ron has asked you, a newly hired financial analyst, to do the groundwork for the briefing by answering the following questions:
 
What are the major differences between an informal reorganization and reorganization in bankruptcy? In answering this question, be sure to discuss the following items:
(5) Fraudulent conveyance

Explanation & AnswerSolution by a verified expert

Explanation

During financial distress, the company can modify its debt in the capital structure, called informal reorganisation, to re-establish itself as financially sound. This process includes extension and composition of debt. In extension, the company asks creditors to postpone the dates of repayment to a later date when the company has some positive cash flow to pay the debt. In case of composition of debt, the creditors voluntarily reduce some of their claims either by accepting lower coupon payments or a reduced principal amount.
 
Reorganization in bankruptcy is a procedure where the court orders the company to restructure its finances, capital, and management, and the company is protected from claims by the creditors. The company then pays its creditors according to a revised schedule set by the court.
 
Common pool problem: If there is no protection under the bankruptcy law, the creditors may foreclose on the firm to receive their claims even if the firm is worth more as a going. This problem is a common pool problem where the company is forced to liquidate even if it can work efficiently after reorganization. Bankruptcy protection under Chapter 11 helps protect the company from foreclosure by the creditors.

Verified Answer

Informal reorganisation is an informal process of re-establish the financials of the company in financial distress. without any legal proceedings. It is a way of the informal settlement of claims without going through a formal bankruptcy procedure.
 
Reorganization in bankruptcy is a court-supervised bankruptcy process where the company restructures its finances, operations, and management to revive as a new business.
 
Common pool problem: If there is no protection under the bankruptcy law, the creditors may foreclose on the firm to receive their claims even if the firm may operate effectively after reorganization. This situation is a common pool problem where the company is forced to liquidate.

Explanation

Holdout problem: After all the other creditors are paid on a pro-rata basis, the amount left can be used to pay the creditors full settlement of their claims. Due to this, every creditor thinks the same thing, and some of them do not opt to receive a lesser claim. This problem is called a holdout problem.

Verified Answer

Holdout problem is a problem where some creditors may not agree to receive pro-rata settlement of their claims in the hope of receiving the full amount of their claims from the amount left after the prorated settlement of other creditor's claims.

Explanation

An automatic stay is a provision that provides a solution to the common pool problem. It limits creditors' ability to foreclose on the firm to collect their claims. However, all creditors can collectively foreclose and force liquidation.

Verified Answer

An automatic stay is a provision under Chapter 11 of the bankruptcy law that limits creditors' ability to foreclose on the firm to collect their claims.

Explanation

In a prepackaged bankruptcy, the firm forms a reorganization plan and gets most creditors to agree with the plan before filing for bankruptcy. If most of the creditors have agreed with the reorganization plan, the reluctant creditors can be brought along with the help of a cramdown. Cramdown allows courts to mandate the reorganization plan despite dissent by some of the creditors.

Verified Answer

Cramdown is a process where the court mandates the reorganization plan despite dissent by some of the creditors.

Explanation

In bankruptcy proceedings, a trustee is appointed to undertake the selling of assets and transferring funds to the creditors. The trustee has the power to transfer the assets to some third party to prevent the assets from distributing to the creditors. Fraudulent conveyance is a provision under Chapter 11 of the bankruptcy law that protects the creditors from the firm's unjustified transfer of the property during the bankruptcy proceedings.

Verified Answer

Fraudulent conveyance is a provision under Chapter 11 of the bankruptcy law that protects the creditors from t

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