Under the United States Bankruptcy Code, there are two types of bankruptcy proceedings that are envisaged for corporate groups in financial distress. These are liquidation proceedings under Chapter 7 and re-organization proceedings under Chapter 11 of the Bankruptcy Code.
Under Chapter 11 bankruptcy proceedings, the debtor Company is afforded with an opportunity to reorganize its business. A company herein gets a second chance to attain profitability and move forward as a going concern. When a Chapter 11 Bankruptcy proceeding is filed, the United States Trustee appoints a Committee which is vested with the duty to carefully examining the interests of all the stake holders and prepares a plan of reorganization for the Company which includes a repayment plan. If the same is accepted by the creditors and stock holders or if is found acceptable by Court, is executed with respect to the Company. The Company is allowed to function as it is used to, but the bankruptcy Courts oversee the activities of the Company. After such a plan is executed, a detailed report has to be submitted to the SEC. In such a proceeding, the Court may relieve the Company from some of its binding obligations. Chapter 11 Bankruptcy proceeding is, therefore, an effective method of rehabilitating the Company, which would eventually provide a better security for all the stake holders.
Chapter 7 of the Bankruptcy Code is adopted when the Company faces a major financial meltdown and will under no circumstances be able to continue functioning. In such circumstances, the Company may opt to liquidate its assets. Under Chapter 7 proceedings, the Company goes completely out of business and a trustee is thereafter appointed by the Court to liquidate the assets and satisfy the debts against the Company. The administrative and legal fees that have accrued against the Company are first paid, followed by the claims of the secured creditors that are usually satisfied by the return of their collateral. If the debts of secured creditors are not satisfied, then they are clubbed together with unsecured creditors. In most case, the financial stability of the Company is so affected that if they file for Bankruptcy under Chapter 7, the stock holders will not be able to save their investment.
Thus the Companies may chose Chapter 7 or Chapter 11 proceedings in accordance with whether they are in a delicate financial position or not.
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