Question

Question 11

From the statements below, which one is the most CORRECT?

Municipal and personal bankruptcy law is governed only by the states and corporate bankruptcy laws are governed by the federal government.

All bankruptcy requests are filed by creditors looking to guard their claims against companies that are in financial distress. Thus, all bankruptcy requests are involuntary as viewed from the perspective of the company’s management.

Chapters 7 and 11 are the most important bankruptcy chapters from a financial management determination. A company can or will be liquidated under a Chapter 7, if a reorganization plan cannot be worked out under Chapter 11.

If a "Restructuring" plan is to be done, this means that a company’s debt can include the forgiveness of certain portions of the debt, but it cannot ask for the change in the debt's prescribed interest rate or the debt’s maturity date.

The United States bankruptcy laws were established in the 1800s, these laws were revised in the 1930s, and since then, they have remained unchanged.

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Question 12

Loki Corporation and his band of thieves are having financial difficulties. On a scale of 1 to 5, with 1 being the first/highest claim and 5 being the last/lowest claim. From the list of items below:

What would be the order of priority that each entity would claim for a distribution of Loki’s assets in a Chapter 7 Bankruptcy?

(1)	The costs incurred by a Trustee to administer and operate Loki’s company.
(2)	The Common Shareholders’/Stockholders’ of Loki’s company.
(3)	Loki’s common, or Unsecured, Creditors.
(4)	Creditors, who have a claim to the profits on the sale of Loki’s secured loans, where the assets have been guaranteed against the loan.
(5)	Taxes that are due payable by Loki, to the state and federal governments.

5, 4, 1, 3, 2

4, 1, 5, 3, 2

5, 1, 4, 2, 3

1, 5, 4, 3, 2

1, 4, 3, 5, 2

Answer 1

• Legal Position

Chapter 7 of the United States Bankruptcy code governs the process of distribution of assets at the time of liquidation. The code specifies the process of liquidation as well as the priorities that has to be followed in order to distribute the assets.

Following are the priorities that are to be followed while making payemnts according to the Absolute Priority rule prescribed in the code.

1) Any Payment Outstanding to the trustee to administer the process.

[Note :- Trustee is appointed to liquidate the assets of the company and pay off the creditors.]

2) Unsecured debts which are Priority Debts such as Child support, taxes, or any personal claims.

3) Secured Debts.

[ Note :- Secured Debts are those debts which are secured by collateral security to reduce the risk of lenidng]

4) Non-priority Unsecured Debts.

• Facts of the case

In the given case the company has outstanding payment of taxes as well as the trustees.So the Payment to trustees will prevail over any other priority unsecured debt followed by the payment to Government for taxes.

So the correct order to Repayments will be Option 1, 5 ,4 ,3,2. The hierarchy will be as follows.

1.The costs incurred by a Trustee to administer and operate Loki’s company.

2. Taxes that are due payable by Loki, to the state and federal governments.

3.Creditors, who have a claim to the profits on the sale of Loki’s secured loans, where the assets have been guaranteed against the loan.

4. Loki’s common, or Unsecured, Creditors.

5. The Common Shareholders’/Stockholders’ of Loki’s company.