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Value. Bankruptcy. Investment Price - Essay Example
Finance & Accounting
Pages 4 (1004 words)
Value. Bankruptcy. Investment Price. Table of Contents Answer 2 4 Answer 3 6 References 9 Answer 1 A company that is incapable of fulfilling its contractual obligations and fails to make the payments to its creditors generally files bankruptcy protection at the court…
On the other hand, the US system is supposed to be more debtor-friendly, where the courts play a significant role in the restructuring of the distressed company (Bourguignon & Pleskovic, 2007). In the US, bankruptcy is managed under the Bankruptcy Code, formed by the Bankruptcy Reform Act of 1978. Under this Act, a company could be restructured and reorganized or else liquidated. A financially distressed company can get protection from the creditors under the Chapter 11 of the Bankruptcy Code. The company can then attempt to rise above its financial hardships and also sort out the payments to its various creditors. Conversely, if the company files under Chapter 7 of the Bankruptcy Code, the assets of the company are liquidated and the proceeds are allocated to the creditors. The major trade-off in the bankruptcy act is between providing protection to a distressed company and ensuring bondholders with adequate security to extend credit. Providing protection to the financially distressed company from its creditors and helping them to start afresh is an important driver of private enterprises. Many entrepreneurs would not take up the risk of forming a business if they had a possibility of facing unrestricted liability. However, the partial liability cancellations and bailouts of the bankrupt companies hurt the interest of the bondholders because they receive only a fraction of the value actually owed. ...
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