Business Failure

A Business Failure is an unfortunate circumstance.

The majority of firms that fail do so within the first
year or two of life , other firms grow, mature, & fail
much later. The failure of a business can be viewed
a number of ways & can result from one or more
causes.
Types of Business Failure

1.Technical Insolvency :Business Failure that

occurs when a firm is unable to pay its liabilities as
they come due.
2.Bankruptcy: Business Failure that occurs when
a firms liabilities exceed the fair market value of
assets .

Major Causes of Business Failure

1. Mismanagement
The primary causes of Business Failure is
mismanagement, which accounts about 50% of all
cases.
Numerous specific managerial faults can cause
the firm to fail. Over expansion, poor financial
action, an ineffective sales force, & high production
costs can all singly or in combination cause the
ultimate failure of the firm.
Poor financial actions include bad capital
budgeting decisions, poor financial evaluations of
the firms strategic plan prior to making financial
commitments, nonexistent or inadequate cash flow
planning, and failure to control receivables or
inventories.

2.Economic Activity Especially economic

downturns can contribute to the failure of a firm.
If the economy goes into recession , sales
decrease
In 1990s, a number of major Business Failures
such as Olympia & York (Real Estate), America
West Air Lines, resulted from over expansion & the
recessionary economy.
3.Corporate Maturity: A final cause of Business
Failure is corporate maturity. Firms, like individual
do not have infinite lives. Like a product , a firm
goes through the stages of birth, growth, maturity,
& eventual decline .

# Voluntary Settlements
An arrangement between a technically insolvent or
bankrupt firm & its creditors enabling it to bypass
many the costs involved in legal bankruptcy
proceedings.
The settlement is normally initiated by the debtor
firm, because such an arrangement may enable it t
continue to exist or to be liquidated in a manner
that gives the owners the greatest chance of
recovering part of their investment.
The debtor, possibly with the aid a key creditor,
arranges a meeting between itself & all creditors.
At the meeting, a committee of creditors is
selected to investigate and analyze the debtors
situation & recommend a plan of action.

# Voluntary Settlements to Sustain The Firm

1. Extension : An arrangement whereby the
firms creditors receive payment in full,
although not immediately.
2. Composition : A pro rata cash settlement
of creditor claims by the debtor firm; a
uniform percentage of each dollar owed is
paid.
3. Creditor Control : An arrangement in
which the creditor committee replaces the
firms operating management and operates
the until all claims have been settled.

# Voluntary Settlements Resulting in Liquidation

A Voluntary liquidation procedure by which a firms
creditor pass the power to liquidate the firms
assets to an adjustment bureau, a trade
association or a third party, which is designated
the assignee.
Reorganization & Liquidation in Bankruptcy
Bankruptcy Legislation: Bankruptcy is a legal
sense occurs when the firm cannot pay its bills or
when its liabilities exceed the fair market value of
its assets.

Reorganization in Bankruptcy :
Voluntary reorganization : A petition filed
by a faced firm on its own behalf for
reorganizing its structure and paying its
creditors.
Involuntary reorganization : A petition
initiated by an outside party, usually a
creditor, for the reorganization & payment
creditors f a failed firm.

# Procedures
a. Filing Bankruptcy court
b.Appointment : Debtor in Possession
(DIP)---Objection -- Trustee
c. Reorganization Plan
d.Acceptance of Reorganization Plan
e.Payment of Expenses

Role of The Debtor in Possession (DIP)

Reorganizations activities are largely in the hands
of the Debtor in Possession (DIP).
The Debtor in Possession (DIP)s first
responsibility is the valuation of the firm to
determine whether reorganization is appropriate.
To do this DIP must estimate both the liquidation
value of the business and its value as a going
concern.
If the DIP finds that its value as going concern is
less than its liquidation value, it will recommend
liquidation.
If the opposite is found to be true, the DIP will
recommend reorganization.
If the reorganization of the firm recommended by
the DIP, a plan of reorganization must be drawn up.

The key portion of reorganization plan generally

concerns the firms capital structure.
Because most firms financial difficulties result
from high fixed charges, the company capital
structure is generally recapitalized , or exchanged
for equity, or the maturity of the existing debts are
extended.
Optimal capital structure has been determined,
the DIP must establish a plan for exchanging
outstanding obligations for new securities.
Once the DIP has determined the new capital
structure & distribution capital, it will submit the
reorganization plan & disclosure statement the
court .

Liquidation in Bankruptcy

The liquidation of a bankrupt firm usually

occurs once the courts have determined
that reorganization is not feasible.
Three important as of liquidation in
bankruptcy are the procedures, the priority
of claims, and the final accounting.

PROCEDURES
Judge may appoint a trustee
Trustee takes charges of the property of the
bankrupt firm & protects the interest of the
creditor.
The Trustee is given the responsibility to liquidate
the firm, Keep records, examine creditors claims,
disburse money, furnish information as required &
make final reports liquidation.
PRIORITY
Secured Creditors
Unsecured, or General Creditors