When a business entity reflects a negative economic net worth, it is considered insolvent. Whenever a situation of insolvency crops up, the business entity makes an effort to get over the situation and settle the dues outstanding, through the proceeds from the sale of a part of its assets or the employment of the cash reserves.

But, sometimes there arises a phase when the entity is declared as bankrupt as the debt problems turn severe. The creditors or the management itself can approach the United States Bankruptcy Court for being termed as bankrupt. When a company is declared by the court as bankrupt, the two options that lie before it are restructuring under Chapter 11 or liquidation under Chapter 7.

A decision to demand restructure is conducted after evaluating the financial and legal impact the decision will have on the economy. On decision, an appraiser evaluates the value of the property. An insolvency practitioner, on the other hand, then works for a formal or informal restructures. An informal restructure can be an ‘extension’ of the time for repayment or a ‘composition’, which is a part settlement of the amount outstanding by the creditors. Informal restructure can also take the shape of mergers. But where the insolvency practitioner is forced to liquidate the company or demand a formal reorganization, it is formal restructuring. Under formal restructuring, if a decision is made to formally restructure taking into account the legal and economic prospects, the company management gets transferred to the hands of a trustee who holds a greater control over the company affairs. Losing the power of management may not be a plausible solution to the shareholders, who will, therefore, make a greater effort to avoid bankruptcy. (more…)