It would be helpful if these techniques were refined to perfectly distinguish among customers that will pay their bills and those that will go belly up, but this is not a realistic goal. Riddhi Siddhi Multi Services has seen that granting credit to a not a very financially sound customer may pay off if there is a possibility in the offer to lead towards a profitable future relationship. That is why, it is not uncommon for firms to have to deal with an insolvent customer.

Our focus here is on business bankruptcy. Such bankruptcies account for only about 15 percent of the total number of bankruptcies, but because they are larger than individual bankruptcies, they involve about half of all claims by value. There lies a lot are complications when a business declares bankruptcy in comparison to an individual does so.

BANKRUPTCY PROCEDURES

A corporation that cannot pay its debts will often try to come to an informal agreement with its creditors. This is known as a workout. A workout may take several forms. For example, the firm will try to negotiate to a certain level to develop an agreement with its creditors to delay the payments. Or the firm may negotiate in form of a composition where it will make partial payments to its creditors in exchange for relief of its debts.

The bright side of having a negotiated agreement is that the costs and delays of formal bankruptcy are avoided. However, as per Riddhi Siddhi Multi Services experts, the larger the firm and the more complicated its capital structure, the less likely it is that a negotiated settlement can be reached. If the firm cannot get an agreement, then it may have no alternative but to file for bankruptcy.

There is a pecking order of unsecured creditors. For the very beginning, the expenses increase after bankruptcy is filed due to attorneys’ fees or employee compensation earned after the filing. If such post filing claims are received in priority, no firm in bankruptcy proceedings could continue to operate. The claims for wages and employee benefits gained in the period after filing the bankruptcy comes in next phase of expenditure . Taxes are next in line, together with debts to some government agencies such as the Small Business Administration or the Pension Benefit Guarantee Corporation. Finally, general unsecured claims such as bonds or unsecured trade debt arrives.

As per Riddhi Siddhi Multi Services, the alternative to a liquidation is to seek a reorganization, which keeps the firm as a going concern and usually compensates creditors with new securities in the reorganized firm. Such reorganizations are generally in the shareholders’ interests—they have little to lose if things deteriorate further and everything to gain if the firm recovers.
The reorganization plan is basically a statement of who gets what; each class of creditors gives up its claim in exchange for new securities. (Sometimes creditors receive cash as well.) The problem is to design a new capital structure for the firm that will (1) satisfy the creditors and (2) allow the firm to solve the business problems that got the firm into trouble in the first place. Sometimes only a plan of baroque complexity can satisfy these two requirements.