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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