What Is Bankruptcy Protection?
What is bankruptcy protection? Bankruptcy protection is the informal term for a filing under the Companies' Creditors Arrangement Act (CCAA), from Canada. This is a federal law designed to give a company time to try to resolve its financial difficulties with the creditors. A company usually files under the CCAA to get the permission to file a restructuring and reorganization plan that would give it time (between one and three months) to try to arrange its affairs so that it can stay in business. Filing a CCAA implies that the company is deeply in debt. So the first thing to do is to make some kind of deal with the organizations or people it owes money to, including lenders, or unpaid suppliers and bond-holders. While a CCAA (a bankruptcy protection) order remains in place, creditors may not take any action to collect money owed to them: of course, they are not allowed neither to seize the company's property nor petition it into bankruptcy. The negotiations between the company and its debtors can take several weeks and even months. In brief, each side tries to find a compromise that implies the minimum loss of money (creditors might, for example, agree to accept 50 cents for each dollar of debt). · What is Chapter 11 Bankruptcy? A filing for court-ordered bankruptcy protection in the United States is under Chapter 11 of the U.S. Bankruptcy Code; this is why we have the common expression of "filing for Chapter 11." Even if both Chapter 11 and CCAA both cover corporate restructurings there are some differences. The most important one is that while American companies under Chapter 11 are able to get labor contracts rewritten as part of their restructuring, Canadian companies under CCAA protection must usually abide by existing contracts. On one hand, Chapter 11 is a detailed piece of legislation that has specific statutory requirements and on the other hand, CCAA is much more general and gives a Canadian judge much more leeway. · A bankruptcy protection may be extended? The answer at this question is yes: under CCAA rules, the court-ordered bankruptcy protection can be extended more than one time · Under a CCAA filing who gets priority? Creditors are not equal and their priority normally defines the rank in which they may be paid by a debtor. First on the list are usually the secured creditors. They may hold a security like a mortgage or other pledge for their debt held. Unsecured creditors are next on the list. · What about shareholders? Shareholders are ordinarily last for getting back their money. In most cases of bankruptcy protection they don't get back their money. they invested. Their old shares become worthless and often new shares are issued in the restructured company. Holders of preferred shares rank ahead of common shareholders in terms of creditor priority (hence the title "preferred") but often do not get back the full value of their shares. In the unfortunate case when a restructuring attempt is not successful, or it's not approved by the courts, a company may be petitioned into bankruptcy or receivership. You shouldn't confuse the court-ordered court protection from creditors, (commonly referred to as bankruptcy protection), and the bankruptcy filing. While under bankruptcy protection, the company is trying to continue operating, in a bankruptcy filing, an insolvent company is liquidated by a trustee. |
