Fundamentals of Financial Management, Third Edition

24.3 MANAGEMENT OF CORPORATE FAILURE

24.3.1 Determinants of the Mode of Handling Failure

There are many ways of handling corporate failure-ranging from a mere contingency plan and out-of-the-court settlements to reorganisation as per the court’s order and to liquidation of the firms. The selection of a particular approach depends on:

1. Nature of the failure;
2. Extent of the failure;
3. Choice of the different parties related to the firm.

If distress is to a large extent structural, there is no way out but to liquidate the firm. If, however, it is a contractual failure, reorganisation schemes are often implemented. When contractual failure is accompanied by economic failure, liquidation is the right course of action.

Again, if the failure is at the ...