The New CFO Financial Leadership Manual, Second Edition

Chapter 24. Bankruptcy

Though no CFO ever wants to be involved in a corporate bankruptcy, circumstances may dictate otherwise. The road through the bankruptcy process absolutely requires the best possible legal counsel; this person can advise on a wide range of possible strategies to take in dealing with creditors and the bankruptcy court and the myriad of claims and counterclaims that can arise over the (sometimes) multiyear course of a bankruptcy case. Before calling in legal counsel, the CFO should read this chapter to gain a basic understanding of the main players in the bankruptcy drama, how the bankruptcy process works, creditor priorities, tax issues, and other related issues.

Applicable Bankruptcy Laws

All applicable laws related to bankruptcy are issued by the federal government and are contained within Title 11 of the U.S. Code, which is referred to as the Bankruptcy Code. Chapter 3 of the Code describes how to file for bankruptcy, while Chapter 5 covers debtor and creditor relations, Chapter 7 describes a corporate liquidation, and Chapter 11 itemizes the steps involved in a corporate reorganization.

A Chapter 7 liquidation is a relatively passive affair for the CFO, who essentially watches while a court-appointed trustee sells off business assets and distributes the resulting cash to creditors and stockholders in a carefully prescribed order of payment (see the “Creditor and Shareholder Payment Priorities” section). A Chapter 11 reorganization generally allows management ...