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Lucido Manzella PC, Clinton Township, Michigan Law Firm, recently shared some thoughts regarding
The Importance of Business Valuations in Chapter 11 Bankruptcy Proceedings.
The intent of Chapter 11 Bankruptcy reorganization is to allow relief to the debtor in possession
while the business attempts to continue operating under court supervision. Once the petition
for bankruptcy is filed, the court issues an automatic stay to prevent creditors from
foreclosing on assets or taking legal action against the debtor. The valuation can assist
the courts when deciding whether the creditors can lift the stay or the debtor can obtain
financing to continue operations.
A valuation expert assists the courts in determining the facts of the case, and can enter the proceedings
at any stage of the initiation process. Of course, any valuation must be prepared in
accordance with applicable bankruptcy law and procedure, as well as meet the accepted
methodologies and approaches while continuing to remain impartial.
Though many experienced valuators shy from the court setting, their expertise and assistance
to the courts can significantly affect the proceedings by informing the bankruptcy judge,
debtor in possession (DIP), the committee of unsecured creditors and/or equity-holders,
as well as secured creditors of the value under various assumptions: liquidation of
its assets, going concern or combination of both.
Peter Lucido also shared Benefits of a Chapter 11 Bankruptcy:
A Chapter 11 bankruptcy is sometimes called a “business bankruptcy” even though it
can also be a good choice for an individual. A Chapter 11 allows a business or debtor to
continue their normal operations while they come up with a “plan for reorganization.”
In some circumstances they can create a plan for liquidation as well.
It is essential to discuss the particulars of the case with a bankruptcy attorney in
Michigan to determine if it is beneficial for a particular situation. Just like the
other types of bankruptcy codes the debtor in a Chapter 11 bankruptcy is trying to get
his debts discharged but very few of those who file for this type of bankruptcy come
through it with the business and ownership still intact.
In the vast majority of cases the Chapter 11 works to form a new entity even though
it will usually have the same name as the old company which went bankrupt. The newly
formed business typically has new management along with a new structure of ownership. But
there remain some very distinct benefits to filing this particular type of bankruptcy.
But there’s more according to Peter Lucido, Attorney in Clinton Township Michigan, as
set out below:
Continuing a business has inherent risk: company-specific risk, risk of changes in the economy and interest
rates, all of which must be factored into the decision during the confirmation stage
of bankruptcy. The professional valuation provides a tool to the courts to analyze from
experienced and impartial analysis the underlying value based on these different assumptions,
risks and standards of value.
Motions by secured creditors to lift the stay seek to foreclose on the assets of the company.
The creditors can seek relief by demonstrating “cause, including lack of adequate protection.”
The judge has the discretion and can rely on the valuation to seek the details of equity
standing of the business. The actual condition of the business is not usually as simple as
it appears based upon the financial statements and tax returns filed with the courts.
The definition of value is the first and foremost issue at the inception of the bankruptcy process.
“Value” can mean different things to different parties: fair market value, market value,
fair value, true value, investment value, intrinsic value, fundamental value, insurance
value, book value, use value,
collateral value and so on. There are income, asset and market-based methods of business
valuation. The premise of value utilized in the valuation process assumes either a “going
concern” or “liquidation” of the subject. The Bankruptcy court utilizes the outcomes
of these different assumptions-based approaches to make its determination.