Ch6 Financially troubled entities

Question 1

financial distress

Answer 1

financial situation when companies cannot meet its cash obligations

Question 2

free cash flow

Answer 2

cash generated and available to be paid to shareholders or debtholders, after having paid all expenses, working capital and long-term assets

= operating after-tax cash flows - capital investment - working capital

operating after-tax cash flows = revenue - costs - income taxes

Question 3

Creditors

Answer 3

1. Federal / provincial government (payroll remittance, sales taxes, health taxes)
2. Municipal government (property taxes)
3. bank
4. secured lenders
5. unsecured lenders
6. suppliers
7. employees
8. landlords

Question 4

Financial fixes

Answer 4

1. debt restructure
2. informal negotiation
3. formal bankruptcy / liquidation
   - Companies’ Creditors Arrangement Act (CCAA)
   - Bankruptcy and Insolvency (BIA)

Question 5

Determination of “Insolvent”

Answer 5

1. Asset insolvent: FMV of assets less than FMV of liabilities
2. Cash flow insolvent: unable to pay obligations due
3. reasonably run out of liquidity prior to being able to complete a needed restructuring

debtor is called “debtor - in - possession” while it seeks to restructure its obligations and continues to operate as a going concern

Question 6

Formal legal proceedings

Answer 6

1. BIA - restructuring or liquidation
   - make proposals to creditors in max. six months and pay off debt.
   - if proposal is not accepted by creditor, the entity proceeds to liquidation.
   - cheaper and faster than CCAA
2. CCAA - restructuring debt and allow it to emerge and continue as a going concern
   - for owing more than $5m
   - no fixed deadline
   - take longer and costlier than BIA
3. both acts have “a stay of proceedings”
   - interest stops accruing at the date of accetance of the petition by the company
   - creditors can file “proof of claim” for amount owed by the entity as at the date petition is approved.
   - judge final decision are binding for both

Question 7

Ranking of creditors

Answer 7

1. super-priority creditors: employee wages, salaries and commissions up to a max; government owed payroll remittance, sales taxes
2. secured creditors
3. preferred creditors: trustees and lawyers, employees exceeding max., landlords (rent)
4. unsecured creditors: the rest

Question 8

Liquidation

Answer 8

1. orderly liquidation
   - takes over 1-12 months
   - higher rice than forced liquidation
2. forced liquidation
   - takes 30-60 days

Question 9

Liquidation value

Answer 9

the value depends on:
1. current economic and industry conditions
2. number and type of potential purchasers (competitors)
3. location, nature, and condition of the assets
4. whether the assets are specialized in any way