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CIRA > Course 1 > Flashcards

Course 1 Flashcards

1
Q

How to fund losses (short term)?

A
  • Accelerate AR
  • Sell obsolete inventory or improve turns
  • Fully draw down on line of credit
  • Further stretch AP
  • Negotiate forbearance on debt payments
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2
Q

How to fund losses (long-term)?

A
  • Reduce SG&A
  • Sell assets
  • Change operating process
  • Revamp distribution process
  • Four wall analysis
  • Sell buildings
  • Cut staff
  • Increase sales
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3
Q

Property Lease Rejection - Timing

A

Residential: ch 7 deemed rejected if not assumed 60 days; ch 11 - rejection must occur prior to confirmation of plan
Non-residential: not assumed within 120 days..deemed rejected; court can extend 90 days prior to 120 initial period for a total of 210 days

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4
Q

Non-residential Damage Claim Calc

A

Greater of 1 year or 15% of remaining portion of lease, not to exceed 3 years + any unpaid rent due under the lease as of the earlier of the petition date or date property was seized

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5
Q

Examiners - Role

A

Role - investigate debtors’ operations in including viability of business

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6
Q

Examiners - Appointment Criteria and Process

A

Criteria for appointment - court deems in best interest of estate or motion for appointment and unsecured claims exceed $5MM
Appointed by US Trustee

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7
Q

Trustees - Role

A

Replaces debtor in possession; authorized by court for fraud, mismanagement, incompetence or appointment is in the best interest of creditors

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8
Q

Trustee - Appointment Process

A

Ch 11 trustee may be elected by creditors if court authorizes appointment
Appointed by US Trustee

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9
Q

Lookback for Fraudulent Transfer

A

4-6 years (state law) or 2 years (bankruptcy code); 10 years (IRS)

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10
Q

Lookback for Insider Preferences

A

1 year

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11
Q

Lookback for 3rd Party Preferences

A

90 days

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12
Q

Timing for Recovery Action

A

Within 2 years after the order for relief, or if a trustee is appointed during the 2nd year, 1 year from the date of trustee appointment

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13
Q

Requirements for Preferences

A
  • Transfer made for benefit of creditor
  • For an antecedent debt
  • Made while insolvent (90 days prior to filing)
  • Made within 90 days / 1 year for insiders
  • Creditor received more than they would in a ch 7 liquidation
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14
Q

Exceptions to Preference Claims

A
  • Made in the ordinary course of business
  • Security interest granted for value (30 days to perfect collateral)
  • New value - creditor extended credit after payment
  • Floating lien on inventory or AR results in an improvement in position
  • Transfers between business debt less than $6,825
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15
Q

Type of Fraudulent Transfer (2)

A
  • Fraud: intent to hinder, delay or defraud

- Constructive fraud: payment for less than equivalent value

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16
Q

Criteria for Constructive Fraud

A
  • Insolvent or became insolvent as result of transfer
  • Debtor was engaged in business with unreasonably small capital
  • Intended to incur or believed debtor would incur debt beyond ability to repay
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17
Q

Functions of US Trustee

A
  • Monitor applications and compensation for professionals
  • Monitor plans / DS
  • Ensure all reports filed
  • Appoint and monitor creditors’ committee(s)
  • Appoint examiner or trustee, if authorized by court
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18
Q

Stages of Business Failure (4)

A

1) Incubation
2) Cash Shortage
3) Financial Insolvency
4) Total Insolvency

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19
Q

Signs of Incubation Period

A
  • Change in product demand
  • Increase in OH costs
  • Obsolete production methods
  • Increase in competition
  • Incompetent managers in key positions
  • Acquisition of unprofitable subsidiaries
  • Over-expansion
  • Incompetent credit & collection
  • Poor communications
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20
Q

Signs of Cash Shortage Period

A
  • Starts when business unable to meet current obligations
  • May have excess physical assets over liabilities
  • Assets are not liquid enough and capital is tied up in receivables and inventory
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21
Q

Signs of Financial Insolvency

A
  • Business unable to obtain funds to meet maturing and overdue obligations
  • If new capital can be obtained and underlying causes are addressed business can be viable
  • If additional financing cannot be obtained business will likely deteriorate to Total Insolvency
22
Q

Signs of Total Insolvency

A
  • Total assets < total liabilities
  • New capital cannot be obtained
  • Business likely cannot be reorganized and should be liquidated
23
Q

Advantages of Out of Court Settlement

A
  • Less disruptive
  • More business-like solutions
  • Frustrations minimized
  • Agreement reached much faster
  • Less costly (factor of time)
24
Q

Weaknesses of Out of Court Settlement

A
  • almost 100% creditor approval
  • Assets subject to attack
  • no method to resolve disputes
  • no formal way to recovery property
  • tax advantage to bankruptcy
  • lack for transparency
25
Q

Reclamation - process / claims / etc.

A
  • goods received within 45 days of petition date
  • request within 20 days after case commenced
  • Goods must not be sold or used in manufacturing of other goods
  • If creditor qualifies, debtor may keep goods and 1) admin expense or 2) lien on other goods / assets
  • Goods received 20 days prior to filing will be considered an admin expense (503(b)(9) claim)
26
Q

Requirements for Key Employee Retention Inducements

A
  • bona fide job offer
  • services essential
  • payment cannot exceed 10 times payment to non-management employees in past year
27
Q

Reasons and process for involuntary ch 7 or ch 11

A
  • debtor made assignment of assets within last 120 days or debtor not paying debts as they mature
  • petition must be filed by 3 or more creditors with claims of at least $16,750
28
Q

Administrative Consolidation

A

-for convenience of court; one listing and one matrix of creditors for notices

29
Q

Criteria for Substantive Consolidation

A
  • creditors act as one economic unit
  • activities are so entangled its too costly to deal with separately
  • separate legal identities not preserved
  • creditors of an affiliate not significantly harmed
30
Q

Debtor’s property

A

-all legal and equitable interest in property and in causes of action and property recovered

31
Q

Adequate Protection

A

-when a creditor’s security interest is in an endangered, dissipating, or depreciating asset, the creditor may move the court for adequate protection

32
Q

Use of Adequate Protection (3)

A
  • Automatic stay
  • Cash Collateral
  • Obtaining credit
33
Q

Forms of adequate protection (3)

A
  • cash payments
  • additional or replacement liens
  • granting indubitably equivalent of entity’s interest in such property
34
Q

Equity Cushion

A

< 12% is not adequate
> 20% is okay
between 12% and 20% is a toss-up

35
Q

Cash Collateral Includes

A
  • cash
  • negotiable instruments
  • documents of title
  • securities
  • deposit accounts
  • other cash equivalents
  • estate and creditor have an interest
  • includes proceeds, products, offsprings, rents, and profits
36
Q

Automatic stay bars…(7)

A
  • All judicial actions
  • Enforcement of final judgements
  • All efforts to create or perfect liens on property of the estate
  • Any act to collect, assess, or recover a claim against the debtor that arose before commencement of the case
  • Setoff of any prepetition debt
  • Commencement or continuation of proceeding before the tax court
37
Q

Need for cash increase under BAPCPA (ch 11)

A
  • change for treatment in utilities and the need for deposits
  • lengthening of time goods can qualify for reclamation
  • creation of admin claim for 503(b)(9)
38
Q

Reasons for out-of-court restructuring

A
  • be viable business (not liquidating)
  • usually a stretch-out of time, cash payment for settlement of debt, debt for equity, etc.
  • typically predicated on financial / liquidity situation
39
Q

Reasons for in-court restructuring

A
  • need automatic stay
  • need DIP financing (may force lenders hands)
  • need to reject leases
40
Q

Four Wall Analysis Data Requirements

A

1) Sales by store location
2) expenses by location (should be ~cash…no depreciation) - analyzed by type
3) Further Analysis of Expense Allocations
4) Sales and Margins
5) Reallocation of Direct Expenses
6) Using Four Wall Contribution Info

41
Q

3 Types of Expenses to analyze / categorize in 4-Wall Analysis, description, and examples

A

1) Direct - incurred by or within a specific location, w/o regard to whether they are controllable (payroll, rent)
2) Assignable - identified w/specific locations should be assigned based on work load, usage, benefit, etc…frequently accumulated in expense center they are generated not allocated (advertising, freight, mailings)
3) Allocable - cannot be identified with specific location, but incurred for benefit of total org; corp mgmt, accounting, data processing, etc.

42
Q

4-Wall Sales & Margin Allocation Adjustments (5)

A

1) Allowance Adjustment - vendor allowances allocated to stores based on sales
2) Market Price - allocate certain re-pricing initiatives; 1 store competes w/Wal-Mart…allocate reduced margin across all other stores; should be removed
3) Clearance Center Adjustment - operated at certain locations…remove from location and re-allocate to those w/o center (adjust for inventory that would otherwise be liquidated)
4) Transportation Haul Adjustment - freight allocated by sales; remove and input actual freight expense based on mileage
5) Other YE or Periodic Adjustments - book-to-physical inventory adjustments

43
Q

4-Wall Reallocation of Direct Expenses

A
  • Companies allocate SG&A expenses to the store vs posting direct expense incurred at store level…following should be removed and actual direct expenses replaced:
    1) Step-rent: incremental cash impact of leases where the accounting treatment of lease expense may reflect different amount
    2) Leased Capital Adjustment - cap leases allocated to stores based on sales
    3) Rent Adjustments - impact of negotiated rent concessions received but not posted
    4) Clearance centers - incremental payroll incurred by stores that operate clearance centers
44
Q

Causes of Business Failure - External (5)

A
  • Economic Change
  • Competitive Change
  • Government constraints
  • Social change
  • Technological change
45
Q

Causes of Business Failure (3)

A
  • External causes
  • Management and internal causes
  • Fraud
46
Q

Management and Internal Causes of Business Failure (examples)

A
  • Poor Management: failure to keep pace with market changes, lack of operating controls, over-expansion, excessive leverage, under management, lack of management depth
  • Unbalanced top management teams
  • Nonparticipating BOD
  • Ossified Culture
47
Q

Detection of Business Failures

A
  • Trend Analysis

- Analysis of accounting measures

48
Q

Trend Analysis (3 types)

A
  • Historical
  • Actual vs forecast
  • Comparison vs industry
49
Q

Analysis of Accounting Measures

A
  • Liquidity Ratios - current ratio, WC capital ratios
  • Coverage Ratios - Times interest earned, CF to debt repayment
  • Leverage Ratios - debt / equity
  • Operating Ratios - return on sales, asset turnover, return on investment or return on total capital, P/E, gross margin
50
Q

Times Interest Earned Formula

A

NI + Interest Expense + Income Tax / Interest Expense

51
Q

Return on Investment Formula

A

NI / Sales x Sales / Investment; investment = total assets or total equity

CIRA (1 decks)

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