Saturday, July 12, 2008

The Bankruptcy Process

Once we finally faced the realization that the end had come a company essentially has 3 options.

1. Pay the final tax return, dissolve and simply close the doors
2. File for Chapter 11 Bankruptcy
3. File for Chapter 7 Bankruptcy

Close the Doors
The first option only works if say, you are a technology company and you never really took your product to market but simply ran out of money - for whatever reason. This is quite common in the technology industry.

Chapter 11 Bankruptcy
Chapter 11 is essentially a restructuring of the company with a view to bringing it back to life as a going concern. Often this is when there are some powerful debt holders who are senior to the creditors and the stock holders. They will have to decide whether they can do better by continuing to operate the company rather than liquidating the assets. In this case the investors and trade creditor usually lose out and someone, often the senior creditors, will end up injecting more capital into the business.

We did not have this option.

Chapter 7 Bankruptcy
Chapter 7 is when a reorganization is unlikely to yield a better result and so the company is essentially shut down and liquidated.

At Signature Days we chose a Chapter 7 because we felt we needed a proper court appointed process to treat all creditors fairly.

Once the filing is done i.e. March 06, 2008 in our case, the court appoints a Bankruptcy Trustee. For Signature Days:

Catherine Steege
Jenner & Block LLP
330 N Wabash Ave
Chicago, IL 60611

Now at this point any prior shareholders, employees managers are completely out of the picture. We have no further influence whatsoever. Essentially ownership is transferred to the trustee. Now its also important to note that this is not a fast process. The trustee usually has multiple cases at a time and speed is simply not a requirement.

The trustee will contact the creditors to serve them notice of the bankruptcy and to offer them the opportunity to file a claim if they think sending out the notice is worth the cost vis-a-vis the value of the remaining assets. At the time of writing I understand that in the case of Signature Days, only the notice has been sent.

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