Principles & Practices Flashcards

An 'out-of-court restructuring' (distressed exchange) is generally preferred over a formal bankruptcy filing because it:

Answer: Is typically faster, less expensive, and avoids public stigma and operational disruption

Out-of-court restructurings avoid bankruptcy costs and publicity but require near-unanimous creditor consent, making them more practical when the creditor base is concentrated.

In a restructuring context, 'net operating loss (NOL) carryforwards' are valuable because they:

Answer: Can offset future taxable income, reducing the reorganized debtor's tax burden

NOL carryforwards can shelter future taxable income, but § 382 of the Tax Code may limit their use if there is a significant ownership change upon emergence.

Which document provides the court and creditors with detailed information about the debtor's history, business, and proposed plan of reorganization?

Answer: The Disclosure Statement

The Disclosure Statement must contain 'adequate information' to allow creditors to make an informed vote on the plan, covering the debtor's history, risk factors, and plan mechanics.

A CIRA candidate should understand that 'executory contracts' in bankruptcy are contracts where:

Answer: Material obligations remain unperformed by both parties, giving the debtor the right to assume or reject them

Under the Countryman definition, an executory contract is one where both parties have sufficient unperformed obligations that failure to perform would be a material breach.

In distressed M&A, a buyer purchasing assets through a § 363 sale receives them:

Answer: Free and clear of most liens, claims, and interests with court approval

A § 363 sale provides buyers with clean title by transferring assets free and clear of liens (which attach to proceeds), making it attractive to strategic and financial acquirers.

The 'waterfall' concept in credit analysis refers to:

Answer: The sequential order in which different classes of creditors and equity holders are paid from available value

The waterfall describes how value flows from secured debt at the top down through unsecured creditors and finally to equity, with each level only receiving value after senior claims are satisfied.

When analyzing a distressed company, a restructuring advisor would typically classify 'trade payables that are 90+ days past due' as an indicator of:

Answer: Liquidity stress and potential inability to meet obligations as they come due

Significantly aged payables indicate the company is stretching vendors due to cash shortfalls, a classic early warning sign of liquidity deterioration and approaching insolvency.