CIRA Negotiation & Workout Strategies 5

Question 1

Under the 'new value' exception to the absolute priority rule, existing equity holders may receive new equity in the reorganized company only if they:

Accepted Answer

Contribute new, substantial, reasonably equivalent, necessary, and non-insider value to the reorganization plan

Answer

The new value exception permits equity retention if existing owners inject value that is new (not pre-existing), substantial, necessary to the plan, and reasonably equivalent to what they receive, subject to a market test.

Question 2

A 'lender liability' claim against a secured creditor is most likely to arise when:

Accepted Answer

A lender exercises so much control over a borrower's operations that it is deemed to have assumed a duty of care or is treated as an equitable insider

Answer

Lender liability arises when a lender's behavior crosses from enforcement of contractual rights into de facto management control, exposing the lender to equitable subordination, fiduciary duty claims, or tort liability.

Question 3

In evaluating whether an out-of-court workout is preferable to a Chapter 11 filing, which of the following is the most significant cost disadvantage of a formal bankruptcy proceeding?

Accepted Answer

Substantial professional fees, reputational damage, and customer/supplier disruption that erode enterprise value

Answer

Chapter 11 proceedings impose significant direct costs (professional fees, administrative expenses) and indirect costs (customer attrition, supplier tightening, employee departures) that can reduce the reorganized enterprise value.

Question 4

Which of the following best describes the 'zone of insolvency' and why it matters in restructuring negotiations?

Accepted Answer

The period when a company is near but not yet insolvent, during which directors' fiduciary duties expand to include creditors, creating legal risk for decisions favoring equity over creditors

Answer

In the zone of insolvency, creditors become the residual economic stakeholders, and directors who favor equity holders over creditors may face breach of fiduciary duty claims, influencing negotiating behavior.

Question 5

A 'priming lien' in a DIP financing context refers to a situation where:

Accepted Answer

The DIP lender's lien is granted priority over pre-petition secured liens, subject to court approval and adequate protection for the primed lenders

Answer

A priming DIP lien is granted priority over existing secured creditors under Section 364(d), requiring the court's approval and the provision of adequate protection to the primed secured creditors.

(CIRA) Certified Insolvency & Restructuring Advisor Practice Test

(CIRA) Certified Insolvency & Restructuring Advisor Practice Test

CIRA Negotiation & Workout Strategies 5