CIRA Principles & Practices 5 — Questions and Answers
Question 1: An 'out-of-court restructuring' (distressed exchange) is generally preferred over a formal bankruptcy filing because it:
- Allows the debtor to ignore holdout creditors entirely
- Is typically faster, less expensive, and avoids public stigma and operational disruption (Correct answer)
- Provides an automatic stay against all creditors
- Guarantees higher recovery rates for all creditor classes
Correct 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.
Question 2: In a restructuring context, 'net operating loss (NOL) carryforwards' are valuable because they:
- Increase the company's EBITDA in future periods
- Can offset future taxable income, reducing the reorganized debtor's tax burden (Correct answer)
- Are always preserved in full during a bankruptcy reorganization
- Allow the debtor to avoid paying administrative expense claims
Correct 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.
Question 3: Which document provides the court and creditors with detailed information about the debtor's history, business, and proposed plan of reorganization?
- The Statement of Financial Affairs
- The Disclosure Statement (Correct answer)
- The Schedules of Assets and Liabilities
- The Monthly Operating Report
Correct 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.
Question 4: A CIRA candidate should understand that 'executory contracts' in bankruptcy are contracts where:
- Both parties have fully performed all obligations
- Material obligations remain unperformed by both parties, giving the debtor the right to assume or reject them (Correct answer)
- The debtor is the sole party with remaining obligations
- All payments have been made but title has not transferred
Correct 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.
Question 5: In distressed M&A, a buyer purchasing assets through a § 363 sale receives them:
- Subject to all pre-existing liens and encumbrances
- Free and clear of most liens, claims, and interests with court approval (Correct answer)
- Only after all creditors have voted to approve the transaction
- With a two-year clawback right retained by the bankruptcy estate
Correct 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.
Question 6: The 'waterfall' concept in credit analysis refers to:
- Cash flow projections shown in a stacked bar chart format
- The sequential order in which different classes of creditors and equity holders are paid from available value (Correct answer)
- A method for calculating monthly interest accruals on secured debt
- The distribution of collateral proceeds among co-borrowers in a syndicated loan
Correct 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.
Question 7: When analyzing a distressed company, a restructuring advisor would typically classify 'trade payables that are 90+ days past due' as an indicator of:
- Improved vendor relationships and extended payment terms
- Liquidity stress and potential inability to meet obligations as they come due (Correct answer)
- Improved working capital management efficiency
- A voluntary early-payment discount program
Correct 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.
CIRA Principles & Practices 5
An 'out-of-court restructuring' (distressed exchange) is generally preferred over a formal bankruptcy filing because it: