Commercial Bankruptcy
Commercial or corporate bankruptcy is a very complicated process. Apart from evaluating the many factors that contributed to the failure, the corporation must address crucial legal issues, face a multitude of stakeholders and creditors, and re-examine its strategic objectives. Because a bankruptcy filing is a thoroughly embarrassing admission that it has failed to achieve its goals, a corporation should be circumspect in deciding to file for corporate bankruptcy, and do so only when there is no other option.
Corporate or commercial bankruptcy may follow any of two basic forms: Chapter 7 and Chapter 11.
A Chapter 7 or straight liquidation will require the company to turn over all company assets to a trustee appointed by the court, and it is the trustee's job to sell the assets and distribute all proceeds (net of liquidation expenses) to all the creditors. Unlike individual debtors, corporate debtors under a Chapter 7 bankruptcy are not allowed to exempt any property and are not entitled to a discharge. Since corporations always have some assets, the trustee always has something to sell in a corporate liquidation. Once liquidation is completed, corporations are deemed dissolved.
Chapter 11 involves reorganization, and while the plan for it is being developed or processed for court approval, the corporation may continue operating. This reorganization plan details the changes believed to be necessary in order for the corporation to regain profitability. Upon the plan's approval, the court authorizes the discharge of debts and obligations; new financing (in the form of securities, new debt and fresh equity) is arranged; and a different or reorganized entity takes over. If the plan cannot be formulated or is disapproved, the option for the company may be straight liquidation, sale of assets and use of the proceeds to settle liabilities.
Because the details are complex, you need to hire a bankruptcy attorney to help you determine the best approach to bankruptcy for the company. This will take into account your immediate goals (whether to shut down or to keep going), the state of the company’s finances, and its relationship to suppliers and creditors.