Transactions with creditors - Distressed firms
5 important questions on Transactions with creditors - Distressed firms
How do governance strategies operate in distressed firms?
Complemented by: standards and trusteeship
1. Transition into bankruptcy: creditors-shareholders
2. Bankruptcy itself: creditors-creditors
What is the standards strategy?
- Live up to certain standards
What are the three categories of the standards strategy?
2. Controlling shareholders
3. "Favored" creditors
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In what way does the standards strategy recruit third parties as gatekeepers? TQ
P 134-135
By making them wary of desperate transactions entered into by a distressed debtor, whose shareholders may be engaging in asset substitution.
- The gatekeeper will only be able to rely on the transactions if they can show they were in good faith for benefitting the debtor's business.
What are the three applications of the standards strategy in regard of creditors and third parties?
- Make the third parties wary of desperate transactions by the distressed debtor, whose shareholders engage in asset substitution
2. Insider creditors who influence distressed debtors in a harmful way (involvement in management by banks, as shadow directors)
- May be held responsible
3. Preferential transactions: particular creditor being placed in a better position than the others in the debtor's bankruptcy - act in bad faith
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