Following news that several companies have filed for bankruptcy protection including popular regional telecoms provider, Digicel, there has been a lot of buzz about what the term bankruptcy means and how it affects the operations of a company.
Does it mean that one of the regions most loved brands will be going out of business?
Not necessarily. More often than not, filing for bankruptcy gives companies who can’t repay their debts a lifeline, an opportunity to reorganise.
What is filing for bankruptcy?
Filing for bankruptcy is a legal process that can reduce, restructure, or eliminate a company’s debts.
Bankruptcy is a court proceeding in which a judge examines the assets and liabilities of a business that cannot pay its bills. The main aim is to help businesses eliminate or repay their debt under the guidance and protection of the bankruptcy court.
There are two main types of bankruptcy proceedings -Chapter 7 or Chapter 11- however, there are other types, including a Chapter 15 proceeding- the type the telecoms firm’s Digicel Group One holding company filed.
Types of bankruptcy
The type of bankruptcy filing is key to understanding whether a firm goes out of business completely or restructures.
In the United States, bankruptcy is governed by federal law, commonly referred to as the “Bankruptcy Code”. Chapter 7 of the code (known as liquidation), forces a company to clear its debt by selling all of its assets. In this instance, the company stops all operations and goes out of business entirely. A trustee is appointed to sell (liquidate) the company’s assets, and the money is used to pay off debt.
In a Chapter 11 bankruptcy often referred to as “reorganization bankruptcy” allows businesses to remain operational while they restructure their debts and assets, so it can pay back creditors. This is used primarily by large corporations like General Motors, and United Airlines, but can be used by businesses of any size.
Chapter 15 filings deals with cross-border insolvency, usually foreign companies with US debts. This type of filing usually grants access to US courts for representatives in corporate bankruptcy cases outside of the jurisdiction (outside of the United States).These cases, usually start off in a foreign country and end up in US courts to try and protect financially troubled businesses from going under. The US courts have a limited scope of power in these cases to only the assets or persons that are in the United States.
A hearing in the Chapter 15 bankruptcy case involving Digicel Group One is scheduled for an undisclosed date in June.
According to court documents, Digicel Group One Limited has about $7.4 billion in outstanding debt and is seeking to restructure about $2 billion as part of an agreement with shareholders.