BBB Company has been a successful manufacturer of quality electronics products for the past 20 years. It is a publicly traded company with 1 million shares outstanding. During the past three years, the company has fallen on hard times. Profit margins in the electronics manufacturing industry have been squeezed due to competition in Japan. For most of the company’s history, research and development (R&D) costs have been a substantial portion of expenses. However, in the last three years, there have not been any R&D expenses. This may have led to the decline in perception of quality, for which customers have expressed concern.
Suppliers have also been complaining that BBB Company has bought increasing amounts of inventory on credit and has pressured them to loosen credit terms. However, the company shows a decreasing inventory over the last three years as sales have declined. Recently, the company CFO talked the local bank into increasing BBB’s credit limit, and the company has used its entire line of credit. The CFO convinced the bankers that the current downturn in sales was temporary and that the company had a new product line that would be very lucrative.
With all its financial pressures, BBB recently decided to file for bankruptcy. It cannot cover the interest payments on loans, nor can it meet its growing accounts payable balance. As creditors begin to seek monetary recovery through assets, they discover that there seems to be very little inventory, and expenses seem extraordinarily high in the current year. Also, some cash (from loans) has disappeared without leaving a paper trail.
1. What evidence indicates that the company has been planning to declare bankruptcy? If so, for how many years?
2. If this bankruptcy was fraudulently planned and assets have disappeared, will BBB Company still be allowed to declare bankruptcy?