In your answers to the following set of questions, assume that Ross Corporation has $200 million of assets at book value, $150 million of liabilities owed to 500 different creditors, and $50 million of common equity book value. Also, assume that Ross has failed to make timely payments on its debt. The assets are worth less than the $200 million shown on the balance sheet, although their actual market value is uncertain. The company issued mortgage bonds that are held by public bondholders and are secured by real estate, and 15 different banks hold loans secured by all of the company’s accounts receivable, inventories, and equipment. There are also some 250 general (unsecured) creditors, including accounts payable accrued wages and taxes, and pension plan obligations. Answer the following questions:
a. Should Ross attempt to resolve its problems using informal procedures, or should it file for bankruptcy? Why?
b. What are the two key chapters in the bankruptcy code, and what is the primary effect of each one?
c. Who is more likely to initiate formal bankruptcy proceedings-the company or creditors? What exactly would be filed to start the bankruptcy process?
d. If the company initiated the proceedings, would it be more likely to seek relief under Chapter 7 or Chapter 11? Would the same true if a creditor initiated the proceedings? Explain.
e. What is the common pool problem, and would it be likely to arise in Ross’s case in the absence of a bankruptcy filing?
f. What is the automatic, stay, and is it likely that it would be applied in this case?
g. What is a pre-pack, and is it likely that one would be used in this case?
h. What is a cramdown, and is it likely that one would be used in this case?
i. Define the terms absolute priority doctrine and relative priority doctrine.
j. If the assets were sold at auction and the company were liquidated, how would the proceeds be divided up?
k. If the company were reorganized, who would get what in the reorganization?