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Bankruptcy is not a crime. It is the fraudsters within the bankrupt organization who through mismanagement of funds, cause the company to be at a fixed position that could get them persecuted under state and US federal laws. However if the company is a limited corporation is treated differently such that the organizational entity is subject to treatment that is outlined in the United Nations Bankruptcy Code (Judith, Arthur & Mary, 2011).
Chapter under Which Hostess Brands Bankruptcy was Filed
The bankruptcy case which Hostess Brand Inc. was facing was filed under chapter 11 of the United Nations Bankruptcy Code. There are several chapters, each relating to different situations of bankruptcy and are found in Title 11 of the United States Code (Anon, 2004).
Chapter 11, which Hostess Brands Inc case was filed under mainly deals with corporate bankruptcy. Here, the company reorganizes itself such that it is able to settle its debts in this way restoring itself back to business. The federal government like in chapter 7 cases assigns a trustee to the case. In this case, the trustee is not responsible for the liquidation of the company exclusively but its reorganization. A detailed audit is performed where the checks and balances are assessed to establish the true financial condition of the company. The company is then subjected to a host of conditions –including the inability to function fully as an independent company- until all its debts have been settled (Irs.org, 2013).
Chapter 7 deals with the liquidation of companies and an individuals’ assets. Usually the federal court appoints a trustee who oversees the liquidation of the debtor’s assets. The liquidation follows a detailed audit of the debtor and its creditor’s accounts. The trustee can be allocated to the debtor through the state court with permission from the federal court. This chapter is considered as the simplest form (Irs.org, 2013).
Chapter 12 on its part deals with fishermen and family farmers, chapter 13 is the wage earner bankruptcy and chapter 15 deals with international bankruptcy cases (Irs.org, 2013).
The Degree of Debt Trouble That the Company Was Suffering and What Other Debt Financing Options It Had Available Besides Bankruptcy
Hostess Brands faced the possibility of bankruptcy in December 2010. This was the second time the company had filed a case on bankruptcy this time based on article 11 as in the former case where it has filed its case under chapter 11 (Anon, 2004).
Its financial position was so poor it could not afford to pay pension for its workers. It had back logged on this creditor for a year now. On the application, the company mentioned that its debts stood at $860 million. Its creditors at the time included Teamsters Union.
The financial alternative that it proposed was the use of $75 million, from Monarch Alternative Capital, Silver Point Capital and other investors, which it would use in operation as debtor-in- possession, DIP.
On the part of its creditors, Hostess Brands proposed that it would give the creditors compensation package that would include $1.5 million along with cash incentives amounting to $1.95 million. The cash incentives would be given in the form of a long term compensation package. This proposal was issued through the then CEO Brian Driscoll
The company had an employee base of 19,000 people. The terms to which they would be subjected to formed headlines as they went to the streets to protest low pay. In a settlement with Teamsters Union, Hostess Brands was to reduce the pay and benefits of the employees while maintaining funding for the pension plans it had with the Union. Moreover, the company was not in a position to continue paying the employees. The company’s executives also got a 1 percent pay cut in an effort to manage the bankruptcy (Anon, 2004).
Why Debt Financing Alternatives Were Not Viable
Following apt considerations, the company announced that it would lay off 18,500 of its employees. It would then use the $75 million to exit bankruptcy. However, the implications of this move did not favor Wall Street investors but did not affect the company as much. This finding was made by the BCTGM International Union (Simkovic, 2009).
Another alternative would be selling the company. Several buyers had expressed their interests. These buyers included Walmart, Grupo Bimbo, Flowers Foods, Kroger and Target. The strategy the company employed in selecting the buyer was based on the type of brand that would be suitable (Anon, 2004).
In addition, the option of filing under chapter 7 was an alternative that the U.S. Trustee for the Southern District lawyer Tracy Hope Davis had seen as viable. The lawyer filed the motion which was ruled against by Judge Robert Drain on the 21st of November, 2012. The ruling was made on the claims that liquidation would not solve the creditors’ quests adequately since bonuses would be granted by insiders. He added that given the financial position of the company, liquidation would not be appropriate since before a trustee is allocated the case the remaining assets would have lost value leading to even greater losses.
Through the ups and downs and court cases that accompanied the Hostess Brands Case, it was finally decided through the federal court that the company would be liquified. The decision was made on the 29th of November, 2012. The court dictated that all the workers present their back-pay claims by the 21st of March 2013. Hilco was chosen as the company to do the sales of Hostess Brands’ equipment, real estate and machinery. The proceeds would go towards settling debts (Anon, 2004).