There is no doubt that factoring enhances cash flow for a business operating as a going concern. But what about a business that is unable to meet its current debt obligations and is facing insolvency?
In the US, a business may seek temporary protection from its creditors by filing a Chapter 11 Bankruptcy Petition in the Federal Bankruptcy Court. The effect of the Petition is to create an automatic stay that suspends the ability of any creditor, secured, or unsecured, to obtain payment from the company or to enforce the security.
Further, the Petition generally prevents the company’s future assets from being appropriated by creditors – notwithstanding any language to the contrary in any security agreement.
That means that a creditor who, in its agreement with the business, used typical language to secure “all the accounts receivables of the business whether currently existing, or hereafter arising, no longer holds an interest in those receivables which come into existence after the filing date of the Bankruptcy Petition.
Effectively, the business can make a fresh start with those receivables and negotiate with the creditors to formulate a Cash Collateral Order (which allows the business to use existing cash to meet at least a portion of ongoing obligations) and the Plan of Reorganization.
However, before Factoring can be implemented to assist the business, a few more steps are required. These are set out in the next post, entitled, Factoring & Insolvency 2.
In the US, a business may seek temporary protection from its creditors by filing a Chapter 11 Bankruptcy Petition in the Federal Bankruptcy Court. The effect of the Petition is to create an automatic stay that suspends the ability of any creditor, secured, or unsecured, to obtain payment from the company or to enforce the security.
Further, the Petition generally prevents the company’s future assets from being appropriated by creditors – notwithstanding any language to the contrary in any security agreement.
That means that a creditor who, in its agreement with the business, used typical language to secure “all the accounts receivables of the business whether currently existing, or hereafter arising, no longer holds an interest in those receivables which come into existence after the filing date of the Bankruptcy Petition.
Effectively, the business can make a fresh start with those receivables and negotiate with the creditors to formulate a Cash Collateral Order (which allows the business to use existing cash to meet at least a portion of ongoing obligations) and the Plan of Reorganization.
However, before Factoring can be implemented to assist the business, a few more steps are required. These are set out in the next post, entitled, Factoring & Insolvency 2.
© 2007 Sanjeev Aaron Williams & Cashwerks All Rights Reserved
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