Video game maker Atari recently filed for Chapter 11 bankruptcy protection. The company is seeking in business bankruptcy to separate from its French parent company. The filing comes as the company is experiencing financial challenges. The company cited “adverse trading conditions and limited development funds,” in addition to the expiration if its credit agreement with its sole lender in March, noting that no replacement investor had been found. Atari in the U.S. plans to complete a sale or restructuring of all of its assets within 90 to 120 days. Atari said that it has approval for a $5 million loan from a company that specializes in distressed lending. Atari plans to “conduct business as usual” during the Chapter 11 process. The CEO noted that he believes the filing is the best decision for the company and shareholders. The filing estimates $1 to $10 million in assets and $10 to $50 million in liabilities. A list of 30 unsecured creditors included retailers such as Walmart and Kmart.
Business or commercial bankruptcy, according to a Chapter 11 bankruptcy filing, is intended for business reorganization. It allows companies to temporary hold creditors off while it proposes a reorganization plan that may include reducing debt and increasing cash flow to return to profitability post-bankruptcy. The alternative, which can also provide relief to struggling company, is a Chapter 7 bankruptcy filing which involves the liquidation of assets and debts.
Because the company’s goal in a Chapter 11 bankruptcy filing is to return to profitability it will begin by first attempting business debt negotiations to renegotiate contracts or leases to either have debts discharged or to partially repay them. Creditors have an incentive and are typically willing to work with a company that owes it money that has entered a commercial bankruptcy because the creditor commonly will not fare as well under a Chapter 7 liquidation bankruptcy as it would under a Chapter 11 bankruptcy. In the reorganization plan, the creditors are placed in classes with an order of priority. The creditors must vote on, and the bankruptcy court must approve, the reorganization plan.
If the reorganization plan is reasonable, created in good faith and in compliance with all legal requirements, the court will commonly approve it. Once the reorganization plan is confirmed, the debts that existed prior to the plan, but not addressed in it, are discharged. The filing company must then repay the creditors in accordance with the reorganization plan.
A business or commercial bankruptcy allows a struggling company to restructure its debt, and hopefully return to profitability. Though the process can be complex, it may certainly be worth it to a struggling company.
Source: USA Today, “Atari’s U.S. unit files for Chapter 11 bankruptcy,” Kevin McCoy, Jan. 21, 2013.
Atari files for Chapter 11 business reorganization bankruptcy