READJUSTMENT OF THE CAPITAL ACCOUNT We have restricted our use of the word " reorganization " to situations involving a foreclosure, or otherwise a sale of the property at the instance of creditors. Common use applies this term more broadly to include any substantial change in the financial plan, not only when there is no sale at the instance creditors, but even when the change does not at all result from insolvency. It seems in the interest of a more careful nomencla ture to reserve the term " reorganization " to cover such cases as we have already dis cussed.
Sometimes substantial changes are made in the plan of capitalization as a result of insolvency without involving a judicial sale. This can most advantageously be done when, though the assets are ample, some business reason has made it impossible for the corpor ation to meet its interest charges or its ma turing obligations. It can sometimes be forced through when a class of creditors realizes that a reorganization involving a judicial sale would cut them off or would reduce the amount they are apt to realize from their claims below the amount they believe the values really in the property ought to pro duce for them. It may especially be utilized when the stockholders believe that the in solvency is temporary and are willing to aid substantially in having the finances arranged in some way that will not involve cutting off their equity. Any creditor whose claim re mains unpaid can eventually force a judicial sale of the assets, and those interested in effecting a solution of the corporation's finan cial troubles can hold this whip over those who are inclined to block, or refuse to support, endeavors to procure an adjustment without such a sale. If the financial difficulties are surmounted without a judicial sale in a way that involves substantial changes in the finan cial plan, we will say that there has been a "readjustment of the capital account." A readjustment involves much the same matters as we have discussed under the head ing of "Reorganization," but it is carried through without the judicial sale. The prop erty is not, however, transferred to a new cor poration, and new securities, including the new stock, issued in payment for the property transferred to the new corporation. Since,
generally speaking, no property is being transferred in any way, any new stock issued must be paid for in cash at par. Either the stock of the corporation must be worth par in spite of the present embarrassment, or worth so near par that parties having an interest in the situation are willing to pay par for it in order to straighten out the situation and avoid greater loss in some other direction.
Of course, it would be rather extraordinary that the common stock of an insolvent cor poration should be worth par. Ordinarily, if new stock is to be issued an issue of preferred stock would have to be authorized. Or, if there is an existing issue of preferred stock, a new issue with a prior preference may be created. The stockholders may be sufficiently interested in carrying out the readjustment to contribute some of their holdings to the corporation, which, becoming treasury stock, the corporation may proceed to sell at less than par. This would involve practically unanimous action, otherwise some of the stockholders would be making a sacrifice for the benefit of other stockholders who are not sacrificing at all.
The readjustment of the Westinghouse Electric and Manufacturing Company fol lowing the financial crisis of 1907 presents a good illustration. The company had been expanding its business rapidly, and as a re sult had a large floating debt, the maturities of which the corporation was unable to meet in the face of the existing stringent financial conditions. This debt consisted of two classes: (1) merchandise debt or credit given by con cerns which furnished materials to the com pany, and M bank debt, the result of floating the company's paper generally throughout the country and of borrowings from the local banks. The business depression which set in after the general financial crisis of the fall of 1907 caused a marked falling-off in the earn ings of the company and made its situation one of great difficulty. Several plans for read justment failed before one finally succeeded.