For instance, a concern with liabilities amounting to $100,000 and assets of $175,000, would sell under foreclosure for perhaps $50,000, since the plant, ma chinery and stock are designed especially for that business and are not of much value to others. By purchasing at bankruptcy sale the stockholders can get a property, free of debt, worth to them over twice its sale price. Against it they may readily borrow at once most of the cash paid for it. But probably no one could be found who would advance these funds to reorganize the old company with its large debt.
Only when industrial receivership is friendly to, and dominated by, experienced management in the inter ests of stockholders, does it hold out much hope of a fair reorganization. As a rule, creditors are neither technically informed in the business nor interested in saving anything for stockholders. If preferred cred itors dominate the receivership, they are likely to ride rough-shod over general creditors and stockholders alike. All they are interested in is the payment of their claims. The interests of others receive but scant recognition. The court will usually follow the recommendations of the receiver, even tho junior cred itors and stockholders may oppose. Reorganizations which give any chance to stockholders or unsecured creditors are scarce where the receiver is the nominee of preferred creditors.
One illustration of this will suffice. The names are omitted for obvious reasons. A company with a splendid business, assets twice its liabilities, and with no preferred creditors got into difficulties for lack of working capital. Certain bankers, being large creditors, suggested a friendly receivership pending reorganization. One of those suggested by the bank ers for receiver approached the principal stockholder, who was also manager, and promised that if ap pointed, he would retain the practical management in office and represent the stockholders' interests in se curing a satisfactory reorganization.
Upon these assurances, he and one other were ap pointed receivers, with the consent of the stockhold ers and upon the advice of an attorney who had repre sented the principal stockholder for fifteen years and who was also attorney for the bankers. To make a long story short, this business was wound up in a short time, with the bankers as preferred creditors. Others received practically nothing, except the receiv ers and the attorney, who fared richly at the expense of the stockholders and the unsecured creditors. Needless to say, the former managers were not con sulted under the receivership, nor would such conse quences have been possible under their advice. No opportunity was given them to reorganize or to pull their company out of difficulties. This "coup" was accomplished by the postponement of action of the other creditors and stockholders past the four-months period required for the bankers to get preferred security, thus avoiding bankruptcy proceedings under the National Bankruptcy Act.
Immediate proceedings in bankruptcy would have been the proper course and would have been ad wised by any independent and experienced attorney, had the stockholders engaged one. This is a typical case of misplaced confidence and poor financial pol icy. Many unsophisticated business men have been misled in this manner trying to reorganize their com panies under secretly hostile or unprincipled control.
4. Elements of reorganization.—The reorgani zation of a large company is a complicated matter, es pecially where there are many widely scattered inter ests, with various grades of claims against the com pany. In the railway field, frequent reorganizations have led to the adoption of a fairly uniform procedure involving the following elements: 1. Company placed under receivership 2. Voluntary protective committees formed to rep resent each class of creditors and stockholders in the company 3. Deposit of securities and claims with trustees, under trust agreements drawn up by each of the vari ous protective committees, giving the latter certain powers to act in the interests of the claimants whom they represent 4. The selection, by joint action of the various pro tective committees, of a reorganization committee to formulate and submit a plan of reorganization 5. A thoro examination and appraisal of the prop erty as a basis for the court to fix an upset price, and the reorganization managers to carry thru an equit able plan of reorganization 6. Reorganization plan drawn up and submitted for the approval of the bankers and protective com mittees, naming therein certain reorganization mana gers to carry out the plan 7. If the plan is found satisfactory, an underwrit ing agreement is made between the reorganization managers and interested bankers to insure adequate new capital for the reorganized undertaking 8. A reorganization agreement, embodying the de tails of the plan, is drawn up and submitted to the va rious security-holders, who are asked to deposit their securities with trustees for the purposes of consum mating the reorganization 9. Campaign to get the assent of security-holders to the new plan and to eliminate dissenting minorities 10. New company incorporated to purchase the business and property 11. Foreclosure under the defaulted security, and cash settlement with security-holders who are not par ticipating in the reorganization 12. The issue of new securities and the collection of assessments for the purpose of converting into se curities of the new company the claims of those par ticipating in the reorganization 13. The pooling of the new stock under voting trustees for the purpose of securing a continuous and uninterrupted management during the early and criti cal period of the new company.