The creditors and stockholders are compelled of course, to pay the expenses of their protective com mittees. Usually the members of these committees receive some compensation for their services, as de fined in the deposit agreements. The greater the amount of the claims or securities deposited, the smaller is the percentage of expense, and this accounts for the reluctance of bondholders to deposit under such committees until they see how things are going. Many inducements are held out to deposit, one of the most important being a limitation upon the expense which the committee may incur. Sometimes foreign bondholders hesitate to deposit, or they may have separate committees, or utilize a separate trustee. They usually cooperate, however, with the domestic committees in reorganization.
If a reorganizition upon a fair basis is likely, it is best for the creditor to deposit. If many of them refuse, their refusal may prevent a reorganization. Of course, those who deposit late are compelled to bear the same expense as those who deposited early, and very late depositors are sometimes subjected to some slight penalty.
7. Duties of the trustee under the defaulted bond. —It will be remembered that when the bonds were originally . issued, the security was pledged with a trustee for the benefit of all bondholders, and the trustee was given authority to act for the bondholders in the protection of their interests, including the right, under certain limitations, to foreclose in event of a default.
It is necessary therefore for the bondholders' pro tective committee to secure the cooperation of this trustee. He is the one who will bring the foreclosure suit, as a rule, assisted by counsel for the bondhold ers' protective committee. If the committee has suc ceeded in obtaining a large enough percentage of the bonds to control the action of the trustee, little difficulty is likely to be encountered. The trust deed usually provides what action the trustee shall take in the event of receivership or default, his duty is to fulfill these conditions and at the same time cooperate as far as possible with the protective committee. Since the trustee is not himself an interested party, the prin cipal work naturally falls upon the committee.
8. Examination, appraisal and upset price.—Since most reorganizations demand that the property be sold under foreclosure and bought in by a new company representing the reorganizers, it becomes necessary that the value and earning power of the various parts of the property shall be determined, in order that the reorganization may be properly financed and justice be done both to the security holders who participate in it and to those who do not. Those who participate
in the reorganization give up their old claims or se curities for new, but those who do not deposit must be paid off, out of the proceeds of the foreclosure sale. There is likely to be but one bidder at the sale, repre senting the reorganizing interests, since any outside bidder would have to put up the entire amount in cash, while the reorganizers may settle with their own depositing members in securities of the new company instead of cash, making it much easier for them to finance the purchase.
The reorganizers are anxious to purchase the prop erty as cheaply as possible, while the non-participat ing stockholders or creditors desire it to be sold at the highest possible price. When practically all join in reorganizing, the sale price is not so important. The property is usually sold as a whole in order to preserve it as a complete operating plant, altho sometimes cer tain parts which are not needed by the reorganizing interests are sold separately. In order to protect non-participants, the court must fix a minimum price, known as the upset price, below which no bids will be received.
After the foreclosure suit has been instituted by the trustee under the mortgage, the protective committees immediately institute an exhaustive examination and appraisal of the property. This often requires a year or more, and is used to determine the upset price and to form the basis for a reorganization. In fixing the upset price, the court will give all parties at interest a chance to be heard, but it ordinarily adopts the price which the appraisal has determined as fair.
9. Reorganization plan of reorgan ization is usually determined by a central com mittee, appointed by the various protective commit tees. Its duty is to formulate the plan, obtain the adherence of the various protective committees and draw up an agreement embodying it for the ac ceptance of the various claimants. If the plan and the agreement are acceptable to the protective com mittees, the agreement is deposited with a trustee and advertised so that the various parties at interest may deposit their claims or securities under it and join in the reorganization.