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Delphi Corporation

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Delphi Corporation is a multinational automotive parts company specializing in the production of electronics and technology systems. The company filed for Chapter 11 bankruptcy in 2005 after irregular accounting practices were reported, leading to losses in sales and cash while operating expenses were increasing. Under Chapter 11 bankruptcy, the firm was forced to dismiss thousands of employees and sell or close numerous factories in an attempt to limit operating expenses. As per Chapter 11 bankruptcy law, the company was required to devise a plan of reorganization that would help the company become a competitive and profitable enterprise.

Delphi Corporation's management did not deem it necessary to negotiate reorganization with the various claimants because entering bankruptcy allowed the company to continue its daily operations. Chapter 11 bankruptcy calls for a halt to creditors' collection efforts, allowing the firm to devise a plan of reorganization that will bring added value to the company. These plans are not simply orchestrated and require the cooperation and approval of other financial claimant classes. These classes are significant in the bankruptcy process because the approval of a POR is dependent on a positive vote from all classes of the creditors who receive less than the face value of their claims. A plan was deemed accepted if one half of the claimants voted in favour and if their claims totalled at least 2/3 of the class' total claim. However, if any claimant class rejected the plan, then the judge could choose to liquidate the assets under Chapter 7 bankruptcy, require management to construct a new plan for consideration of the claimants, or force the group to accept the reorganization plan. Therefore, Delphi Corporation decided against negotiating reorganization with various claimants because if they get a positive vote on the plan under the conditions of Chapter 11, they can begin to move away from bankruptcy and become competitive and profitable once again. The reorganization plan allows Delphi Corporation to pay off its priority creditors prior to its impaired creditors, and because priority creditors generally offer more financial support than other claimant classes, and therefore, have more to lose in the bankruptcy process. By satisfying their priority creditors first, they guarantee that the most important claimant class will vote in favour of reorganization plan, so even if other claimant classes shoot down the deal, then a high percentage of claims will be in support, and therefore, the judge can ultimately force the other claimant classes to accept the plan via cramdown if the firm's expected value increases by accommodating the proposal.

The reason why Delphi Corporation chose Chapter 11 over Chapter 7 bankruptcy is because Chapter 11 allows the firm to continue its operations until a reorganization plan leading to increased overall value is agreed upon and implemented, whereas Chapter 7 results in the immediate liquidation of assets to creditors and a fresh start for the company. The Chapter 11 decision shows that Delphi believes they can achieve a higher overall value for their creditors by limiting their operating expenses with the proper mix of debt and equity. Chapter 11 also allows Delphi to delay the collection of claims by creditors, thus giving the firm time to devise the best strategic option for raising cash and reducing facilities and business lines that do not fit with the company's future strategic goals framework. By accepting Chapter 7 bankruptcy, the creditors request immediate liquidation of assets, and the company shows their lack of faith in returning to a competitive and profitable enterprise, thereby paying off their debt and accepting a fresh start. A final reason why Delphi Corporation opted for Chapter 11 over Chapter 7 bankruptcy is due to the fact that small firms rarely enter into Chapter 11, and Delphi was a large firm dealing with billions of dollars annually, so liquidating the value of the firm's assets for such a large company would be much more complex and time consuming. Essentially, Chapter 11 bankruptcy signals that a firm has too much invested into the everyday operations of the company to liquidate their assets in the case of bankruptcy. Furthermore, Chapter 11 allows the firm to become competitive while working through the bankruptcy process by securing debt and creating new equity, therefore holding onto the hope that after a voting in a proposed POR the company will return to business as usual. Chapter 7 bankruptcy may be filed for in the event that if the firm is facing harsh economic conditions, requires a foundational adjustment in its business processes or has accumulated too much debt to creditors to ever tread water.

A debtor in possession (DIP) is a company who has filed a bankruptcy petition, but remains in possession of property, upon which a creditor has a lien note or a similar security interest. This defines any corporation that continues to operate its business while under Chapter 11 bankruptcy. Under special circumstances the DIP may keep the property by paying the creditor with fair market value instead of the contract price. Debtor in possession financing refers to a special form of financing for companies in financial distress. This security is usually more senior than debt, equity, and other securities issued by the company. DIP financing is the feature of Chapter 11 bankruptcy that allows a company to continue its daily operations while under strict repayment and operating



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