Question

Klose Corp. is worth $15 million as an operating company. The company is in financial distress, and if it were liquidated, the company’s value would only be $8 million. To avoid liquidation, an adjustment bureau prepared a reorganization plan that needed the approval of Klose’s 10 creditors. Each creditor currently has a claim of $1.5 million toward Klose’s assets. The workout plan proposes that each creditor accept a settlement of $1 million in exchange for the $1.5 million outstanding debt. The equity holders will be entitled to a claim of $5 million [$15 million – (10 x $1 million)]. However, 2 of the 10 creditors did not agree to the workout plan and refused to tender their bonds for $1 million when the actual face value of the bonds is $1.5 million for each creditor. Considering that two creditors still have a claim of $1.5 million each against Klose’s assets, the remaining 8 creditors also rejected the workout plan.

Klose Corp.'s situation represents the: ________

a. Fraudulent conveyance problem
b. Common pool problem
c. Holdout problem

Answer 1

C. Holdout Problem

Step-by-step explanation:

Based on the information given Klose Corp.'s situation represents the: HOLDOUT PROBLEM reason been that when the company is facing difficulty in paying their creditors the company will start to renegotiate in order for the creditors to reduce their debt and in a situation where the creditors did not agreed , withhold or refuse to give the company permission, problem will tend to arise which is called HOLDOUT PROBLEM