Reorganization – Definition

Cite this article as:"Reorganization – Definition," in The Business Professor, updated September 27, 2019, last accessed October 22, 2020,


Reorganization Definition

Reorganization is a process structured to restore a firm that is bankrupt or one that’s financially unstable. A reorganization entails asset and liability restatement, and also holding talks with creditors so as to arrange maintaining repayments. Reorganization is an effort at prolonging the life of a company experiencing bankruptcy via special arrangements, as well as, restructuring in a bid to reduce the likelihood of past situations reoccurring. Usually, a reorganization signifies the transition in the tax structure of a company.

Reorganization can also imply a change in a company’s structure or ownership via a merger or consolidation, recapitalization, transfer, spinoff acquisition, or identity change, or management structure. An endeavor such as this is also referred to as “restructuring”.

A Little More on What is a Reorganization

The court supervises the first reorganization type and centre on restructuring the finances of a company after a bankruptcy. During this period, a company is protected from creditors’ claims. Once the bankruptcy court authorizes a reorganization plan, the company would repay creditors how best they can and also restructure its operations, finances, management, and other necessary aspects needed for its revival.

The United States bankruptcy law gives public companies the option of reorganization as against liquidation. Through Chapter 11 bankruptcy, firms are capable of renegotiating their debt with their creditors so as to try getting more favorable terms. The business keeps on operating and strives at repaying its debts. This step is considered drastic and the process, complicated and expensive. Firms without hope of reorganization must review Chapter 7 bankruptcy, also referred to as liquidation bankruptcy.

Reorganization: Who Loses?

A reorganization is bad for creditors and shareholders, who might lose a major part or all of their investment. Supposing the company emerges successful from the reorganization, it might issue new shares that would eliminate the previous shareholders. Supposing the reorganization is unsuccessful, the company would liquidate and also sell off whatever assets are left. Shareholders would be last to get any proceeds and would typically get nothing unless money is remaining after paying senior lenders, creditors, bondholders, and also preferred stock shareholders.

Structural Reorganization

The second reorganization type has more likelihood of being good news for shareholders because it’s expected to enhance the company’s performance. To attain success, it’s mandatory that the reorganization improves company’s decision-making capabilities, as well as, execution. This reorganization type can occur after a new CEO is gotten by the company.

In some situations, the second reorganization type occurs before the first type. If the attempt of the company at reorganizing via something such as a merger is unsuccessful, it may then try reorganizing through Chapter 11 bankruptcy.

References for “Reorganization”

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