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Business Law Bankruptcy and Insolvency BUS2010

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Business Law Bankruptcy and Insolvency BUS2010

Case study

Hometown Hardware Ltd. (Hometown) and its owners, Bill Ikeda and Martha Wong, were introduced in Chapters 25 and 26. They have successfully operated a building supply outlet in Timmins, Ontario, for the past 35 years. Eighteen months ago, Bill and Martha became concerned about the imminent arrival of a major international hardware and building supply chain in a new shopping area on the outskirts of town.

They decided to expand their operation in order to respond to this competitive threat. To finance the expansion, they sold $ 200 000 worth of shares in Hometown and were able to borrow $ 200 000 from their bank. The loan was secured by a mortgage for $ 100 000 on Hometown’s land and buildings, a line of credit for $ 100 000 secured by inventory and accounts receivable, and personal guarantees signed by Bill and Martha. The expansion strategy failed. Just after the large competitor opened, the housing market collapsed. Hometown has experienced a 30 percent drop in sales to consumers and local tradespeople. Bill does not expect this decline to abate.

Business Law Bankruptcy and Insolvency BUS2010

When the chain first opened in Timmins, Bill reacted with a costly promotional campaign. To cover this extra expense, Bill borrowed $ 10 000 from his brother, George. More recently, he was under pressure from a major supplier, Good Lumber Ltd. ( GL), to pay his overdue account. Bill sold land that the company owned adjacent to the store. With the proceeds, Bill paid $ 20 000 to GL and repaid George. Bill wants to keep his business running as long as possible, but he fears that the store may no longer be viable and is wondering whether he should try to preserve, sell, or close it.

The company owns the property (subject to a mortgage) on which the business is located and leases several vehicles and pieces of machinery. Bill hopes to continue to draw his regular salary from the business; pay Martha as the store manager; and make regular payments to the bank on the mortgage and line of credit, to the lessors of the equipment he is using, and to his regular suppliers. He is concerned about the guarantees that he and Martha have signed for the bank relating to the corporation’s loans. He is also late in remitting employee deductions for income tax and pensions to the government. APA FORMAT

  1. What choices does Hometown have in dealing with this financial crisis?
  2. What rights do Hometown’s creditors have?
  3. What will happen to Hometown, its owners, its creditors, Bill, and Martha if bankruptcy occurs?
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