Business Studies
Respond to the following in a minimum of 175 words:
Choose an issue recently covered in the news faced by a business in the United States.
Discuss the issue involved.
Explain how the law and constitution were applied in the resolution.
ANSWER
Forever 21 Bankruptcy
Forever 21 underwent bankruptcy proceedings. As of the petition date, the debtor’s capital structure consisted of outstanding funded debt obligations in the aggregate principal amount of $500 million (Wang & Kim, 2019). There are a number of events that led to the filling of the chapter 11 case. The major one being a decrease in mall traffic. The decline in mall traffic led to sales reduction. Despite all the efforts made by forever 21 to improve its sales, it remained saddled with excessive store space with no sales to back up the long term lease agreements they had previously entered. The company’s liquidity has dwindled. Although it passed the vendor relationship liquidity test, the dwindling cash flow, and the inability to access incremental liquidity made it hard for it to attain stability.
Another factor that led to its predicament was a burdensome international portfolio. They engaged in a rapid international expansion that turned strenuous to its finances due to operation scaling inefficiencies, leading to global underperformance. Forever 21 also experienced borrowing base challenges. The ABL facility borrowing base made it difficult for them to clear inventory, which led the company to aged inventory that crowded out new products. Low liquidity made it difficult to procure new products.
The company instituted an in-court- process under chapter 11 to attain an operational rebirth. The primary objective was to close struggling stores worldwide, refurbishing its merchandise and seek better trade terms. Chapter 11 of the United States Bankruptcy Code provides for the reorganization of a corporation or a partnership. Under this chapter, a debtor is required to formulate and propose a plan for reorganization to keep the business afloat and pay the creditors’ overtime. A chapter 11 case is instituted through filing a petition in the bankruptcy court. In this case, the petition filed was voluntarily done by Forever 21. The petition was accompanied by a written disclosure statement and reorganization plan. Under Chapter 11 of the Bankruptcy Code, the case filed allowed Forever 21 to keep its franchise and implement a suitable strategy to pay off all its creditors.
Reference
Wang, K., & Kim, I.A. (2019). At its peak, Forever 21 made $4.4 billion in revenue. Here’s what led to the brand’s downfall and bankruptcy. Retrieved 22 October 2020, from https://www.businessinsider.com/forever-21-bankruptcy-rise-fall-retail-apocalypse-fast-fashion-2019-9?IR=T#:~:text=Forever%2021%20has%20filed%20for,%22Don%22%20Chang%2C%20billionaires
