Reorganization. When the financial reconstruction or rehabilitation of a railroad or other
corporation is voluntary— that is, by concurrence of the security-holders—the term readjustment
applies. When the financial reconstruction is compulsory—that is, when it is effected by a
receivership and foreclosure—the term reorganization applies. Most reconstructions are
compulsory; they seldom can be effected except by legal process following insolvency.
The method of reorganization is ordinarily as follows: After default has been made in interest on
bonds, say the first mortgage bonds, a receiver is appointed, after which a plan of reorganization
is formulated. Provision usually is made in the plan whereby the first mortgage bonds, together
with the accumulated unpaid interest, are to be paid in full. Such holders as may desire to do so
take for their bonds bonds of a newly formed company, with perhaps stock for the unpaid interest.
Such holders as prefer cash for their bonds and unpaid interest are paid in cash. It sometimes is
the case that the holders of bonds who take bonds of the new company for their old bonds receive
the unpaid interest in cash.