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Saddled with debt, American video game maker Midway has filed for Chapter 11 bankruptcy.

Creator of the long-running Mortal Kombat said it is seeking protection from creditors after a change in ownership last year pushed forward the deadline for Midway to pay off its debts.

The company said Chapter 11 protection will let the company conduct its business as usual (of losing money annually for nearly a decade). Midway stressed bankruptcy would affect only its US operations.

The events surrounding Midway's crippling debt has spurred a group of the company's bondholders on Friday to file an objection to the bankruptcy. Filed in Delaware court, the complaint claims Midway's plea for relief is "tainted by highly unusual transactions" from Midway insiders which, "to put it charitably, require significant scrutiny."

Midway's bank book has been in hot water since December when the majority shareholder and media mogul Sumner Redstone sold off his controlling 87.2 per cent stake in the company to private investor Mark Thomas for a fire sale price of $100,000 and $70m in debt.

The change in ownership triggered debt repayment clauses that allowed creditors to ask for more than $150m in outstanding notes that otherwise wouldn't have been due until 2025.

The objecting bondholders claim months before Redstone's departure, he ballooned Midway's loan obligations from $15m to $90m in loans issue by the Redstone-owned and controlled entertainment company, National Amusements.

According to the filing, the bondholders said they believe that as a consequence of the sale to Thomson, Redstone was able to capture the benefit of substantial tax losses that would otherwise have been available to Midway.

They also appear to cast doubts about the motives and very identity of Thomas in the filing. They describe him as a "very secretive individual" that is "virtually unknown in the video game industry."

The group claims that no formal disclosures have ever been made regarding the basis for the Redstone-Thomas transaction and that no disclosure has been made regarding Thomas and any potential relationship he or his companies have with any Redstone party. But they claim it's "safe to assume" there is a connection "given that Redstone essentially gifted his rights in the Debtors to Thomas."

Firms objecting to the bankruptcy filing include Highbridge International, Tennenbaum Capital Partners, Magnetar Financial, and Lanphier Capital Management.

A copy of the complaint can be found here. (PDF) ®

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