Going Bankrupt in the World

It all starts by defaulting on an obligation: Money owed to creditors or to providers is not paid on time, interest payments owed on bank loans or on corporate chemical bonds issued to the public are withheld. It may be a impermanent problem - or a lasting one.

As clip travels by, the creditors gear up and litigate in a tribunal of law or in a tribunal of arbitration. This is a technical or equity insolvency status.

But this is not the lone manner that a company can be rendered insolvent. It could also run liabilities which will outweigh its assets. This is bankruptcy insolvency. True, there is a argument raging as to what is the best method to measure the assets and the liabilities. Should these assessments be based on market terms - or on book value?

There is not one decisive answer. In most cases, there is strong trust on the figs in the balance sheet.

If the dialogues with the creditors of the company (as to how to settle down the difference arising from the company’s default) fails, the company itself can register (=ask the court) for bankruptcy in a "voluntary bankruptcy filing".

Enter the court. It is only 1 participant (albeit, the most of import one) in this unfolding, complex drama. The tribunal makes not take part directly in the script. To state its lines - tribunal functionaries are appointed. They work manus in manus with the representatives of the creditors (mostly lawyers) and with the management and the proprietors of the dead company.

They confront a tough decision: should they waste the company? In other words, should they terminate its business life by (among other things) merchandising its assets?

The return of the sale of the assets is divided (as "bankruptcy dividend") among the creditors. It do sense to take this path only if the (money) value generated by settlement transcends the (money) the company as a going concern, as a living, functioning, entity.

The company can, thus, travel into "straight bankruptcy". The secured creditors will have the value of the property which was used to secure their debt (the "collateral", or the "mortgage, lien"). Sometimes, they volition have the property itself - if it not easy to waste (=sell) it.

Once the assets of the company are sold, the first to be fully paid off will be the secured creditors. Only then will the precedence creditors be paid (wholly or partially).

The precedence creditors include administrative debts, unpaid wages (up to a given bounds per worker), uninsured pension claims, taxes, rents, etc.

And only if there is any money left after all these payments, it will be proportionally doled out to the unsecured creditors.

The USA had many versions of its bankruptcy laws. There was the 1938 Bankruptcy Act, which was followed by amended versions in 1978, 1984 and, lately, in 1994.

Each state have modified the Federal Soldier Law to suit its special, local conditions.

Still, a few things - the spirit of the Law and its doctrine are common to all the versions. Arguably, the most celebrated process is named after the chapter in the law in which it is described, Chapter 11. Following is a small treatment of chapter 11 intended to demonstrate this spirit and this philosophy.

This chapter allows for a chemical mechanism called "reorganization". It must be approved by two one-thirds of all social social classes of creditors and then, again, it could be voluntary (initiated by the company) or involuntary (initiated by one to three of its creditors).

The American legislator set the following goals, in authorship the bankruptcy laws:

To supply a just and just treatment to the holders of assorted classes of securities of the firm (shares of different sorts and chemical chemical chemical bonds of different types)

To eliminate onerous debt obligations, which blockade the proper operation of the firm and impede its opportunities to retrieve and ever refund its debts to its creditors.

To do certain that new claims received by the creditors (instead of the old, discredited, ones) equal, at least, to what they would have got received in liquidation.

Examples of such as new claims: proprietors of unsecured bonds of the firm can receive, instead, new, long term bonds (known as reorganisation bonds, whose interest is collectible lone from profits).

Owners of subordinated unsecured bonds will, probably, go stockholders and stockholders in the insolvent firm will have no new claims.

The chapter dealing with reorganisation (the celebrated "Chapter 11") allows for "Arrangements" to be made between debtor and creditors: an extension or reduction of the debts.

If the company is traded in a stock exchange, the Securities and Exchange Committee (SEC) of the USA counsels the tribunal as to the best process to follow in lawsuit of reorganization.

What chapter 11 learns us is that:

The American Law tilts in favor of maintaining the company as a going concern. A whole is larger than the sum of money of money of its parts - and a life business is deserving more than than than the sum of its assets, sold separately.

A more in-depth study of the bankruptcy laws shows that they allow for three ways to undertake a state of malignant insolvency which endangers the well being and the continued operation of the firm:

Chapter 7 (1978 Act) - liquidation

A District tribunal appoints an "interim trustee" with wide powers. Such a legal guardian can also be appointed at the petition of the creditors and by them.

The Interim Trustee is empowered to do the following:

liquidate property and do statistical distribution of liquidating dividends to creditors

make management changes

arrange unsecured funding for the firm

operate the debtor business to forestall additional losses

By filing a bond, the debtor (really, the proprietors of the debtor) is able to recover ownership of the business from the trustee.

Chapter 11 - reorganization

Unless the tribunal regulations otherwise, the debtor stays in ownership and in control of the business and the debtor and the creditors allowed to work together flexibly. They are encouraged to attain a settlement by via media and understanding rather than by tribunal adjudication.

Maybe the biggest legal revolution embedded in chapter 11 is the relaxation of the ages old absolute precedency rule, that states that the claims of creditors have got categorical precedence over ownership claims. From now on, the interests of the creditors have got to be balanced with the interests of the proprietors and even with the larger good of the community and society at large.

And so, chapter 11 allows the debtor and creditors to be in direct touch, to negociate payment schedules, the restructuring of old debts, even the granting of new loans by the same ill-affected creditors to the same irresponsible debtor.

Chapter 10

Is kind of a legal hybrid, the progeny of chapters 7 and 11:

It allows for reorganisation under tribunal appointed independent manager (trustee) who is responsible mainly for the filing of reorganisation programs with the tribunal - and for verifying hard-and-fast attachment to them by both debtor and creditors.

Despite its lucidity and business orientation, many states establish it hard to follow to the pragmatic, no sentiments attack which led to the practical elimination of the absolute precedence rule.

In England, for instance, the tribunal appoints an functionary "receiver" to manage the business and to recognize the debtor’s assets on behalf of the creditors (and also of the owners). His chief undertaking is to maximise the return of the settlement and he goes on to work until a tribunal settlement is decreed (or a creditor settlement is reached, prior to adjudication). When this happens, the receivership stops and the receiving system loses his status.

The receiving system takes ownership (but not title) of the assets and the personal business of a business in receivership. He accumulates rents and other income on behalf of the firm.

So, British People Law is much more than in favor of the creditors. It acknowledges the domination of their claims over the property claims of the owners. Honouring duties - in the eyes of the British legislator and their tribunals - is the basis of efficient, thriving markets. The tribunals are entrusted with the protection of this moral pillar of the economy.

Economies in transition were in transition not only economically - but also legally. Thus, each 1 adopted its ain version of the bankruptcy laws.

In Republic Of Hungary - Bankruptcy is automatically triggered. It is not allowed to trade debt for equity. Moreover, the law supplies for a very short clip to attain understanding with creditors about reorganisation of the debtor. These characteristics led to 4000 bankruptcies in the aftermath of the new law - a number which mushroomed to 30,000 by 5/97.

In the Czechoslovakian Republic- the insolvency law consists particular cases (over indebtedness, for case …). It delineates two deliverance programs:

A Debt to Equity Barter (an option to bankruptcy) supervised by the Ministry of Privatization.

The Consolidation Bank (founded by the State) can purchase a firm’s duties if it went bankrupt at 60% of par.

But the law itself is toothless and lackadaisically applied by the incestuous web of establishments in the country. Between 3/93 - 9/93 there were 1000 filings for insolvency, which resulted in lone 30 commenced bankruptcy procedures. There hasn’t been a single major bankruptcy in the Czechoslovakian Democracy since then - and not for deficiency of candidates.

Poland is a particular case, always pitting horses against tanks, always losing the war, as a result. The pre-war (1934) law declares bankruptcy when confronted with a state of permanent illiquidity and excessive indebtedness. Each creditor can apply to declare a company bankrupt. An insolvent company is obliged to register a upper limit of 2 hebdomads following surcease of debt payment. There is, indeed, A separate settlement law which Allows for voluntary procedures.

Bad debts are transferred to alkali portfolios and have got 1 of three fates:

Reorganization, debt-consolidation (a reduction of the debts, new terms, debt for equity swaps) and a programme of rehabilitation.

Sale of the corporate liabilities in auctions

Classic bankruptcy (happens in 23% of the cases of insolvency).

No one is certain what is the best model. The ground is that person have yet to come up with replies to the questions: are the rights of the creditors superior to the rights of the owners? Are it better to rehabilitate than to liquidate?

Until such as clip as these inquiries are answered and as long as the microeconomic debt crisis deepens -we volition witnesser a flowering of versions of bankruptcy laws all over the world.