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A critical analysis of the reasons why companies fail/go into administration/liquidation. Relevance to different countries/regions.

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Contents


Introduction
Chapter 1. Bankruptcy in the USA
Chapter 2. Bankruptcy outside the USA
Conclusion
Bibliography

Введение

A critical analysis of the reasons why companies fail/go into administration/liquidation. Relevance to different
countries/regions.

Фрагмент работы для ознакомления

up with a plan of reorganization that everyone can live with. The
debtor is even able to obtain confirmation of a plan that some
groups of creditors oppose if the plan meets, in addition to all the
usual tests. The process of obtaining the confirmation of such a plan over the objection of creditors' is referred to "cramdown", which requires valuations
and these are expensive and unreliable. Ideally each debtor prefers a plan
that each group of creditors can embrace.
The Bankruptcy Code is designed to protect the rights of creditors and at the same time ensure that a few malcontents do not
thwart a bargain that is in everyone's interest. The current Bankruptcy Code of the USA assumes that in the typical case the debtor will propose a plan of reorganization within 120 days of the filing of the Chapter 11 petition. (Nommay, 1993) During this period, the right to propose a plan of reorganization belongs exclusively to the debtor. The plan divides the claims of the creditors into various
classes and proposes a treatment for each class. After the debtor
files the plan, the debtor must try to get the plan accepted. The
debtor must write a "disclosure statement" and persuade the court
to approve it. The purpose of the disclosure statement is to explain
the plan to those who must vote on it. After the disclosure statement is approved, the debtor is able to solicit acceptance of the plan from the various classes.
A majority of the creditors holding claims in the
class who vote must vote in favor of the plan and their claims
must have a value equal to at least two-thirds of the value of all the
claims of those creditors who are voting. After the votes are received, the debtor can ask the court to approve the plan of reorganization. The court must satisfy itself that the plan meets all the requirements of Chapter 11.
The valuation of the rights often requires, among other things, an estimate of the future cash flows of the firm and an appropriate discount rate. In practice, however, courts devote fewer resources to answering this question and conduct less elaborate proceedings to determine whether a plan meets this
best-interests-of-creditors test than they devote to deciding
whether the absolute priority rule is satisfied when an entire class
dissents and the plan must be crammed down. The court must be satisfied that
the plan is "feasible," that the firm will not end up in a reorganization again.
If the court confirms the plan, the plan is carried out according
to its terms allowing the failing company to survive and recover.
In the prototypical Chapter 11 case, the old claims against the
firm disappear with the discharge and the new obligations of the
firm take their place. The firm sails off happily into the future. A
financial reorganization of the firm takes place in such a way that
the firm survives as a going concern. This scenario, however, does
not play itself out very often. (Thorne, 2008)
Bankruptcy filings happen too late rather than too soon. The firm is
already in desperate straits, and the inability to cut a deal outside of
bankruptcy does not bode well for the bargaining process inside of
bankruptcy. In the typical case, the debtor will not come up with
a plan of reorganization inside of the 120 days that the
Bankruptcy Code presumptively gives the debtor. Bankruptcy
judges, however, regularly extend the exclusivity period.
If the debtor can implement a plan of reorganization, dismissal is unlikely. If the debtor has no ability to implement a plan of reorganization, dismissal or conversion of the case is appropriate, quite apart from whether the debtor is found
to act in "bad faith." It is bad practice to file a Chapter 11 petition
without some goal that is attainable, at least if things go well.
There must be some possibility of a plan that creditors might
realistically approve or which the court has the ability to confirm
over their objection. When the debtor has only a single asset and
no employees and only a single creditor and when the debtor
seems to be fleeing from an imminent foreclosure, a bankruptcy
judge may well suspect that no such plan exists. The biggest difference among bankruptcy judges may lie not so much in whether they will dismiss such cases, but rather in how quickly they will reach the conclusion that the debtor does not belong in Chapter 11 and become willing to grant the creditor's motion to
lift the stay or dismiss the case.
Each bankruptcy court has a list of the exempt property interests, the rights granted under law of the state. State bankruptcy law plays a significant role in many cases, and the judge has to generalize bankruptcy law across state lines. According to Chapter 7 of the US Bankruptcy Code, debtors surrender their non-exempt property to a bankruptcy trustee who is bound to liquidate the property and distribute the proceeds to the debtor's unsecured creditors. (Nommay, 1993)
The exempt property interests, which should be considered, may concern a personal residence, a home­stead, a burial plot, a motor vehicle, a "non-collector" firearm, a piece of household furnishing, an item of wearing apparel, a book, a tool of one's trade, an unmatured life insurance policy, a contract right, a divi­dend interest, an interest or loan value in a life insurance policy, a health aid, a Social Security ben­efit, an unemployment compensation benefit, an as­sistance benefit, a veterans' illness and/or disability benefit, an alimony and/or support right interest, a stock interest, a bonus interest, a pension interest, a profit-sharing interest, an annuity interest, a disabil­ity or other compensation plan interest, a wrongful death benefit, a life insurance proceed interest, a per­sonal injury award, and/or a loss of future earnings award. (Anderson, 2003: 27)
When bankruptcy case reduces to the liquidation and distribution of the debtor's ex­isting assets, all the debtor's assets are to be gathered and distributed according to the law. No company can be interested in such consequences.
The emphasis of bankruptcy procedures in the United States as well as France, to I. Hashi’s mind, is on the survival of the firm and the saving of employees' jobs and the firms' productive capacities—thus the notion of "debtor-oriented" procedures. (Hashi, 1997: 11)
In many cases bankruptcy can be predicted and averted. If bankruptcy is predicted the management will try to find out a number of ways to agree with their creditors. Even if they did not managed to do so before bankruptcy proceedings initiated by the creditor the company has a real chance to transform the creditor's claim from an unsecured claim to a secured claim, enabling the creditor change his or her mind due to an appearing opportunity to collect more money by not suing.
To sum up, bankrupcy in the USA is currently increasing greatly. It results in economic collapse not only of the debtors but of their creditors as well. The economic disaster involving bankrupcy and liquidation procedures seems to be caused by mistakes made by the top management of both the debtor and the creditor, who have run out of an opportunity to come to agreement with each other trying to keep on coopereating and overcoming the current financial difficulties to mutual benefit.
Chapter 2. Bankruptcy outside the USA
The two dictinctive features of its economic prosperity, both the stock and real estate markets, have been falling significantly since the global economic turndown started bursting out from the USA to the rest of the world, making lots of businesses fail, go into administration and liquidation. Even the most rapidly developing economies, those of Hong Kong, South Korea, China and Japan showed a great number of companies going bankrupt due to their inability to forecast and consider the forthcoming global economic recession.
But even before it bankruptcy turned out from time to time because of poor loan strategy. This point of view is shared, for example, by P. Hardy, who claims:
The demise of the Peregrine Group, for example, has been attributed in part to bad loans from Indonesian debtors. Other less prominent Hong Kong based businesses have gone the same way. At times of financial difficulty and when faced with a Hong Kong debtor, it is impor­tant for creditors to know what legal proce­dures are available to them and to have an understanding of Hong Kong insolvency law. (Hardy, 1998: 16)
Credit or loan agreements tend to take various forms, most expressly providing that unless a debtor can make payment or is unlikely to default thanks to its clear insolvent position, the creditor has a right to demand early repayment of the total outstanding loan, the circumstances indicated in such credit or loan agreements being referred to as events of default.
According to P.Hardy, a creditor faced with such a debtor has a number of options:
The first (and often the most attractive) option is to explore the possibility of rene­gotiating the debt by rescheduling payment obligations and varying interest payment terms. This rescheduling would usually be supported — where available — by addi­tional security over the debtor's unsecured assets, the subordination of existing share­holder and other debt, and the provision of a third-party guarantee. Where the debt is syndicated to a group of lenders or arises under a debt security (such as a bond or floating-rate note), the rescheduling must be structured with regard to the rights of the syndicate members or security holders, whose specified majority approval will ordinarily be required.
If rescheduling is not a viable option or cannot be satisfactorily agreed between the parties, the creditor may call an event of default and use the mechanism specified in the loan documentation to seek early repayment. If the debtor is unable to meet its repayment obligations, the creditor would usually take court or arbitral action (again, depending upon the means of resolving disputes specified in the loan doc­umentation) to obtain a judgment or arbi­tral award compelling the debtor to repay the creditor. This judgment or award can then be enforced against the available assets of the debtor.
The option of last resort, which is available to both the debtor company and to any of its creditors, is to seek to wind up the debtor company. This procedure — to which Peregrine Investments Holdings and some of its subsidiaries are presently sub­ject — is described in detail on the follow­ing page. (Hardy, 1998: 16-17)
The debtor’s relationships with the creditor should bev reviewed by the top management of all the parties involved so as to avoid inadeqate solutions of the creditor’s complaints and claims. The creditor should not be too critical and aggressive, as hostile actions won’t benefit him as much as willing to concede reasonably.
The terms “liquidation” and “insolvency” in Hong Kong have the same meaning as the terms “reorganization” and “bankruptcy” accordingly, the liquidation procedure being regarded by most of the experts as deficient. Hong Kong periodically revising its bankruptcy and insolvency laws, the key features of the process seems to be essentially the same.
Any reorganisation procedure avail­able in this country of the Far East does not provide any moratorium for the company. The country's deficiency implies its insufficient capability of preserving the exis­tence of an insolvent company, which tends to makes a greater number of liquida­tions be pursued than might occur in comparable circumstances in the US or Britian, resulting in a greater proportion of unsatisfied creditors.
According to Hong Kong law, where assets of an insolvent company are got rid of to a creditor before a winding up has been commenced, the liq­uidator may possibly treat the disposal as a prefer­ence and recover the assets. If assets are recovered from a creditor, the latter keeps on being entitled to prove its debt, although in a similar way as other creditors of equal priority.
Court actions are commonly pursued in Hong Kong unless a debtor is willing or able to agree to an acceptable procedure of rescheduling. When needed, debt recovery through the courts can be a relatively easy-going process, litigation considered unlikely to be an adequate remedy if the debtor's unsecured assets are insufficient to satisfy a particular court judgement.
In Australia, where courts do not usually tend to order that a company be wound up if the dead­lock between the directors is only temporary or if there exists a mechanism for decisions to be made. As W. Robson says, it may be possible to resolve the issues even if the voting power of the deadlocked directors is equal, the problem arising in ac­tually convening a meeting with a duly constituted quorum. (Robson, 1992)
As to the situation in New Zealand lots of companies fail because the local law places the cost and burden on the creditor. The shift in the balance of power in favour of the liquidator and the requirement to run every transaction through the ordinary course test, according to T. Telfer, achieved too much equality from the creditors' perspective. (Telfer, 2003: 80-81)
However, in most cases the company’s going into liquidation or administration can be explicated considering its top management’s inability to forecast how volatile economic situation in the country and all over the world is and to abstain from borrowing too much money they would be unable to pay back in less favourable economic circumstances. Because of all that, in T. Mitchell’s opinion, most businesses of China, for instace, are on the brink of liquidation.
When the economy was active officials in the delta - which accounts for one-third of China's exports - were inclined to take a laisser faire approach to industrial disputes. But now that they find themselves on the frontline of China's slowdown, they are adopting a more interventionist posture to pre-empt potential social unrest in their own backyard. Emergency funds to pay workers' salaries are being established and officials are actively monitoring factories to identify troubled ones before they go bust. (2008)
In China, lots of businesses fail to carry out liquidation procedures, their operations having stopped because of poor management or ineffective cooperation among the shareholders. (Guthrie, 2008) A company sometimes has a chance to remain in operation and refuse to initiate liquidation procedures although it has had its business licence revoked or has been ordered to close down. Under these circumstances, the realization of a company's assets is not quite clear. Therefore, creditors cannot say when they will be paid-off and shareholders are prevented from distributing the residual value of their invested capital fairly. In order to protect the interests of creditors, the PRC Company Law provides that should a company fail to establish a liquidation committee within a certain period of time, its creditors may apply to the people's court to appoint appropriate persons to form a liquidation committee and carry out the liquidation, that could have been avoided if the management had been more accurate when making up their mind whether to invest in some particular venture businesses, initiate acquisitions, participate in the mergers, selecting the ways to borrow money needed and thinking over of the potential failures to honour their pledges to the seemingly loyal creditors.
Potential risks for both the creditor and the debtor seems to be increasing if they turn down an opportunity to come to an agreement settlinged the case out of court, as that way they keep on cooperating and do not need to try to get a miserable compensation at a high cost, staking their money, carrying a risk of going bankrupt as well due to the growing risk of inability to settle up accounts with their own creditors, who can as well be tough, unwilling to solve their occurring problems in private.
To sum up, bankrupcy all over the world seems to be given rise to by inability of the debtor and the creditor to sustain their cooperation to mutual benefit. That inability can be generated by the distinctive features of law, which in some countries favours the creditors, while other countries enable the debtor an opportunity to avoid bankrupcy and liquidation procedures by trying to agree with the creditors, who are ready to make concessions so as to reduce their potential losses as much as possible.
Conclusion
The causes of bankruptcy, as well as company’s going into administration and liquidation, in general involve inadeqate solutions made by the company’s top management, inability to take into account potential risks connected with the choice of the new business strategy, resources of loans, distinctive fatures of the creditors selected.
But because of differences in law, which may be more creditor-oriented or debtor-oriented, the number of causes, their variety and significance differ from one country to another one.
In the cases, where the law lets creditors and debtors to revise and review their position, bankruptcy can be on time prevented, giving the both parties a better chance to recover and get the money loaned.
Retaining control over cash flow sustainability is very critical for the economy of each particular country, because otherwise it is doomed to the ever increasing stream of bankruptcies due to the increasing number of the companies running into debt and failing to cover their costs.
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