Business Bankruptcy or Liquidation - Hobsons Choice

By: Akhil Shahani

No founder wants to think of a scenario in which he or she is forced to wind up shop, yet business bankruptcy is a hard reality. When does one take a decision to call it quits? Is there more than one way of closing down, and if so, what are the implications? What choices should an entrepreneur consider when faced with business bankruptcy? In here, we try to answer some of these unpleasant questions.

It is ironic that closing shop is no less complex than setting up. There are several routes to this, including liquidation, reorganization and filing for bankruptcy. Which road to take depends upon a host of factors - company assets and the likely stance of creditors, are a couple of the most important.

If the business is a sole proprietorship, it does not really exist as an entity separate from its owner, who can choose to file for bankruptcy under different provisions, as the case may be. Companies that wish to go out of business can file business bankruptcy, but that is not their sole option. Liquidation of assets and cessation of operations can protect them from creditors' claims and lawsuits; however, there is a danger that they may sue the management if they suspect foul play. Therefore, filing bankruptcy also offers a different kind of protection. Yet another option, reorganization, can help companies wriggle out of existing commitments that are too onerous to bear, and also helps to free up cash. But management must recognize that a successful reorganization exercise would require a high degree of involvement on their part, and could also entail large legal expenses.

Liquidation is seen as a good option for businesses that are not capital intensive and have few physical assets, or those that have no future whatsoever. A business that has decided to liquidate must carefully consider the following:

Asset size and value: Care must be taken to ensure that the list is exhaustive. Assets not only include physical property but also important intangibles such as brand names, customer relationships, work in progress, patents and trademarks, licenses and so on. All of these must be valued carefully, and benchmarked against market prices. Specialist firms like Liquidator Services can help auction inventory on their online marketplace. Some financial assets, such as deposits with service providers or landlords are often tough to recover, and must be factored in. Finally, an assessment must be made of what portion of assets is secured against debt.

Debt estimation: While it is equally important to put a number on what the company owes and to whom, attention must be paid to those debts for which the management and other officers are personally liable, such as unpaid sales taxes. Another cause for concern could be those debts that are secured in some manner, by way of company assets.

Securing a fair price: Since creditors have the right to the proceeds from liquidation of assets, the management must make all efforts to secure a fair price. Usually, when management adopts a "do-it-yourself" approach and sets its mind to selling the assets, a better price realization may be expected. However, it is advisable to also seek the help of other professionals, brokers and advisors.

On the other hand, a company that decides to go the business bankruptcy way has to hand over responsibilities of asset disposal to a bankruptcy trustee, which usually implies that the assets will not fetch top dollar. However, the officers of businesses that file for bankruptcy are generally provided a certain degree of immunity from litigation by irate creditors. In return, they have to suffer the not inconsiderable legal expenses, and the invariable delay associated with bankruptcy proceedings.


Bankruptcy
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 
 • 

» More on Bankruptcy
 



Share this article :
Click to see more related articles