Bankruptcy and insolvency can have a big impact not just to those directly affected, but also to those they deal with. Businesses are no different can be just as affected by bankruptcy and insolvency laws. This article intends to address some of the ways in which a business in affected by bankruptcy laws.
Before one analyses the way in which a business can be affected by bankruptcy laws, it is first important to consider : what exactly is bankruptcy? It is a common word that is also commonly misused. First of all, before one even begins to attempt to define bankruptcy, it must be realised and acknowledged that different jurisdictions have different insolvency regijmes. However, in most jurisdictions, “bankruptcy” is a term used for individuals, where else companies are considered “insolvent” or “wound-up”.
Businesses can be affected in numerous ways when they are made “bankrupt” (or declared insolvent/wound up):-
(a) Events of defaults – Most contractual agreements and relationships will include a special section called “events of default”. These “events of default” will usually be circumstances where the other party will be entitled to terminate the contract or claim other relief from the party. No business would want to trigger an event of default given the nature of the consequences. Unfortunately, however, most contracts will provide that the presentation of a winding-up petition (or if the insolvency of the business itself) will be an event of default. This can set off a chain reaction that can have severe consequences on the viability of the business.
(b) Reputation – A company that is deemed insolvent or bankrupt will definitely suffer damage to their reputation for obvious reasons. The damage to reputation is not only limited to the company itself but also to the individuals who were running the company. There is an old Malay proverb that says “A tiger that dies will leave behind its stripes, a man that dies will leave behind his name”. This emphasizes the incalculable value that reputation brings to a person and to a business.
(c) Investor confidence – Related to item (b) above, the obvious consequence to a company would also be a loss of investor confidence as bankruptcy always gives a tinge of poor management.
All in all, bankruptcy laws are made for a reason and once they are implemented and exercised, they can bring a lot of damage to a business who unfortunately happens to end up on the wrong side of the law.