Problem

Business bankruptcy

Other Names:
Risk of insolvency
Business failure
Corporate loan defaults
Nature:
Adverse economic conditions or various forms of unnatural trade competition may force otherwise viable enterprises into bankruptcy. Bankruptcy provisions of the law are abused in many countries when officers of enterprises voluntarily file for bankruptcy after concealing assets or paying themselves gratuitous sums, or in the course of fraud. Insolvent business enterprises may be declared bankrupt, through a judicial process designed to ensure that all creditors receive fair treatment. Others, however, vanish from the scene, leaving their creditors -- including their employees -- empty-handed.
Incidence:
Approximately 12,000 American companies filed for reorganization under chapter 11 of America's bankruptcy laws in 1988 and 20,000 were expected to do so in 1989. One year in the mid-1980's saw 25,000 French companies and 16,000 German companies fail. During that same year more British companies closed their doors than in any other year in history. In 1990, UK bankruptcies, reached their highest level for 10 years. The collapse of one large property developer alone led to the failure of 120 smaller firms working as sub-contractors. In 1991, a total of 21,827 UK companies failed, the worst failure rate since the end of World War II. One company in every 43 was going bankrupt in that year. The ease of booking travel on the internet is one reason why 15,000 travel agency bankruptcies are predicted in the USA for 1999.

The last type of business to fail during a recession are banks. Bank failures in the USA, for example, climbed from 6 in 1977 to 42 in 1982 and 48 in 1983. From 1982 to 1988 some 620 American banks failed, or have been forced to merge, and 100 savings and loan institutions have closed and another 350 have been declared insolvent. These thousand-odd banking failures have involved 7% of the total domestic deposits in savings institutions in the USA. It has been estimated that the cost to the government of protecting investors may total over $500 billion over the next 30 years.

Counter Claim:
1. The concept of the elimination of inefficient firms is essential to capitalism. Bankruptcy is as necessary for capitalism as profit; together they make up the stick and carrot which persuade businessmen to work. Bankruptcy is one of the means whereby inefficient enterprise is culled out of the race for profits.

2. In the USA, for example, bankruptcy laws have been amended to allow for reorganization of the enterprise and time to pay its debts in an orderly fashion. Therefore bankruptcy does not automatically mean failure or business liquidation but can be a safety-net or a last chance to save a business. In China bankruptcy is now being considered as an legitimate way of controlling inefficient loans.

3. The opulence of the front office decor varies inversely with the fundamental solvency of the firm.

Broader Problems:
Risk
Insolvency
Related Problems:
Insolvent institutions
Problem Type:
D: Detailed problems
Date of last update
01.12.2017 – 20:13 CET
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