What Happens when Businesses go Bankrupt? Insolvency, Aftermath, and Recovery

How Countries Worldwide Handle Bankruptcies

As part of the normal boom and bust cycles of Free Market Capitalism, businesses do go bankrupt because they either ran out of money due to unfavorable external market conditions, or due to their internal issues to do with inept handling and poor management processes.

Thus, entrepreneurs and business owners must not fret when bankruptcies happen and instead, they must focus their attention on handling the aftermath of such events so that shareholders and other stakeholders do not lose and suffer in the bargain.

In this endeavor, the government and the regulators play an important role as far as ensuring that all stakeholders are satisfied with the outcome.

For instance, in the United States where Corporate Bankruptcies are the order of the day, there are well established and clearly laid down procedures to handle bankruptcies.

Indeed, perhaps no other country in the world has such clear guidelines which indicate the maturity of its financial system as well as the depth of its institutions in helping businesses and individuals get back on their feet after unfavorable events such as bankruptcies.

The US is also notable for having different sections or Chapters as they are known for business owners and entrepreneurs to handle bankruptcies such as Chapter 7 and Chapter 11 clauses. These laws help businesses to file for bankruptcies in an orderly manner so that the broader economy does not take a hit.

For instance, in the aftermath of the 2008 Financial Crisis that paralyzed the economy, the government quickly stepped in and presided over the bankruptcy of some entities whereas it also bailed out others which were considered Too Big to fail or on the premise that the economy would go into a tailspin if they are not bailed out.

The Indian Experience in Handling Bankruptcies

In recent years, India too has evolved from a poor bankruptcy handling system to one where now there are clear laws and regulations to help promoters, business owners, entrepreneurs, and other stakeholders approach bankruptcy in an orderly manner.

For instance, the recently passed Insolvency and Bankruptcy Law clearly specifies how bankruptcies can be handled and how businesses can be liquated to help all stakeholders gain rather than lose in the process.

This law was passed after much hue and cry since the perception was gaining around that the government was “soft” on big promoters and well known industrialists.

Ensuring Justice to All Stakeholders

Having said that, while there is no reason to panic when businesses go bust, it is also the case that bankruptcy is not a pleasant experience neither for the promoters nor the employees and shareholders.

This is because the employees are immediately laid off whereas the shareholders run the risk of losing their money in the process.

Indeed, the prevailing rules worldwide often do not protect the shareholders especially those who have invested in Stocks and not Debentures or Debt.

To explain, Corporate Law mandates that the shareholders are to be paid the last and those holding debt must be paid before them.

Moreover, the shareholders also are paid only when there is money left over when compared to those who hold debt and debentures.

In addition, the focus of the laws is on ensuring that the assets are disposed off or are transferred to the new owners and in turn, helping those who hold debt recovers their money in the process.

Further, there are no explicit guarantees in the law to protect the employees specifically though there are provisions for a fair disposal of assets and paying dues to them.

Thus, the point we are making is that shareholders and employees must do their due diligence before investing or joining businesses.

The Case of the Indian Aviation Sector

On the other hand, bankruptcies when handled well can rejuvenate the businesses and help former promoters to regain their footing.

Upon examining the Indian Aviation Sector which is a classic case study on how bankruptcies can turn messy as well as result in happy turnarounds, we find that the Kingfisher Case is an example of how bankruptcies can turn real messy if they are not handled.

The case is dragging on since the last decade with no end in sight for the beleaguered creditors or the former employees while the erstwhile promoter lives it up abroad.

On the other hand, the case of Spice Jet is an example of how acute financial distress can be handled well and the firms turned around.

Somewhere in the middle is the case of Jet Airways which seems to be moving towards some sort of resolution after a protracted struggle to tide over the crisis.

Some experts opine that the IBC or the Insolvency and Bankruptcy code passed by Parliament is a response to criticism and media outrage after the cases mentioned above and other such cases which spurred the government into taking action.

Rejuvenation Instead of Relapse

As can be seen from the preceding discussion, bankruptcies can be occasions for both rejuvenation as well as relapse and hence, there is a need to handle them well without losing sight of the larger goal of ensuring justice to all stakeholders.

As more and more countries become capitalist, there is a need for them to put in place frameworks and systems that would help them manage the aftermath of bankruptcies.

The history of capitalism is strewn with heroic recoveries as well as depressing failures of formerly successful businesses and their owners.

To conclude, all stakeholders must ensure that they do not lose sleep when businesses go bankrupt and instead, must focus on finding their feet again.


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The article is Written By “Prachi Juneja” and Reviewed By Management Study Guide Content Team. MSG Content Team comprises experienced Faculty Member, Professionals and Subject Matter Experts. We are a ISO 2001:2015 Certified Education Provider. To Know more, click on About Us. The use of this material is free for learning and education purpose. Please reference authorship of content used, including link(s) to ManagementStudyGuide.com and the content page url.


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