REFLECTION OF BANKRUPTCY

We often hear that a company or organization is bankrupt. And we all know that this is not a good financial condition for any company. But there are a lot of things that are surrounded by the term “corporate bankruptcy”. Therefore, a detailed understanding is very important for the associates of any company.

What is corporate Bankruptcy?

There are numerous financial obligations that an organization needs to manage during its course of business. When an organization is not efficient to carry out its financial commitments or is unable to do the payments to its creditors, it files for bankruptcy. This is a legal step where the company tries to free itself from financial obligations. The company files a petition in the court of jurisdiction for this situation where concerning authorities assess and measure all the outstanding debts of that organization and pay from the company’s assets. In some cases, the unpaid debts to the creditors are forgiven by the possessor.

Generally, all the unsecured property of the bankrupt goes to the Director General of Insolvency (DGI) and the DGI has the authority to do the proceeds of sale to the creditors first against their proof of debts.

Causes of business bankruptcy:

Every company deals with a variety of products or services they offer to its customers. But what is the ultimate goal of an organization? To make money. And to survive, it needs to make sales to generate revenue and profit.

But when companies fail to make a profit for an extended period, the owner may be forced to exit the market or re-structure the business and therefore, be compelled to go into bankruptcy.

Though the primary reason is the lack of profitability, there are many underline factors that negatively affect the survival of the company.?

???????????Market condition: A bad market condition and the sub-standard overall economy, specifically the market in which the organization operates, can lead to a weak financial condition. The recent Covid-19 pandemic situation is a classic example of such a condition where many organizations are forced to go into bankruptcy.

???????????Financing: Many small businesses and start-ups often struggle to create a balanced financial situation and to manage this, they take out loans to help their operations. And if the business struggles for a longer time, it's difficult to arrange more loans, thus the company gradually moves to bankruptcy.

???????????Poor decision-making: Lack of proper planning and hasty business decisions can lead to business failure. For example, if you spend huge money on product development without proper market survey, production cost, competitor analysis, there is a high chance of failure, and the whole project and its expenditure goes for a toss.

???????????Other causes: Apart from the above-mentioned significant causes, there are several other aspects that can directly or indirectly take the company to bankruptcy. These include natural disasters, criminal activities, lawsuits raised by the stakeholders or competitors, breach of any law, loss of key employees, and many more.??

Discharge from Bankruptcy

There are some legal ways to get discharged from bankruptcy. But after receiving the discharge order, the debtor is no longer obliged to pay the debts which are specified in the order. After the issuance of the discharge order, no creditor is legally allowed to carry out any type of collection activity from the debtor.?

Though several debts do not qualify to be discharged. Government tax claims, unlisted claims by the debtors, alimony payments and child support obligations, debts related to personal injury, debts to the Government are some of such items which are not waived off by discharge order.

Discharge from bankruptcy is not a right of the debtors. After filing a petition in the court for bankruptcy, the creditors receive a notice and if they want, they can object and file a complaint in the court. This leads to more complications and advisory proceedings to recover money or enforce a lien.

What are the consequences?

Though declaring bankruptcy can save you from some legal obligations and help you to save your home or ability to operate financially, it has many adverse effects.

• ?All company assets are liquidated to repay the obligations on the debts.
• ?This can drastically affect the credit score of the owner of the organization and as a consequence, it becomes tough to get a new loan to start afresh.
• ?It brings down the morale of the resources like associates of the organization, its suppliers, customers, consumers, all the shareholders, and all the links associated with the whole supply chain.
• ?If you are declared bankrupt, you will be disqualified from some of the major aspects like –

1.?????Holding the office of MP/MLA, public office, certain positions in statutory bodies or societies and organizations.

2.?????Practicing certain professions

3.?????Carryout business alone or in partnership

4.?????Working in relative’s business

5.?????Leaving Malaysia without proper permission of DGI or court

6.?????Enforcing certain rights under certain legislation

Conclusion:

Bankruptcy is not at all good for any organization or its owner. Though it offers some legal support to the debtor the situation affects all the stakeholders and employees badly. Therefore, the organization and its associates need to keep a close eye on the financial and legal situations and take necessary steps to control them.

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