Sometimes financial success also
brings uncertainties in the business world. It is impossible for even the most
competent management of a corporation to overcome the hard times in the form of
economic downturns, market fluctuations, or disruptions that may lead to
financial distress of the organization. In the worst fears that every business
fears is bankruptcy and it brings the impression of failure, stress, and loss.
However, bankruptcy does not work that way as destination. In fact, the
majority of firms used bankruptcy as stepping stone restructuring, innovation,
and repossessing the business better than before.
Bankruptcy can be quite
frightening but also a life saver to a business on its deathbed. Knowing how
these procedures work can help and generally prove proactive; this makes
comforting advice for any business owner in the right time of need. Be it small
family-owned enterprise or multinational corporations, many methods exist to
guard a business when facing bankruptcy and may turn out to be the difference
between survival and closure.
This blog follows a
pretty good approach of practical moves to protect a business from bankruptcy:
either change the planning crisis-management for negotiation with creditors or
separate personal and business finances/consultancy of an attorney. And here is
how to get through such serious financial troubles: by real examples of
companies that have been through bankruptcy like General Motors and Kodak and
others-bankruptcy is very troublesome but also an opportunity for rebirth and
renewal.
Whether you are currently
suffering from hardship or simply want to be prepared for future crises,
knowing how to shield your business during bankruptcy will be a requirement for
long-term survival and success. Within this blog let's explore some
of these critical strategies that assist in protecting your business,
stabilizing your finances, and repositioning your organization for rapid
recovery after periods of financial stress.
Familiarize Yourself with Types
of Insolvency and Bankruptcy
It would be useful to know what
kinds of bankruptcy filing exist before acting. In the United States, most
business concerns will file either under Chapter 7 or Chapter 11.
Chapter 7 Bankruptcy Involves
selling off a business's assets and using the sales to settle debts. It is
heavily used by business closures.
Under a Chapter 11 bankruptcy,
the corporation would continue operations and perhaps reformulate its debts to
negotiate with creditors like banks, lenders, leasers and other creditors.
In India, The Insolvency and
Bankruptcy Code were passed in 2016. Such a law consolidates and revises a few
laws relating to bankruptcy relief. The said law allows companies to
restructure debts and continue operations alongside business carried on under a
resolution plan. The IBC provided a legal framework under which companies could
resolve financial distress and protect their businesses.
For example: General Motors
(GM)
GM filed Chapter 11 bankruptcy in
2009. Instead of liquidation, debts were restructured and the federal bailout
allowed GM to continue running its existing plants. GM is a multinational
automobile maker currently. Restructuring allowed it to close down its
non-profit lines, renegotiate labour contracts, and focus on profitability of
more extended processes.
For illustration:
Bhushan Steel was the largest steel producing manufacturing company in India.
It faced some severe financial losses which got it into bankruptcy. IBC law
made Tata Steel take over Bhushan Steel. It was given a chance not to
liquidate but save jobs under IBC law, whereas Tata Steel took over the
operations and made the business back to its healthy form. This helped Bhushan
Steel's assets to ensure continuity of its operations without facing any
interruption.
Knowing what was applicable under
what circumstance would have better equipped you.
Identification of Personal and Business Property
Great forms of insulation using
personal assets considering business ventures, for instance, intellectual
property, plant and machinery or other real estate are important. One may even
own good assets in other legal entities or use them as sources of funding to
make your business more concretes. If operated and owned as a sole
proprietorship then the personal assets risk goes at stake when your business
files for bankruptcy.
File or Form an LLC:
Incorporates your business, or forms a Limited Liability Company. It separates
you and other owners from a business, helping protect your home, your car, and
other personally held property from creditors in the case of bankruptcy.
For example: Small Business
Owner
Since business and personal
finances can never be separated from your assets, personal liabilities have led
many small business firms to bankruptcy. You could eliminate personal liability
by making your business a corporation or a limited liability company so that
your assets are protected from ever being claimed by the creditors if the
business goes bankrupt.
Preparedness for the Worst: Emergency Fund
Creating a business emergency
fund to cover some of the unexpected expenses or downturns that come your way
pays for itself. Your emergency reserve may help keep you far from bankruptcy
at least long enough to find some other solution.
Diversify Your Revenue Streams: If you depend on one source of revenue, then you should go
bankrupt when you lose it. It reduces the risk for you.
For illustration: Netflix
Originally a DVD rental service,
it evolved to become a streaming giant. Then, it already knew the signal that
physical media was on its way out when it started shifting online streaming and
original content creation, thus giving it diversification of revenue streams
which saved it from getting dragged under the coffin when the cost-conscious
disrupted the DVD rentals business model.
Refinance Debt Quickly
If you forecast you'll go
bankrupt because of a financial breakdown, get ready to initiate discussions
with creditors before that happen. Most creditors often attempt to obtain an
altered agreement with you instead of trying their luck in bankruptcy court.
Agree on payment plans. Then if
you cannot pay at all, go directly to the creditors to secure lower payments or
an extended deadline.
Debt Consolidation: For
instance, all the business debits can be consolidated into a single loan with a
lower interest rate. This is capable of streamlining cash handling.
Negotiation with Creditors:
It may plead for the clients on reasonable terms of repayment or possible
reduction of liability.
For example: When
it was India's largest private airline, Jet Airways saw, in 2019, the company's
most sharp financial crisis. In fact, the firm entered the discourse with
creditors through the aegis of IBC. While the business stayed shut temporarily,
creditors of Jet Airlines began working upon the resolution plan that can help
in re-orienting the airlines. This cooperation with creditors has already kept
Jet Airways from immediate liquidation and throws open doors for its re-launch
under new ownership.
For illustration: In
2017, Essar Steel was declared bankrupt with an amount of around INR 54,000
crores against it. The company had been undergoing the process of IBC, but it
had initially migrated to corporate debt restructuring. Being guided by creditors
and financial institutions, the liquidation process of Essar Steel was not
allowed to proceed and hence entered the acquisition offers and strategic
restructuring. Finally, ArcelorMittal took over or merge Essar Steel, and the
company continued under a new management system.
Intellectual Property Protection
Probably, one of the richest
resources, which your business owns, could be its intellectual properties like
Trademark, Copyrights, patents, Design rights and other IP rights. To protect
them:
Register your IP: Make
sure that your trademarks, patents, or proprietary processes are registered
and, therefore, legally protected.
Consider Licensing Arrangement
Agreements: In cases where you are liquidating due to bankruptcy, going in
pre-arranged licensing agreements allows you to continue keeping the control of
your intellectual properties even if other business assets get sold off.
For example,
although the Kingfisher Airlines went into bankruptcy in 2012 it, amid many
blunders, showcased how companies guard their assets. Even when the Kingfisher
had stopped flying the brand name and trademarks of the company were pretty
easy to be worthy of negotiating over with creditors. These would constitute an
effective chip in the liquidation procedures.
Make Sure Contracts Include
Ensure that your business
contracts have bankruptcy protections, including clauses limiting or even
forbidding bankruptcy. There are, for example:
Force Majeure Clauses:
This releases parties from their contractual obligations in cases of certain
instances such as financial hardship or natural disasters.
Bankruptcy Clauses:
Sometimes, a contract allows that you or the other party may be allowed to
cancel if the other person files for bankruptcy. These can provide protection
but watch out for how they might blunt your options if you are the one to file.
For illustration:
Srei Infrastructure Finance Ltd was declared insolvency and bankrupt under IBC.
The Srei Infrastructure Finance Company had advanced widely to infra projects
and faced setbacks due to defaults. So it went into financial insolvency. In a
bid to rescue the business, strategic investors were sought after. Srei also
looked for merger opportunities. Maintaining the basic business but filing for
bankruptcy, Srei Infrastructure sought entry of outside investors on board as
it looked for collaborations.
Choose a Bankruptcy Lawyer
Because bankruptcy law is very
complex, engaging the services of a competent attorney well-equipped in
business law is important. Such an attorney can help in:
They would guide you in the
process of filing so you do not file the wrong bankruptcy form or commit any
legal faux pas.
Develop a Contingency Plan
Outline detailed plans for
contingencies in case financial setbacks occur. The contingency plan should
indicate any alternative actions the business will undertake if your business
is known to be headed downhill financially, such as cost-cutting measures,
alternative funding, or strategies about liquidating assets.
For example:
Spice Jet low cost airline in India-reached the brink of insolvency. Due
to ballooning debt and other operational issues. It has managed to turn the
business around through operational reconfiguration and efficiency using
technology. The airlines took different measures around fuel efficiency,
renegotiated contracts, and redesigned its online booking. At present, Spice Jet
is one of the biggest airline players in India.
Restructuring and Downsizing
In certain cases, bankruptcy can
be avoided if restructuring is done promptly. Downsizing operations, selling
non-essential assets, or refocusing on your core competencies can allow your
business to regain stability.
Cash flow focus Cash flow
analysis multiple areas of the balance sheet that relate to cash flow
improvement.
Payroll layoffs and reduced hours
are painful but sometimes deduction of payroll expense is required to save the
business when hours can be reduced or people lay off.
For illustration, Videocon
Company was one of the biggest and most seasoned customer electronics companies
in India; this company filed for insolvency in 2018. The firm sold pieces of
non-core assets such as land and overseas ventures during IBC restructuring.
The process is to save themselves from creditors. Although Videocon's main
business on electronics remains to undergo debt liabilities, selling the
non-core assets will be helpful in the debt discharge procedure and salvaging
what's left of the business.
For example: Café
Coffee Day, the popular coffee chain in India, faced acute cash shortfall in
2019 after the death of the founder. The company was highly debt-strapped and
used restructuring of operations to ward off an immediate fall into bankruptcy.
CCD shut loss-making outlets, cut overhead costs and recuperated on profitable
locations. This in turn helped CCD remain in liquidity and continue trading
despite financial distress.
Seek Alternatives to Bankruptcy
Bankruptcy should be the last
option. After severe leaking from other available options, one may consider filing:
Seek Investors or Partners:
New investors or business partners may be identified, who could invest some
more equity or help share controlling the business.
Business Loans: At other
times, you can access a business loan or line of credit that you can use to pay
off outstanding debts but still keep the business running.
Ensure Transparency in Communicating with Stakeholders
Now, in such a scenario of
bankruptcy, maintaining open communication with the employees, shareholders,
and customers is essential. It can foster trust, reduce panic, and maintain
loyalty from key stakeholders.
For illustration:
RCom owned by Anil Ambani declared in 2019 to be bankrupt. It kept the
communication lines open for its stakeholders. The investor and creditor were
very much in the loop as far as the updates on the developments were concerned.
Such an open communication helped in mitigating the ramifications of bankruptcy
and retaining good will during tough times.
Conclusion
The moment bankruptcy represents
a fairly scary prospect for any business owner does not mean preparation and
strategic actions taken forward at the right moment cannot truly restrict the
impact of this developing situation. Separation of assets, reserve funds, debt
re-negotiations, and the protection of your intellectual property can keep some
significant aspects of your business intact. Advise with a bankruptcy attorney
and weigh some alternatives as possible avenues to recovery without total
closure.
All those precautions will
provide the best chances for the survival and resulting success of your
business even when disaster strikes and money reaches a terrible strait.
