When one hears the word bankruptcy, one would tend to cringe at the mere thought of it. It’s not surprising given the fact that no entrepreneur would want to put up a company with the end goal of losing and closing shop. But what exactly does bankruptcy entail especially to stakeholders? We’ve gathered answers from the experts over at AABRS. Read about them below.
But before we continue allow us to give you a clear understanding of the terms starting with their definitions.
Stakeholders refer to a person, a group or an organization that has interest or concern in the company. This includes owners, directors, employees, shareholders, creditors and vendors to name a few.
Bankruptcy pertains to the legal proceeding that involves a business that is unable to fulfill its obligations and liabilities to creditors. Such proceeding involves the company having to sell off all of its assets with the proceeds used to repay creditors in full or if not in proportion to their interests. Its completion closes the company and relieves it from the remaining unfulfilled obligations incurred prior to filing for bankruptcy. This should not be confused with insolvency which refers to the state or condition of having more liabilities than assets or more cash outflows than inflows.
When a corporate bankruptcy has taken place, the following is how it will affect the entity’s various stakeholders:
- Owners/Shareholders – The proceeds of the liquidation of the assets will first provide for creditor interest. Should there be any left then that would be the only time when owners and directors can get their share.
- Directors/Employees – Cessation of business comes with bankruptcy. The entity will have to close shop and everyone will lose their jobs. We know how bad that sounds but it is what it is.
- Vendors/Suppliers – With the company closing down, it can affect the operations of its vendors and suppliers. Think about it as a food chain or a domino effect. When you close, all your orders and purchases will be cancelled too and that can be a problem for your suppliers especially if you were a big client.
- Creditors – Bankruptcy is also bad news for creditors. Although given first priority, there is still a huge chance that they cannot collect in full especially if the sale proceeds could not suffice.
- General Public – According to AABRS, a company closing down can rock the economy as it will decrease income generation and will leave a huge chunk of individuals unemployed.