Many people got used to understand the bankruptcy as process over. This term is associated with lesions in the business market. However, very few people know that bankruptcy may be a unique tool for solving various problems. For example, the bankruptcy procedure can successfully carry out the liquidation of the legal entity. Therefore, it is possible to identify a number of objectively positive and negative aspects of this method of the “disappearance” from market. Advantages of this procedure include (Elliot and Elliot 64):
Bankruptcy is the only currently legitimate way to relieve the company from debts before the state budget, financial institutions and employees of the company (Elliot and Elliot 65).
Bankruptcy allows almost fully saving the assets of a legal entity (Fabozzi 44).
This type of liquidation has obvious shortcomings, namely:
Bankruptcy is a very long and laborious procedure, coupled with the need to pass a large number of bureaucratic bodies (Fabozzi 45).
In order to achieve at the end of the process favorable to the founders result, the bankruptcy should be carried out by loyal to the interests of the company specialist, which inevitably increases the final cost of liquidation (Elliot and Elliot 66).
Thus, in case of the desire to become bankrupt, the purpose and the means that will be used to achieve it should be weighed. If the company has no significant debts, does not have major assets and does not perform an intense activity, it makes sense to give preference to other methods of avoiding liability, for example, in some cases, reorganization can help the enterprise. If the debt actually reached large sizes, the financial history of the company is very active, enterprise’s turnover is huge, and the reputation of the legal entity is not without “dark spots”, there is one legitimate output – the liquidation of the company with debts as result of bankruptcy declaration (Elliot and Elliot 68).
Speaking about governmental bailout, it is sanitation of the bank or other business caught in a difficult situation, carried out, usually by cash subsidies from the state. This measure was taken by the USA during the global financial crisis of 2008-2009. Its pros concern saving the whole economy as the part of financial institutions’ collapse could result in the failure of the total financial segment, safety of vital services (like airlines), saving jobs, conduct of reforms and ability to receive return on investment (Wolfe, n. d.).
One of the cons includes moral-hazard actions not just by the saved organization, but by other objects (consumers, creditors, debtors, depositors, etc.) that perform economic dealings with that organization as well. Other cons are decrease in economic efficiency, temporary measure and relocation of prosperity from taxpayers to the saved institution and its lenders (Fabozzi 53).
Private sector acquisition can be considered as an alternative to the liquidation of the bank. The main task is to preserve confidence in the banking system. There are two significant drawbacks. First, the socialization of losses reduces the cost of financing the mega-banks, while their balance sheets are selectively subsidized. This, in turn, aggravates the situation with the banks that are “too big to prevent their collapse”. Second, the shareholders have the opportunity to speculate for the rise and, at current market prices, with almost no risk – for a fall. This will lead to the fact that they “will put all on the map”. Thus, socialization of losses increases the need for control over the management. Benefits of acquisition can eliminate the risk of panic among creditors or of “contamination” of the bank liabilities’ holders, such as insurance and pensions (Elliot and Elliot 83).
Works Cited
Elliot, Barry and Elliot, Jamie. Financial Accounting and Reporting, 14th ed. Upper Saddle River: Prentice Hall. 2010. Print.
Fabozzi, Frank J. Handbook of Finance, Financial Markets and Instruments. New Jersey: John Wiley & Sons. 2008. Print.
Wolfe, Michael. “Are There Any Benefits of Government Bailouts?” eHow. n. d. web. 4 July 2016.
