Curious about what happens when a company declares bankruptcy? Learn about the process, implications, and steps taken in this informative article.When a company declares bankruptcy, it means that it has already undergone a restructuring and still has not been able to settle its debts.
Today, bankruptcy refers to the legal process for individuals and corporations that have more liabilities than assets and are unable to operate, to be able to face their debts through restructuring and if this does not work, they will have to dissolve.
To do this, they must comply with the Bankruptcy Law, which seeks to prevent companies from going bankrupt. Ricardo Robles Pelayo, a law professor at the Escuela Bancaria Comercial (EBC), explains that in order to avoid bankruptcy, they must undergo restructuring.
The law professor explains that it used to be more common for companies to go bankrupt, but nowadays the vision of entrepreneurs has changed and instead of closing down their company, they look for alternatives to continue.
If they cannot meet these debts in the second stage, then the bankruptcy procedure begins, where all assets are sold to pay creditors,” he explains.
Why does a company go bankrupt?
There are several factors that lead to the dissolution of a company, one of them may be external situations , such as the pandemic; when companies continued to pay their employees despite having closed, but some were left without resources for the business to continue.
Another factor is poor management , which involves making bad decisions, which leads to the company going into bankruptcy and possibly into insolvency.
Ricardo Robles says that, despite efforts to avoid closure, he estimates that 20% of the cases advised end in bankruptcy ; therefore, he stresses the importance of the restructuring stage in companies.
This restructuring stage helps a lot precisely to face obligations, not only with suppliers, but also with the treasury, workers, etc.,” he mentions.
What happens with outstanding debts?
Commercial bankruptcy consists of creditors such as collaborators , treasury, suppliers and institutions receiving what is owed to them, it is like standing in line to see who has priority to have their debts paid.
The Law provides for a preferential right for workers, because it is a social sector that the Constitution itself protects and gives them the right of preference over other creditors of the company,” says the EBC professor.
If the business has already provided severance pay to its employees, it can settle tax debts with Infonavit or the Mexican Social Security Institute.
This would be the best-case scenario, because when talking about dissolution, creditors will not receive the payment they are owed because liabilities such as tax payments exceed assets.
In the event of poor administration or negligence, those responsible for the damages or companies such as limited partnerships (partners involved in the company’s operations) must compensate the company from their assets , but this only occurs in isolated cases.
Fines for bankrupting a business
The professor says that in law there is a rule that establishes that no one is obliged to do the impossible, so if the company no longer has resources to settle the debts and “it is evident that I no longer have assets, property or those I have have already been auctioned off and that is no longer enough to cover liabilities, then I can no longer do anything about it,” says Ricardo Robles.
When a company declares bankruptcy, it is governed by the principle of good faith , but if the authorities detect that it is a strategy of evasion or fraudulent bankruptcy, the Federal Penal Code, in article 388 bis, mentions the following:
Anyone who places himself in a state of insolvency, with the aim of evading his obligations with respect to his creditors, will be sentenced to six months to four years in prison and a fine of fifty to three hundred days.
To avoid business bankruptcy, it is recommended to maintain healthy finances, know the financial market and anticipate its changes; acting preventively will prevent the company from having problems in its operation.