Companies are greatly concerned about corporate bankruptcy due to the financial and operational difficulties it brings, impacting both the business and its stakeholders.
This text delves into the idea of bankruptcy, its operations, phases, and, especially, methods for forecasting it using efficient tactics.
What does corporate bankruptcy entail?
Corporate failure occurs when a company is deemed incapable of repaying its debts according to the law.
This event typically signifies the end of the organization’s operations, involving the sale of its assets to pay off its debts.
Bankruptcy can stem from reasons like poor management, lack of planning, or external crises like pandemics and recessions, in addition to reflecting a financial crisis.
How does the procedure for the company’s insolvency function?
The bankruptcy procedure is regulated by Laws No 11.101/2005 and No 14.112/2020, referred to as the Falence and Judicial Recovery Laws, with the goal of safeguarding creditors’ rights and providing a just resolution for the financially troubled company.
It typically operates as follows:
- Bankruptcy application can be initiated by the company or dissatisfied creditors facing payment delays.
- The court examines the company’s financial status to determine if bankruptcy is warranted.
- An administrator is appointed to oversee the procedure and guarantee that creditors receive payments based on the resources at hand.
- Company assets are sold to settle debts, with a priority given to labor and tax creditors for payment.
What are the three stages of bankruptcy?
Corporate insolvency can be categorized into three primary phases.
Preventative stage
Before filing for bankruptcy, businesses might try to turn things around by using strategies like renegotiating debts with creditors, making significant cost reductions, or reorganizing the company structure.
It is essential during this period to determine if there is potential for improving the financial well-being of the company. Seek assistance from specialized consultants or mediators to facilitate this assessment.
Judicial or non-judicial debt collection
The legal recovery is a formal option to prevent bankruptcy.
The company has proposed a recovery plan that must be authorized by the creditors and the judge in order to restructure the debts and ensure business operations can continue.
Law No. 14.112/20 promoted the use of mediation and conciliation to resolve conflicts, thereby broadening extrajudicial recovery options.
Negotiation occurs directly between the parties in these situations, bypassing the need for legal intervention, resulting in a quicker and more economical process.
This solution relies on trust between lenders and borrowers, along with conducive circumstances for adhering to the deal.
To learn more about credit recovery strategies in businesses, read our full article.
Settlement is the establishment of a community or group of people in a particular area.
If the efforts to recover are unsuccessful, bankruptcy is declared, and the attention shifts to selling the company’s assets to settle debts with creditors.
The law prioritizes payment in the following order: employees first, followed by taxes, and then other creditors.
This procedure concludes the operations of the company and eliminates the debts that are unable to be settled.
How can a company prevent going bankrupt?
While bankruptcy may be unavoidable in specific situations, there are several steps that can assist in anticipating it:
Effective management of finances
Monitor cash flow closely, track expenses, income, and payment due dates diligently.
Identify financial obstacles and address them proactively to prevent them from becoming unmanageable. Efficient monitoring helps in foreseeing issues and taking preventive measures.
Strategic planning involves long-term organizational decision-making.
Establish specific and measurable objectives for the company, along with well-defined performance metrics.
Analyze outcomes frequently and modify tactics based on market shifts, like evolving consumer needs or economic fluctuations.
Revenue diversification refers to the act of expanding and varying income sources.
Diversify your sources of income instead of depending on just one. Broaden your range of products or services and explore new markets.
This approach minimizes the effects of sector-specific downturns and enhances the ability of businesses to adapt.
Financial support
Establish a financial reserve that can support the business during challenging times.
It may be crucial to address unforeseen decreases in income, higher expenses, or delays in customer payments.
Investing in technology is essential.
Implementing comprehensive management systems like ERPs and data analytics tools can enhance efficiency, cut expenses, and forecast future patterns.
Technology is a valuable tool for enhancing effectiveness and minimizing operational hazards.
Planning and resilience are what set things apart.
Corporate bankruptcy is difficult to navigate, but with effective management and planning, it can be prevented.
The priority should be on developing a company that is resilient, adaptable, and ready to tackle market challenges, rather than just avoiding financial difficulties.
Sources:
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https://www.planalto.gov.br/ccivil_03/_ato2019-2022/2020/lei/l14112.htm
Why do companies fail?
Ineffective leadership, chaotic finances, high levels of debt, economic downturns, and external influences like pandemics are the primary reasons.
What occurs during the bankruptcy procedure?
The company’s assets are used to settle debts with creditors in a specific order before the organization ceases operations.
How are the employees affected when the company goes bankrupt?
Labor rights take precedence when it comes to compensation. Workers have the right to pursue legal action to guarantee timely payment of salaries and entitlements.
Who is responsible for the debts of an insolvent company?
The company’s assets are liquidated to settle debts owed to creditors. If the assets are not enough, the remaining debts may be cleared.
