Bankruptcy is a term used commonly in cases on individuals, companies and countries alike. It is the situation that arises when a party does not possess sufficient assets to successfully settle its liabilities. In other words, the debts of a company are far greater than the resources available to realize them. In the case of a company, bankruptcy usually occurs after suffering recurring losses for a considerable amount of time and suffering cash flow shortages.

In cases of countries, bankruptcy occurs due to aggressive lending policies and a significant increase in irrecoverable debts. Notable examples where bankruptcy and subsequent bail outs have taken place at such a level include Greece and Cyprus during the European Debt Crisis.

Laws and regulations Concerning Bankruptcy

Whenever a party is unable to pay its debts, the creditors of the company are entitled to file a suit for recovery of their debts by involving courts and arbitrators. Different jurisdictions have different laws considering bankruptcy and liquidation. Liquidation is usually when a liquidator or manager is appointed for the property of the party declared bankrupt and is given all responsibility to dispose of the property and assets to generate funds to pay creditors. When a liquidator is appointed, the first task is to establish a list of people entitled to a share in the proceeds of a liquidation. The priority of parties entitled to a share is governed by law and it is usually the government that holds first priority in the form of unpaid taxes and fines.

Bail-outs and Remedies to Bankruptcy

As mentioned prior, liquidation of the property of the bankrupt party is usually the primary solution to settle claims of various creditors. However, solutions such as takeovers or bail outs have also been witnessed in cases of large companies and countries.  A bail out refers to a third party providing the funds required to settle claims and obtaining control of the bankrupt entity in exchange for the financial support. This method of solving cash flow issues is considered preferable to employees, creditors and other stakeholders since this does not mean dissolution of the company thus preserving business relationships.

The company taken over is then restructured allowing it to trade again. Bailed out companies are usually renamed and re-branded so that stakeholders are comfortable and the history of bankruptcy does not taint future business relationships.