To begin with, the presence of bankruptcy does not depend on the market spirits. On the other hand, when the economy falls into crisis, the number of bankrupt companies usually rises, and the dynamics of this trend is one of the most credible information about the crisis conditions. As a result, it is extremely important to understand the nature of bankruptcy. Generally, the biggest reason for bankruptcy stands for lack of solvency, so that the company is unable to pay its creditors the needed amount of money at the concrete time. Moreover, beneficiaries from such operations vary, but the usual ones are auction participants and lawyers.
Firstly, the main objective for the company to file for bankruptcy is the lack of resources to serve the financial expenses, which are usually bank credits or the company’s obligations. When the company does not have enough money to pay its creditors on a specific date, it usually starts a bankruptcy process. Due to this fact, leveraged companies, usually those with a debt/equity ratio of 2 and more, enter the risk zone when the business experiences stagnation (Altman, Hotchkiss, and Wang, 2019). This risk is the issue of solvency, giving the creditors to take off all the company’s assets when the business is completely filed for bankruptcy and is ready to pay off the part of the overall debt. Consequently, business bankruptcy occurs mostly due to the company’s inability to pay debts in time.
While the evident beneficiaries are lawyers, who execute their job without any risks, the auction participants may also have advantages from their business bankruptcy. This is due to the balance prices of the vast majority of assets that are listed on a company’s assets. While the biggest part of auction beneficiaries are the creditors trying to take their credit collateral back, other people may also gain an opportunity to buy some objects in a significant sale.
Overall, bankruptcy usually occurs when the company is experiencing the issue of solvency. As a result, they sell all their property at the auction to satisfy a part of their creditors who want to realize the price of credit collateral. The evident beneficiaries are the lawyers, while the unexpected ones are the auction participants, who can purchase objects at a high discount.
Reference
Altman, E., Hotchkiss, E., & Wang, W. (2019). Corporate financial distress, restructuring, and bankruptcy: analyze leveraged finance, distressed debt and bankruptcy (Wiley Finance) (4th ed.). Hoboken, New Jersey: Wiley.