FINANCIAL DISTRESS,

BANKRUPTCY COST,
BANKRUPTCY PROCESS,
LIQUIDATION
MEANING OF FINANCIAL
DISTRESS & ITS CAUSES
•Refers to a condition in which a company cannot meet, or has difficulty paying off,
its financial obligations to its creditors and other stakeholders.
•Causes
•Business Risk- Variability of demand for its products, its prices, input prices.
•Financial Risk – High proportion of debt in the capital structure entails high level of
interest payments.
• Failure of sales & Inadequate cash inflows.
• Pressure from creditors – Creditors would call back their loans.
• Distress sale: Sale of assets below its economic value to discharge its obligations.
BANKRUPTCY COST-DIRECT &
INDIRECT
•Direct bankruptcy costs are incurred in the process of selling
the assets of a bankrupt firm and redistributing the proceeds.
The bankruptcy costs that arise from cash outlays that relate
to bankruptcy process such as:
•fees paid to lawyers, accountants, administrators, liquidators,
and investment bankers involved in bankruptcy proceedings.
These costs can be substantial, sometimes exceeding 5% of
the book value of the firm.
INDIRECT COST
•The bankruptcy costs incurred by a firm as an indirect result of
the bankruptcy process such as :
•lost sales (customers become reluctant to purchase from a
bankrupt firm),
•loss of suppliers,
•departure of key employees,
•missed opportunities to invest in positive-NPV projects, and so
on.
Indirect bankruptcy costs are not cash outlays but rather economic
losses.
FRAMEWORK

Co Act
BANKRUPTCY PROCESS (IBC,
2016)
• Received President assent on 28 May 2016.
th

• Extends to the whole of India

• Seeks to consolidate and amend the laws relating to reorganisation and insolvency
resolution of corporate persons, partnership firms and individuals in a time bound
manner for maximisation of value of assets of such persons.
Insolvency and Bankruptcy Board(IBB)

Insolvency professional Information

Agency (IPA) Utilities (IUs)

Insolvency
Professionals
Committee of
Creditors
Insolvent entity
BANKRUPTCY PROCESS
• Resolution timeline and process
75%
Default
creditors
to
Appointment of an approve
Insolvency No the plan
Professional

Moratorium Period Yes

(180 days)
Implement
Credit the plan
Committee
formation Goes into
liquidation
LIQUIDATION AND REORGANIZATION
Firms that cannot meet their obligations have two choices:
liquidation or reorganization.
Liquidation means termination of the firm as a going concern.
 It involves selling the assets of the firm for salvage value.
 The proceeds, net of transactions costs, are distributed to creditors
in order of priority.
Reorganization is the option of keeping the firm a going concern.
 Reorganization sometimes involves issuing new securities to
replace old ones.
REORGANISATION
•Reorganization is a process designed to revive a financially troubled or bankrupt firm.
1.Reorganization can also mean a change in the structure or ownership of a company through a
merger or consolidation, acquisition, transfer, recapitalization, or change in identity or
management structure.
2.Reorganization is supervised by the court and focuses on restructuring a company's finances
after a bankruptcy. During this time a company is protected from claims by creditors.
3.Once the bankruptcy court approves a reorganization plan, the company will repay creditors to
the best of its ability, as well as restructure its finances, operations, management and whatever
else is deemed necessary to revive it.
LIQUIDATION
Liquidation (or "winding up") is a process by which a company's
existence is brought to an end.
First, a liquidator is appointed, either by the shareholders or the
court. The liquidator supervises the liquidation which involves
1.collecting and realising the company's assets (turning them into
cash),
2.discharging the company's liabilities, and distributing any funds
left over among the shareholders in accordance with the company's
constitution.
After these steps have been carried out, the company is formally
dissolved.
CAUSES OF FINANCIAL
DISTRESS
Inappropriate capital structure
Poor Debt Management
High fixed costs
Management incompetency
Government factors
Change in customer preference
Seasonal factors
Fall in value of currency
Economic conditions
Wrong demand projection
REMEDIES TO FINANCIAL
DISTRESS
Proper debt management mechanism
Proper capital structure
Reducing fixed costs
Proper demand forecasting
Regular check-up of cash flow statement
Proper capital-budgeting decision
Merger with competitors
Union between sellers
Closing the product
 LARGEST DEFAULTERS TO FACE
RBIBANKRUPTCY!!!
named the largest defaulters to face bankruptcy, these are:

S.No. Company Defaulted Loan

According to RBI, these 12 accounts owe ₹ 2.5
1 Bhushan Steel trillion
Rs 44,478 cr to the system, which constitutes around 25%
of gross bad loans.
2 Essar Steel Rs 37,284 cr
3 Bhusan Power and Steel Rs 37,248 cr
4 Alok Industries Rs 22,075 cr
5 Amtek Auto Rs 14,074 cr
6 Monnet Ispat Rs 12,115 cr
7 Lanco Infra Rs 44,364.6 cr

8 Electrosteel Steels Rs 10,273.6 cr

9 Era Infra Rs 10,065.4 cr

10 Jypaee Infratech Rs 9,635 cr
11 ABG Shipyard Rs 6,953 cr
12 Jyoti Structures Rs 5,165 cr
Above amounts are the defaulted loans by these Companies