Bankruptcy legally is the company’s inability to fulfill its obligations to creditors, in which case the company resorts to liquidating its bank accounts and all its properties to pay off its obligations. What most causes bankruptcy for companies is borrowing for lack of liquidity and the inability to pay obligations on time. When the return is less than the liabilities, the company is forced to liquidate some properties to meet the obligations, and when the company fails to pay, it declares bankruptcy.
It is not bad for companies to declare bankruptcy. Bankruptcy is a disruption in the companies’ business and the inability to pay debts that the company is involved in due to the company’s loss which is beyond the control, so the company becomes unable to pay these debts.
Reducing the company’s capital is the most popular solution for the company to get rid of the statutory obligation, but it is not a solution to the company’s debt problem.
If the company is exposed to losses while the shareholders continue to work, in this case, the company can reduce the capital to what is less than the limit stipulated in the corporate system, and a decision to reduce is issued after a report on the accounts of its causes, company obligations and the effect of the reduction is issued.
Also read: Tips for Achieving Financial Goals
Capital Reduction Methods
The First Way
By canceling a group of shares equivalent to what needs to be reduced, in this case the company must take into account the equality of all shareholders.
The Second Way
Purchase of a group of its shares equivalent to what is required to be reduced, and then cancel them.
If the total losses of the joint-stock company reaches half the capital during the fiscal year, the company accountant must inform the chairman of the board of directors, who in turn informs the members of the board. The Board of Directors invites the general assembly within 15 days to meet within 45 days to decide the procedures that the company will follow, whether reducing or increasing the company’s capital, to reduce the percentage of losses that the company is exposed to or dissolve the company.
Types of Bankruptcy
The First Type
The liquidation of assets and their payment by the creditor’s agent, and when there is a surplus of returns, it goes to the shareholders, but it rarely happens, as the shareholders do not reach anything after that most of the time and all the shares lose their value.
The Second Type
If the company is a public company that trades its shares on the stock exchange, this trading will be suspended until the crisis ends.
The companies’ inability to pay commercial debts as a result of economic or political circumstances that lead to a weak or low value of its assets as a result of the depression of markets and seasons or loss that may be caused to their customers and affected by the companies.
The mistakes that companies make from poor spending, speculation in financial markets and exchanges, or withdrawing checks without a balance
When companies resort to conceal their money and books or falsify their accounts, and their owners run away.
Also read: The Effects of Bankruptcy
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