The following is a list of all the most common reasons for bankruptcy worldwide. The number of persons unable to pay their obligations has risen dramatically. Congress recently discussed the situation with legislation that makes it extremely difficult to certify for this status. The following is a list of the most common reasons for bankruptcy today.
If the term “bankruptcy” is still used, this situation corresponds in law to a company’s “insolvency.”
Suspension of payments should be distinguished from other difficult situations that companies may encounter, such as insolvency, temporary embarrassment, or continued loss-making operations.
So when should a business be considered “bankrupt”? A company is in a state of insolvency when its available assets (cash in hand and the bank as well as anything that you can transform into money very quickly) no longer allow it to meet its current liabilities (debts for which the payment can be claimed immediately by creditors, such as employees, suppliers, or the Public Treasury). In other words, a manager may consider his company bankrupt when his accounting and financial situation no longer allows him to honor his debts with his funds: the company must then “file for bankruptcy. »By declaring the cessation of payments to the court within 45 days.
The suspension of payments can affect all companies, whatever their legal status and the nature of their activity. Whether you carry out a commercial, craft, or agricultural activity in your name or through a company, it is essential to recognize your business’s first signs of failure to preserve it and prevent the situation from degenerating. It is strongly recommended that professionals accompany you to identify the difficulties encountered quickly and take measures to overcome this ordeal.
What are the Leading Causes of Business Failure?
The manager must understand and monitor the events that could cause the bankruptcy of his company to anticipate them as well as possible and avoid incurring responsibility. The causes linked to a company’s bankruptcy can be external or internal to the company.
Events outside the company cause some bankruptcies. These causes are linked, for example, to a particular economic context, a bad economic situation for the specific field of activity, or a social crisis (such as strikes by yellow vests). The Covid-19 health crisis has thus precipitated many companies, some already in difficulty, into bankruptcy.
Is your company experiencing difficulties related to this exceptional context? Note that to limit the devastating consequences of the Covid-19 epidemic, the government has adopted rules relating to companies in hardship, particularly the safeguard procedure. Thus, until August 23, 2020, inclusive, your company’s state of insolvency is assessed in relation to its situation on March 12, 2020.
Apart from specific external events, a company’s bankruptcy is often linked to one or more internal causes.
- The problem can sometimes exist right from the start of your business if a lousy strategy has been defined in its business plan and its financial viability cannot be precisely estimated. It is essential to build up a solid legal arsenal from the start of the business to avoid any risk of insurmountable blockage after that.
Many bankruptcies are paradoxically caused by the company’s rapid and uncontrolled growth! Your business can also go through difficulties because it is in a sensitive phase that requires all your vigilance. It is the case during the first years following its creation and development.
- The lousy organization of the company (such as a disagreement between its leaders or significant waste) or even unpaid customers can also weaken its situation.
- Finally, other causes of bankruptcy that appear during the life of your business may characterize mismanagement. You can put your business at risk because of bad investments or inadequate strategic choices. Likewise, the inability to anticipate or react to competition, technological innovations, or market changes can lead your business to bankruptcy. Knowing your environment to prepare your business for changes will preserve it and ensure specific longevity.
- Warning: A manager who voluntarily commits one or more faults endangering his company’s financial health and activity could be liable.
What to do When Your Business Difficulties Persist?
If your business experiences persistent difficulties, several procedures are in place to help you deal with them. A manager cannot be told responsible for the sole reason of not having been able to make his business viable. The law, therefore, helps entrepreneurs in difficulty or in a situation of failure to enable them to negotiate with the main creditors.
The ad hoc mandate and the conciliation procedure allow you to settle the financial difficulties of your business in an amicable and preventive manner.
If these settlement measures prove insufficient, you can opt for legal action by opting for a so-called “collective” procedure: the safeguard, reorganization, or liquidation procedure. The procedure will then vary depending on whether your business has been breached.
When encountering difficulties you cannot overcome, you can ask the judge to open a safeguard procedure. This preventive legal procedure can allow you to reorganize your business and thus continue your economic activity, maintain jobs, and settle liabilities.
But the backup procedure can be unnecessary (or late!) When the difficulties are too intense, your business is already in insolvency. If this is the case, you are required to declare the situation of suspension of payments of your company within 45 days of the date of termination, under penalty of committing a management fault that could engage your liability (the court could then make you bear all or part of your business debts).
Once the declaration of cessation of payments has been made, the judge may decide to place your company in receivership. It will thus be able to continue operating its activity within the framework of a judicial review to settle its liabilities and seek prospects for recovery. The opening of judicial liquidation proceedings may be decided if your company’s situation is irreparably compromised.
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