Our society does not view bankruptcy in very high respects, for that matter majority of societies don’t view it in a similar way. But there is a amazing society – America – here a bankrupt promoter in 1990’s could become the president of the country. America has the highest bankruptcy rate in the world with the most being in Tech Sector. Yet its tech sector rules the world and amazingly America has the record of creating the most creative companies in the world. Like in ‘silicon valley’ it is generally said, its tough to get private equity funding unless you haven’t failed at minimum 3 ventures in your life.
If a promoter or a businessman does a startup he needs to commit entire savings to his business idea which is new, to show that he really believes in the idea. Think about startups odds only 1 out of may be 20 or 30 make it to next year. Same goes for restaurants. It is widely known that Jeff Bezos (Amazon) – when he left his high paying job took out his parents money and he knew that the odds were less than 30% he will survive. We know of Jeff Bezos who made it, but there would be many with the same intent, hard work who would have never made it and ended being bankrupt saving their only business. Risk taking gives creativity and that is how capitalism functions. It is very easy to say the promoter did this mistake or that (its majorly hindsight blabber), but even when the promoter when he is making the decision, he has no right whether it will turn out right or wrong. If someone’s business is failing he will try every bit to save it. Business is a game against the odds and you work everyday to improve the odds in your favour, but sometimes you make mistakes and they turn up costly.
So, does it mean every bankruptcy is good – no never. It all boils down to the intent of the promoter (Not legal) – Is he willing to payback when he has money or is he ready to bear the cost of his mistake. Unfortunately few crooks and frauds destroy the typical culture and capital does not reach the deserving candidates.
Lets view bankruptcy from the viewpoint of everyone.
Bankruptcy – Viewpoint of Entrepreneur
Entrepreneur who is bankrupt and willing to accept his mistake is better else you are stuck. There is wide difference between intentional/fraud bankruptcy vs normal one.
I have seen many promoters just try their every bit to take out money from the company once its bankrupt and love to live of luxury. Example: Case of Vijay Mallya, Diamond Merchant Nirav Modi, Many more the list goes on. I have known example of people going spending money and enjoying while their lenders still asking for money.
Accepting the mistake involves selling your personal assets to the utmost extant possible to pay back the lender, cutting down your expenditure, if possible shifting in a smaller house – not that having crores in accounts and not giving anything to lender – even if it means you going down as status – It shows real intent that your willing to bear the cost of mistake and have an intent of paying back. Anyone giving reasons to the lender – ‘Aise hota hai, you have so much money, Why should I pay you?’- Clearly shows no intent.
While we have seen promoters, who go to the utmost extant remain there are willing to give personal assets, move to smaller houses and willing to pay back to the lender.
Bankruptcy – Viewpoint of Banker/Lender
Accepting one investment went wrong and learning from it is far better. If the promoter has shown an intent by doing some action either selling his personal assets or something – working out a solution is way more effective.
If the promoter is fraud – legality has an option – but marking down your investment heavily is better as there are less chances of recovering money. Again better to learn and move ahead.
Bankruptcy – Viewpoint of Investor
Accepting it is the entrepreneur who is taking the risk on the ground. It is very easy to blame him/her to take the wrong decision. Its your mistake too in the end. Maybe one investment didn’t go write. Cribbing against a genuine entrepreneur. Generally, promoters who aren’t fraud bankruptcy is entitled as a stigma to them by the investor. We have good example of Mr. Achal Bakeri of Symphony, whose company emerged from almost bankruptcy. Its better as an investor to accept mistake and learn from it.
Generally, once the company is into too much debt the narrative starts building of finding problems in the promoters.
Whatever, be the case, genuine bankruptcy should never be a social stigma as it hampers the risk taking the economy and further the creativity.
Argha Investment Advisers 