> Really? 5 years? That seems really harsh. Is it all business failures or does it have to be due to mismanagement?
There’s a big difference between bankruptcy and business failure. Plenty of businesses fail without entering bankruptcy, they’re wound down responsibly and their creditors are repaid in full.
If a company fails due to bankruptcy, then it means that people who lent money to that business are out of pocket, and end up paying for the failure.
The whole point of “limited liability” companies is that the owners and management are shielded from creditors in the event of bankruptcy (hence the “limited liability”). So a five year ban (which is true in most countries) from directing another limited liability company is reasonable, it don’t prevent your from running a business, only from running a limited liability business, because there’s now evidence that in the event of failure you’ll leave your creditors high and dry.
Ultimately the privilege of running a limited liability company, where the state promises to protect you from your creditors if things go wrong, is just that, a privilege. If you prove yourself unable use that privilege responsibly, then that privilege is temporary taken away. To be clear, the privilege removed is protection from creditors by the state, if your business fails. You can absolutely start another business, it’s just that the state won’t protect you if you fail.
The counterpoint is what's the point of reducing losses on bankruptcy if it makes the entire business climate worse? By trying to protect creditors you just make everyone poorer.
Does it? You could equally well argue that punishing CEOs for bankruptcy makes banks more willing to lend money, improving the business climate.
And of course for startups in the early years it's not that relevant anyways, since nobody will lend you anything until you have revenue. VCs invest instead of lending and aren't owed anything if you shut the company down.
Well, you’re basically taking something (cost of capital) that could be priced (via interest rates and collateral requirements) and turning it into a regulatory barrier. Personally I doubt that that is better, and I think the general consensus is that it is quite a bit harder to do business in those places with these regulations.
Does it? For most companies their creditors are other businesses that they’re sourcing supplies from. What makes you think those businesses can afford to take the hit?
Ultimately most of the real creditors to small and medium businesses are other small and medium businesses. So if you offer no protection to them at all, you either get extremely risk adverse companies that refuse to offer any sort of credit (such as 30 day invoices), or a single business failure ends up causing a cascade of failures all of their suppliers take the hit, and also go out of business.
Ultimately increasing the trust between businesses, so they’re able to extend thing like 30 day invoices as standard, substantially improves the business climate. It reduces the barrier and risk of everyday business transactions, makes it easier for businesses to manage their cashflow, and ultimately allows businesses to grow faster and in more robust manner.
None of this is about protecting lenders like banks, or investors. Most of the time they screwed anyway, it’s about protecting other businesses who’s primary function isn’t financial risk management.
Though, I don't think the distinction really matters within the context of my point. Both investors and creditors are exchanging money for a bet on future profit derived from the company being solvent in the future and having extra money to either pay back debts or pay out dividends.
My point is that America tends to get a lot of flak for rigging the system in favor of those with excess money (some of it is even fair). My point is that if you want to structure your system past what we're willing to do, you may want to stop and think for a second about if that's what you really want.
Now, if you want to protect the money of people with extra money to lend out, that's absolutely fine. It's a completely internally consistent position. But my understanding is that it's not that popular of a position, so I'm surprised the system is set up this way.
> Both investors and creditors are exchanging money for a bet on future profit derived from the company being solvent
Nope, that's still just investors.
Creditors are not people who made bets on the company's future profits. Creditors are people who the company made legally binding contracts with to pay them. For example people who provided products and services who are getting stiffed. Also: taxes due.
Even a bank loan is not a bet on the company's future profits. A bank loan is a contract that says you will repay the money lent, with interest. Irrespective of profitability.
Which is why a limited liability company usually can't get credit unless it is also guaranteed by someone else. Because with no outside guarantees, it would be a bet. (Yes, convertible bonds exist, but different topic).
We could go back to bad old days, where business owners were directly exposed to their creditors. Business fails, say goodbye to home, car, personal savings. If that’s not enough, off to the debtors prison with you, you can work till you’ve repaid your business debts.
Screwing over the bond market by screwing over owners of your company's bonds make the entire investing and general retirement and pension climates worse. Retirements and pensions are often guaranteed in part by the government, with tax funds. Tax increases and retirement deficits directly hit consumers in their ability to consume, and at least a few years back consumers were responsible for about 2/3rds of GDP (in the US, at least), so a bit more important than the business climate itself.
And that's without even factoring in the effect of bankruptcy on consumers employed by the bankrupt company. Employees of a bankrupt company are considered the highest level of unsecured creditors, but they still come behind secured creditors. So bankruptcy can not only result in an employee (who is also a consumer in the more general economy) losing their job, but losing their last paycheck and benefits coverage. Which has a consequent effect not only on consumption, but on utilization of public, tax- or fee-supported services.
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If a person bankrupts a company, they could probably use 5 years to let all of the lessons that they should have learned sink in. If you fail out of school you have to retake your classes in order to graduate.
So just bring in another CEO just for the bankruptcy. Currently that's not an uncommon practice in the US. Of course this new CEO would have to be a one-use fall guy with somebody else actually doing the job...
> If you prove yourself unable use that privilege responsibly
Good luck determining whose actually to blame and who is innocent... at the end of the days only unlucky small to medium business owners who can't afford expensive lawyers or consultants will suffer from such a policy.
Because you can just hire the CEO to take the blame and continue running the company from another position. Unlike with lawyers, engineers and auditors this arrangement would be much hard to prove.
Also CEO are liable when they engage in criminal behavior just like everyone else.
And where are talking about auditors there are very specific and procedures which define they duties and responsibilities. How could you replicate that for CEOs?
You can also screw over your creditors without declaring bankruptcy. Just stop paying your bills. Elon is famous for not paying creditors at twitter. Bankruptcy is just a way to get relief from creditors and prevent them from suing you.
Is it possible to have declared bankruptcy with no creditors? Can you just spend all of your own money down to zero? Would you still be banned due to losing only your own money?
I think it would be very difficult to achieve, you would somehow need to convince a bankruptcy court to accept your bankruptcy, despite having no creditors.
If you spend all your money down to zero, then the normal thing is to just have your company dissolved and struck of the companies register. For which there is no consequences, you just tell the state your business is no longer operating, they make a note of that, and that’s it. Business dissolved, you get on with your day.
Bankruptcy is something you get into when you can't pay debts to your creditors.
If you have no debts, and thus, no creditors, you can't go bankrupt by definition. Of course, if there are government fees or taxes to pay, the collector of those becomes a creditor. You would want to formally close the business so that it doesn't accrue annual fees and force you to do more paperwork.
do you have any sources for that? Considering that in germany, the "Mittelstand" is the major economic engine powering the economy compared to major corporations.
There’s a big difference between bankruptcy and business failure. Plenty of businesses fail without entering bankruptcy, they’re wound down responsibly and their creditors are repaid in full.
If a company fails due to bankruptcy, then it means that people who lent money to that business are out of pocket, and end up paying for the failure.
The whole point of “limited liability” companies is that the owners and management are shielded from creditors in the event of bankruptcy (hence the “limited liability”). So a five year ban (which is true in most countries) from directing another limited liability company is reasonable, it don’t prevent your from running a business, only from running a limited liability business, because there’s now evidence that in the event of failure you’ll leave your creditors high and dry.
Ultimately the privilege of running a limited liability company, where the state promises to protect you from your creditors if things go wrong, is just that, a privilege. If you prove yourself unable use that privilege responsibly, then that privilege is temporary taken away. To be clear, the privilege removed is protection from creditors by the state, if your business fails. You can absolutely start another business, it’s just that the state won’t protect you if you fail.