Bankruptcy & Re-birth…

Doctor Vijay Mallya's personal aircraft.

Image via Wikipedia

As the Kingfisher Airlines saga dominates the airwaves, and public indignation runs high as to a possible Government sponsored bail out of Vijay Mallya’s beleaguered airline, the words of a brilliant Dutch professor came to mind.

Bankruptcy is a bit like Death” he said.”It’s sad when it happens, but it is most merciful and best for all concerned when it happens swiftly.

This sounded a bit counterintuitive, especially if one looked at it from the point of view of key stakeholders like employees, who for no fault of theirs would be out of a job, or shareholders who would lose their investment.

To counter our protests, Dr Bomhoff went on to explain. “In many ways it’s a bit like your Hindu cycle of Death and re-birth. At the point a company goes bankrupt, it dies because it has run out of cash and no one is willing to extend it further credit. However, at that point its assets are still productive. The soul of the company can be re-born again in a new Avatar and have a great new life !”

The concept was quite intriguing but not quite clear. As we discussed it, the Professor laid out his argument as follows :

  • The plant and machinery of the bankrupt firm  (in Kingfisher’s case its aircraft) if liquidated and sold swiftly, could be bought by a more efficient competitor (for example a profitable airline like Indigo) and put to use.
  • Similarly, though employees of the bankrupt firm (in Kingfisher’s case its pilots, crew, engineers, ground staff etc) would lose their jobs, they were skilled and well trained and could be re-hired by competitors
  • Because the liquidation price of assets were likely to be lower than the original capital expenditure, and staff were likely to accept competitive salaries, the new owner, would probably be able to offer the same goods & services at a more competitive rate, thus benefitting the customer
  • Investors and creditors who took a hair-cut and lost money, would learn from their experience and have a better understanding of the risk – reward relationship going forward. Risk would be appropriately priced which is always beneficial for a healthy entrepreneurial environment.
  • The alternative to swift bankruptcy proceedings – namely a protracted and painful restructuring or a shut down of the firm while everyone protested its closure, would be like a slow and lingering death. While this took place both the physical and human assets of the firm would atrophy leading to a net loss for all concerned.
His comments were made several years ago in the context of a major Power plant.
With the passage of years it is evident how true his words were. They will probably prove to be as prophetic, in the case of not just Kingfisher, but also the other airlines in India which are struggling to keep afloat.
Let us hope that the concept of Bankruptcy and Re-birth takes root, allowing firms, like individuals to live out their karmic destiny !

8 thoughts on “Bankruptcy & Re-birth…

  1. very educative. it is one reform in waiting for some sectors and judiciously used has potential to redistrbute resources rationally.Market will certainly fail(under this presumption)

  2. Dear Kaushik – certainly stakeholders do go through pain in a bankruptcy. But it sends a strong message and promoters (who loose all their equity in a bankruptcy) and creditors (who take a hair cut) pay very close attention the next time as to how a business is managed. The problem with bail -outs is that it creates a moral hazard.

  3. Hi Meera,

    This is a unique thought process which you have. But I suspect (and i’m sure you know) the actual swiftness of the re-birth is not highly probable in india. Sale of aircarfts etc will take time… might be bound in legal matters but most importantly the stake holders such as employees may not be able to find suitable employment making livelihood very difficult. Other stake holders (Mr. Mallya for example) might still be laughing his way to the bank (or swiss bank). This being said I surely dont propagate that the authorities should bail the airline out — after all what is so unique about this airline that demands a bailout from tax payers money?

    • raised valid points.we are living in the world of crony for moral hazard of bail outs remember the target beneficiaries are political groups for whom suitably worded schemes are devised.under the cirm very diff for bankers to practice risk reward

  4. Interesting analysis … and huge learnings from each of these experiences as we see more and more from the same … only point to note is human memory on such items are far from being engrained for eternity … just a while and all these will recur … its tragic but true !!! Its the people who are part of the experience who perhaps are more cautious on their decision making !

  5. Hi!Maam-Very well written and triggers some good thoughts.My only point is such cases are always debatable….will swift Bankruptcy lead to Rebirth always or will lead to sudden death paralyzing life of thousand of stakeholders.I think in any challenging times the option of revival should always be worked upon in details in an atmosphere of positivity first before looking into any other option.

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