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.