Bankruptcy/ Liquidation Strategy – When a company finds itself in the worst possible situation with a poor competitive position in an industry with few prospects, management has only a few alternatives– all of them distasteful. Because no one is interested in buying a weak company in an unattractive industry, the firm must pursue a bankruptcy or liquidation strategy.
- Bankruptcy: It involves giving up management of the firm to the courts in return for some settlement of the corporation’s obligations. Top management hopes that once the court decides the claims on the company, the company will be stronger and better able to compete in a more attractive industry.
Eg: GTB (Global Trust Bank) was promoted as a private sector bank in 1993, and was running successfully and setting records. In 2004, it became bankrupt under the pressure of bad loans and merged with a public sector bank, Oriental Bank of Commerce.
- Liquidation: It is the termination of the firm. Because the industry is unattractive and the company too weak to be sold as a going concern, management may choose to convert as many saleable assets as possible to cash, which is then distributed to the shareholders after all obligations are paid.
Eg: Small businesses and partnership firms liquidate when one or more partners want to withdraw from the business.
Liquidation may be done in the following ways:
- Voluntary winding up.
- Compulsory winding up under the supervision of the court.
- Voluntary winding up under the supervision of the court.
131 Comments