Table of Contents
1. Introduction
2. Leading successful change
3. Instability
4. Corporate Insolvency
5. Business and Insolvency in Australia
6. Corporate Law and the corporations act 2001
7. Corporate Bankruptcy
8. Bankruptcy in the US
9. US Bankruptcy Code
10. Adopting a insolvency regime based on the Bankruptcy Code
11. Conclusion
12. Bibliography
Introduction
In Australia’s early decades the economy rode on the sheep’s back, with assistance from other agricultural exports. It was the 1930s depression, accompanied by social chaos in rural and mining areas that effectively forced the country into the import-replacing industrialization that became the basis for a post-war economic boom. Thus Australia ran a bipartisan protection strategy till the early 1980s which allowed reasonably high wages, low unemployment and a diverse manufacturing sector while achieving reasonable import replacement. This strategy was abandoned in 1983-85 as the Labor government worked to bring Australia out of the era of protectionism and into a new era of open competition and manufacturing for global markets. The company became global because Australia could not stay wealthy by selling commodities, especially after Europe’s transformation from being the world’s biggest food importer to its biggest food exporter. [1]
Also, many countries have minerals besides Australia. In the twenty years to 1995, Australia’s terms of trade fell almost 20% and their manufactures were too expensive to compete on world markets which, in any case, were turning away from old industries such as steel and motor vehicles. Competitiveness was ravaged by high inflation from 1973 to 1983. Tariffs were cut rapidly and imports surged, paid for by borrowing funds attracted through high interest rates. Interest payments on such borrowings are now a significant component of the balance of payments deficit. [2] Unemployment, exacerbated by technological change, soared as imports replaced Australian-made goods, although not enough to reduce demand to inflation-squashing levels. Australia’s trade balance moved from a surplus of $A183 million in 1983-1984 to a deficit of $A3274 million in 1985-1986; its current account deficit over those three years rose from $A7.3 billion to $A14.3 billion. The deficit on merchandise trade in 1994-19995 was still a very high 1.8% of GDP. The late 1970s through the 1980s was also a period of financial deregulation, meaning removal of all controls on interest rates, exchange rates, capital flows and credit. Globalization of financial markets has the effect of narrowing interest rate and equity yield differentials between countries. It also weakens the link between a country’s domestic saving and investment, making it possible for investment to grow for long periods without a corresponding rise in saving. [3]
Notwithstanding these problems, productivity has continued to grow, sluggishly, since the end of the long boom in the 1970s. Real GDP per head increased by over a third between 1972 and 1995 and this performance puts us somewhere in the top ten of the OECD growth league. Over the last five years Australia’s per capita growth performance ranks among the top five. Between 1963 and 1993 manufacturing’s share of GDP declined from 26% to 15% while services plus dwellings increased from 59% to 74% of GDP. 12 Mining and agriculture have expanded relatively in Queensland and Western Australia, dragging linked industries along with them. Meanwhile, the rest of Australia, where manufacturing is relatively more important, has been focusing on restructuring its textiles, clothing, and footwear industries, metals industries and so on, and has lagged behind the frontier states. Perhaps the single most important shift in the product mix has been the marked growth in international tourism. [4]Doing business in Australia can be a good or bad thing depending on the industry and the economic trend the country is experiencing. Business in Australia experiences things like those in other countries. One thing the different business experience is insolvency. The paper will discuss about why should or shouldn’t Australia adopt an Insolvency regime based on the US Chapter Bankruptcy Code,
Leading successful change
Over the last two decades of the twentieth century, theories of organizational changes have had a tremendous impact on business and not-for-profit companies. Many of the top corporations, have implemented one or other change program over the last twenty years, often at the cost of millions of dollars, and involving large-scale restructuring and extensive job losses (Mills 2003). At the end of the day, while it is generally agreed that certain change programs have become widely popular, there is considerable debate about the success or failure of the subsequent changes themselves. Business critics blame suggested failure on incorrect implementation. Other business critics are less convinced, questioning the lack of evidence of a clear link between the implementation of selected change program and subsequent business success. It is argued that, within management thought and practice, the notion of organizational change has changed in significance over the last two decades, from one of many potential strategies of managing to a key influence on organizational effectiveness and survival. The focus has shifted from the strategic choice of the actor to one of incontrovertible external forces that managers need to anticipate, react to and manage. It is contended that organizational change as imperative has become an important management discourse that can be witnessed in the discursive practices of companies. [5]
Explaining the popularity of organizational change in sense making terms it can be argued that change has become a conventional management practice, developed and sustained through a powerful management discourse, whose on-going character influences the decision-making of large and small companies, profit and not-for-profit companies alike. Whether or not the adoption of a particular program of change is the right course of action for some companies doesn’t seem to matter. Decisions to implement change programs are based on plausibility rather than accuracy. Prior to 1980, within business texts, organizational change as a management technique was either not mentioned at all or was limited to discussion of group dynamics and employee resistance to change. [6]
Over time, the emphasis on change programs has switched focus from ways to improve employee satisfaction to a goal today of customer-driven corporate effectiveness. But something more than a change in focus has occurred. The notion of organizational change has taken on new meaning. Since the early 1980s, it has become an imperative rather than a technique to be considered at appropriate times, a holistic rather than a piecemeal approach to organizational effectiveness. [7]Organizational change is done by a company when it believes that the company is not adjusting to the new trends in its environment. To turn the division around the management must make sure that the changes will help the members of the organization to easily adjust. The management must also make sure that there are back up plans in case the changes that the company intends to make will fail. In a situation where insolvency is eminent companies have no choice but change their strategies so that the company will still remain in its industry. Insolvency affects not only the way the business operates but it alters the way businesses look at change. Insolvency creates certain urgency in business to find ways to change their strategies, techniques and procedures. Insolvency can or cannot bring the best out of a company depending on how they adapt to insolvency and the different changes that fit the situation.
Barriers to change
Potential barriers to change could be found in culture values and attitudes, social claims and obligations, or associated with perceptual differences between change agents and recipient groups. It is said that barriers to change can come from the value people place on their traditions, what they were taught as they became members of the culture, what they learned as true and behaviorally correct. Such things produce the pride in being identified with the group and with knowing the right way. In other words, the cultural forces consist of all those things that exist within the integrated culture and the logical order of things as they have been learned. [8] It has become very clear, over many years of study, that the greater resistance to change comes where people place the greatest value, in association with core areas of culture. The social system of culture is such a core area of culture, if for no other reason than that humans group together. The enculturation system, which emphasizes cultural transmission and acquisition within a culture, is another core area on which great value is placed, for it ensures that the culture survives. Culture is reproduced through learning. Worldview provides the members of the group with some understanding or perception of the world around them. [9]
Economic and political systems assist them in adapting to the resources with which they have to work and the social order within which all these things must exist. Changes that suggest altering basic beliefs and/or behaviors with regard to any of these core areas of culture, directly or indirectly, come into conflict with established patterns of belief and practice. In such circumstances, any of the traditional patterns can turn into barriers or stimulants to change. This is why it is so critical to understand the cultures involved in a change setting, not just as they may be ideally portrayed but as they actually exist and as individual members live them. For example, in the American culture, the gaps between these versions of culture can be substantial. Strategy is a question to be considered in the dynamics of change during implementation as well. Minimizing the potential barriers to change and maximizing the potential stimulants must become as much a part of planners’ strategy as the introduction of the change idea itself. Barriers to change can be found in culture, in traditional practices and beliefs, in social structure, and in psychological areas. [10]
In the corporate world, this can mean the expected relations between management and employees, using established channels of communication, and recognizing that there are both formal and informal leaders. Cultural barriers can come from the value people have placed on tradition, the learned truth and correct behaviors, the pride they take in being identified with the group, and the logical order of things as they have been learned. [11] Change helps in making sure that financial insolvency doesn’t create a catastrophic instance in a company but in certain scenario there are barriers to change. Companies must ready not only for changes but for the different barriers against it.
Financial Issues
Throughout modern world finance, financial crises have tended to stand as important moments in the reproduction or unraveling of successive financial orders. The resolution of financial crises through structures of governance has been integral to the reproduction of financial orders, preventing the superficial fluctuations to credit practices that arise in a crisis from escalating into structural disruption and the unraveling of an order. As the financial crises of the late eighteenth century and 1929-31 illustrate, crises that occur during periods of relative instability may expose weaknesses in the ability of formal institutions of governance to manage credit practices and thereby contribute to the unraveling of a financial order. A common sense explanation of the major crises of contemporary world finance has emerged, at once reflecting and contributing to the forging of relative stability around neo-liberal organizational principles of governance. Certain domestic policy decisions and/or institutional arrangements are deemed to be inappropriate as they are cast as perverting or forestalling the market mode of behavior and the capacity of the market mechanism to rationally determine exchange rates and the availability or otherwise of credit.[12]
By proportioning blame on domestic policies and institutions that are perceived either not to reflect or to act as impediments to market signals, the common sense neo-liberal representation of contemporary financial crises effectively rests on the assumption that market disciplines are produced by world credit practices. Preventing further crises is viewed as hinging on the adoption of market-conforming. Macroeconomic policies and the extension of the rational market mode of behavior from world credit practices to local credit practices. The speculative practices of world finance are not completely separate from the real economy of world production and trade. Claims and obligations arising from investment and credit creation are often directly and indirectly claims and obligations on the real economy. The current situation of financialization expresses itself not only quantitatively as the ascendance of financial contracts over real economic turnover, but also as a qualitative effect of a subordination of real economic and social relations to the financial system.[13]
The adjustment of social relations in the face of pressures for commodification encounters significant social, political and embedded institutional forces. It follows that a contradiction is present between credit practices that are subject or respond to speculative motivations on the one hand, and the tensions generated by credit obligations that assume the commodification of real socio-economic relations on the other. The major crises of contemporary world finance share their roots in this structural contradiction that, at different instances, rears its head and finds expression in the distress and panic of financial market sentiment.[14] One form of financial issues experienced in the world not only by countries but by businesses is financial instability.
Financial Instability
Financial instability generally resulted from credit risks. In the new environment that emerged from deregulation and liberalization, both the risk management techniques of banks and the supervisory practices of public agencies proved inadequate to cope with traditional banking risks. The pattern of crisis resolution was also rather similar across countries, not least in that the role of central banks was relatively limited in comparison with the role of the government and its agencies. Whereas in most cases some initial liquidity support or bridging loans was provided by central banks, it was often clear from the outset that the problem was insolvency rather than illiquidity. Although there should be no illusion that the old type of financial distress will not recur in the future, one could argue that the new financial system brings to prominence new sources of instability. [15]
Recent changes in the financial structure can be summarized by the breakdown of the separations that characterized the old system. Many countries have integrated the supervision of different financial institutions and have switched from strict command and control to incentive-based supervision; this switch has supported the development of risk management practices. [16] Overall, there is little doubt that price stability supports sound investment and sustainable growth, which in turn is conducive to financial stability. The suggestion that large price movements can cause financial instability is supported by evidence from major financial crises. All in all, because the fragility of banks and their counterparties tend to be more frequent when prices are unstable, the pursuit of price stability can be seen as a crucial contribution to financial stability. [17]
Over the last few decades competition, enhanced by information technology, and driven on by monetary and financial instability and deregulation, has changed the financial landscape. Increasingly, concerns about financial stability have gained prominence, largely as a result of the growing number, breadth and severity of bouts of financial distress. As the financial environment changes it is appropriate that policy-makers review current arrangements to determine what changes should be made.[18] One such area is that of institutional structure and how it can contribute to effective and efficient regulation and supervision. The reduction of risk and the promotion of efficiency of key payment and settlement systems are important means of preventing financial instability and helping to contain it when it arises. The ability of the domestic government to prevent financial instability will depend in part on the perceived expertise, independence and credibility of the central bank and its Governor. [19] Financial instability is due to many instances that pertain to the situation in a country and its environment.
Corporate Restructuring and Downsizing
Corporate downsizing is a concept that is not completely defined or specified. In a general perspective, however, it is used to describe different types of corporate renewal. The activities included under this broad concept range from internal organizational change to activities designed to facilitate changes in strategic orientation. Downsizing activities may be either internally or externally induced in response to either an actual or anticipated reduction in a firm’s performance. The inability of corporate managers to effectively evaluate and monitor division-level managers may lead to inappropriate division-level managerial activity and relatively poor corporate performance. In this context, corporate restructuring implies that firms reduce their size and/or scope through downsizing in an effort to correct the problem and restore the firm to an acceptable level of performance. In the past few years, many corporations that downsized their workforce and restructured their design introduced some changes in their resource deployment levels, design, and structure. These changes were more pronounced in some industries than others. Hard hit were the retail, aerospace, and petroleum industries. [20]
To define the linkage between the degree of downsizing and business performance, some understanding of the business itself, and its structure, objectives, and interactions with customers, suppliers, and the rest of the outer and inner environments, is necessary as each business has a particular relationship to its suppliers and customers. Each business buys materials, supplies, products, or services from suppliers, and sells materials, supplies, products, or services to a downstream enterprise. Over the course of the different processes, a business attempts to create a competitive advantage by creating a distinctiveness that encourages the buyer to choose the company’s product over its competitors’, and encourages the supplier to provide preferential treatment to this company. For most organizations, the outcome of organizational downsizing is not only painful but unsuccessful. In many cases, firms fail to take into consideration the people factor.[21]
Sometimes firms that undertake this exercise fail to keep managers and employees adequately informed about the changes taking place in their organizations. Moreover, top management does not give middle-level managers, who are responsible for implementing change, adequate training for those tasks. This results in poor worker morale, management confusion, reduced worker productivity, and a lack of commitment to the downsized firm. When companies downsize, they often focus their energies on the people who are to be dismissed. These organizations tend to ignore the problems experienced by employees who remain with the company. Unfortunately, the emotional fallout and alienation of those who remain can have a negative influence on individual and corporate productivity. The solution is a carefully constructed corporate policy aimed at alleviating fears and bringing the new, leaner workforce back. [22] Despite the relatively lower vulnerability to displacement or white-collar workers, companies were more likely to offer special assistance to affected white-collar than blue-collar workers in a range of areas, including the continuation of health and life insurance coverage, income maintenance assistance, early retirement benefits, relocation assistance, counseling, and assistance in searching for a new job. Also, managers and professionals may be relatively more protected during the corporate restructuring of the mid-1980s than during a general recession a decade earlier. [23]
Corporate restructuring is expanding the rate of lateral movement and contracting opportunities for upward movement. As a result managers and professionals entering the workforce now may expect to work for more companies and for more divisions within a company. Also, corporations hiring managers and professionals may anticipate less managerial and professional loyalty to the firm and more privatized commitment to individual career development. [24] When instability happens in a company, one change they had to undergo is Corporate restructuring and downsizing. These two procedures lessen the potential weakness of the company. It also provides solution in terms of removing some financial duties and responsibilities of the company.
Corporate Insolvency
A large number of highly leveraged corporations found them selves unable to make debt-service payments to creditors, domestic or foreign, thus turning their loans into non-performing status. This aggravated the already deteriorating portfolios of commercial banks, making it difficult for them to continue providing new loans to those borrowers with overdue debt. In addition the contraction of aggregate demand-largely brought about by steep currency depreciation and macroeconomic policy-began to suppress corporate cash flows and profits. Corporate difficulties only added to the further deterioration of the banking sector. The systemic crisis in the financial sector induced a flight of deposits to quality institutions. [25]
Many financial institutions began to shift their assets to safer government bonds and central bank certificates instead of extending new loans to the corporate sector. The lack of bank credit further aggravated the corporate sector’s difficulties. Corporate insolvency had become so widespread and commercial non-performing loans so large, that these countries continued to contract despite the reversal of macroeconomic policy. Frameworks for resolving problem banks, for recapitalizing weak but viable banks and for restructuring corporate debt were introduced, and substantial progress has been made in all of these areas-although with varying pace and degrees across countries. [26]
Although most of the fundamental principles of international insolvency law were originally conceived in the context of the insolvency of natural persons, it is undoubtedly the case that the area of greatest commercial significance both in terms of the monetary amounts involved, and in terms of the complex issues encountered concerns the insolvency of companies. Historically, corporate entities of various kinds have been endowed with legal personality under municipal law, ranging from ecclesiastical or public bodies to the merchant adventurers of medieval and later times. These forms of corporate status were usually conferred by means of a Royal charter. [27]
However it was with the evolution, during the middle part of the nineteenth century, of the statute-based system for the formation of joint stock companies possessing corporate personality with limited liability, that the full possibilities were realized for legal persons, formed under the national law of one country, to become involved in international commercial ventures and legal relationships accompanied, inevitably, by the risk of financial failure. From these elements, the still evolving fabric of international corporate insolvency law has been gradually assembled.[28] Insolvency in organizations happen because of inability of an organization to pay its debts that are already past its due. When organization’s experiences insolvency they have no choice but to find ways to earn finances to pay for the different debt they have.
Business and Insolvency in Australia
One of the unexpected results of the turnaround in Australia over the last fifteen years is that Australian manufacturers have become Australia’s most active exporters. It is one of Australia’s best-kept secrets. Most Australians still believe that the tariff cuts wiped out Australian manufacturing. The fact that manufacturers are now Australia’s most dynamic exporters is a matter of great historical importance. It is one of those things that lead a nation to change its mind about itself. Twenty years ago, nearly 80 per cent of Australia’s exports were from farming and mining. This was the traditional pattern of trade for Australia. No other advanced economy was like us, with the exception of New Zealand. It was one of those things that made Australia Australian. Australia’s contribution to the world economy was as an exporter of farm and mining products. [29]
A major cultural shift in attitudes among Australian executives in manufacturing had taken place. This was the new face of Australian manufacturing. Australian manufacturers have not helped to market their own case. Decades of dependence on protection has bred a habit of mind. When asked about how things are going, there is still a semi-automatic inclination among older manufacturers to claim that others have a competitive advantage and the government has to help. Politics has also played a part. The successful campaign by the automobile and clothing and textile industries for a pause in the process of tariff cutting in 1997 also left an impression with the public that those industries still needed help. In truth, both industries could have coped with a steady and slow reduction in tariffs, but they lobbied intensively and successfully for a pause. But it is difficult to make a convincing case for assistance from the government and at the same time declare that the industry is globally competitive and part of Australia’s most dynamic export sector. Exposed to competition, manufacturers had to reconfigure their businesses if they were to survive. Once able to compete with imports in the domestic market, they then found that they had products which could be made at a price which was competitive on export markets. That was the theory. Overall, it seemed to work. There is plenty of anecdotal evidence from manufacturers that this was how they saw things.[30]
In the last two financial years of the twentieth century, exports from Australia’s manufacturers fell off. This was the short-term effect of the economic recession among Australia’s trading partners. No doubt this will lead those predisposed to think this way to note that Australia’s manufacturers are now just part of the economic ruck. This will not alter the longer term trend of Australia’s manufacturers becoming Australia’s leading export sector. [31] The business sector of Australia has its strength on manufacturing. This sector has achieved both success and failure. This sector also has instances of insolvency that depends on how a business is run and how the government assists the business.
Corporate Law and the corporations act 2001
In the corporate law context, a structure of entitlement rules defines the respective rights of shareholders and the various non shareholder corporate constituencies. These rules confer various powers or immunities on their beneficiaries. Some of these entitlement rules are rules of corporate law, others are not. An example of the former is shareholders’ statutory voting rights. Corporate law statutes confer voting rights on corporate shareholders as to a range of specified matters. The effect is to deny participation in control through the voting process to other actors within the corporate enterprise and to interested members of the general public. Statutes also limit shareholders’ liability to corporate creditors to their capital contributions, leaving creditors to bear the risk of corporate insolvency. Common law fiduciary duty doctrine likewise plays an important role in structuring the legal relationships among shareholders and non shareholders.[32]
Management, having complied with the corporation’s contractual and other legal obligations, must then seek to maximize shareholder wealth, rather than, for example, seeking to share gains among shareholders and certain non shareholder constituencies. An example of entitlement rules that are not found within corporate law is the common law employment-at-will doctrine. This doctrine allows corporate management broad freedom to discharge employees whenever it is deemed to be in the shareholders’ financial interests to do so. All of these legal rules define important attributes of one’s status as a shareholder or non shareholder, and thereby structure the relationship among shareholders and non shareholders in important ways. [33]
The entitlements specifying the relations among shareholders and non shareholders are mostly default rules. They define rights that can be modified by contract. This point is familiar to corporate law commentators. Thus, for example, shareholders can agree to give up their limited liability and can also extend voting rights to groups other than common shareholders. Acting through corporate management, they can also agree to long-term employment contracts that override the at-will doctrine. Corporate law contractarians talk about the corporation as a product of consent by the various corporate constituencies to the terms of their contracts with each other. Thus, for example, if voting rights, limited liability, fiduciary duties, and the employment-at-will doctrine are, as default rules, merely terms of a standard-form contract, creditors or employees who do not bargain for their modification can be said to have agreed to these attributes of their relationship with the shareholders as part of their agreement to extend credit or to enter into an employment relationship. [34]
However, thinking about intra corporate relations in this way should not blind one to the fact that the bias of the default rule in question was not itself the result of a bargain between the parties. By providing default terms, corporate law and other legal doctrines determine the entitlement structure that will obtain unless that structure is altered by affirmative conduct. [35] Corporate law covers different aspects of a business and it makes sure that rules in the business will be followed well. The corporate law provides guidelines for business so that they will act accordingly and with regard for the welfare of others. The corporate law assists in helping the company achieve its goals. One corporate law is the Corporations Act 2001; this set of laws for businesses in Australia provides guidelines on how business can be done in Australia. The corporation law is focused on providing guidelines mostly to single owned companies but it also provides guidelines to partnerships and corporate type of business.
The Corporation’s Act 2001 is one of the longest enacted set of laws in the world. It consists of different sections that each has detailed discussions and definition of how businesses, managers and employees should act on certain instances. The different sections are divided on different subsections that provide more specific explanation and information about the law. The act contains guidelines on what auditors or directors should be chosen, it also determines how a company should conduct its meeting. When the company is about to close the corporation’s act provides a detailed instruction on how it should take place and what are the requirements for it. The corporation’s act 2001 provides not only guidelines but assistance whenever a business needs to have changes in ownership or the business will change its type. It assists in providing solutions on how to operate the business when it is facing problems such as insolvency, bankruptcy or other financial problems.
Corporate Bankruptcy
The automatic stay protection in a US corporate bankruptcy is intended to stop individual creditors from taking actions, such as lawsuits or set-offs, that could prejudice the eventual re organization of the debtor’s affairs. Of course, the legal ability to cram down a plan of re organization on dissenting creditors in a corporate bankruptcy means that the automatic stay protection is needed only during the period before the re organization becomes effective. The situation is different in a sovereign debt workout. The threat of disruptive legal action while a restructuring is underway is certainly present in the sovereign context, although holdout creditors have traditionally waited for a sovereign to complete its restructuring with other creditors before launching a legal attack. [36]
But without a sure ability to cram down a deal on holdout bondholders, the sovereign debtor must worry about maverick creditor litigation both before and after completion of a restructuring with the other bondholders. Collective decision-making provisions can provide significant protection against maverick lawsuits while the workout is in progress. The customary requirement that holders of 25 per cent of the bonds in a particular issue consent to an acceleration of the un matured principal gives a measure of protection because most bondholders will not wish to sue just for their share of one or two missed payments. Of equal importance, however, is the ability of a simple majority to rescind any prior acceleration as part of a final workout. The discontented bondholder who is thinking of pursuing independent legal remedies must therefore face the possibility that, after months of expensive litigation, the sovereign debtor will reach an agreement with the majority of its bondholders, the acceleration will be reversed, and the litigant creditor will be left with a claim only for its share of any payments that remain unpaid after the settlement. This can be a powerful disincentive to the commencement of lawsuits before a restructuring has been concluded. [37]
While creditors have an incentive to shut down failing firms prematurely by racing to be first to collect, managers of these firms may have an incentive to delay bankruptcy as long as possible, because they lose their jobs and equity loses its value when the firm is liquidated. This can also give rise to inefficient bankruptcy decisions. The economically inefficient decision for the firm to continue operating results from a combination of the coalition benefiting by shifting priority so that the last lender ranks above the earlier lender and the coalition benefiting by using the earlier lender’s funds to gamble on the risky investment of continuing the firm’s operations. The riskier the firm’s future earnings, the more strongly the coalition prefer that the firm continue operating, regardless of whether doing so is economically efficient.[38] Companies have different solutions for different instances of bankruptcy that befall on them. The companies not only use different strategies to solve bankruptcy problems but they request the assistance of the government in solving this problems. Together they put up a valiant effort to keep the company running.
Bankruptcy in the US
Free market competition entails both winners and losers, however, and so the story of the invisible hand is not always optimistic. Competitive markets reward firms that are efficient, but they also punish those that are not. Bankruptcy is the downside of competitive markets, one of the necessary costs that market advocates tend to play down. Bankruptcy involves economic dislocation because productive assets must be redeployed, and unemployed workers have to search for new jobs. The dynamism of competitive markets nevertheless entails considerable uncertainty. People are happy to celebrate market efficiency so long as the company they work for can survive and they maintain their jobs. The social costs of highly competitive markets are sufficient to induce many governments to try to buffer or protect their citizens from some of the more extreme consequences. [39]
Competitive markets have been the focus of the recent conservative shift, and bankruptcy is a distinguishing feature of competitive markets. Consider the costs of bankruptcy, and indirectly of unemployment. With generous unemployment insurance benefits, the government directly bears one of the main costs of bankruptcy: worker unemployment. Every laid-off worker is going to apply for unemployment insurance or some other form of public benefit. He or she no longer pays taxes and so increases government spending while decreasing revenues. With meager unemployment benefits, or a sparse social net more of the costs of unemployment are born directly by the fired or laid-off workers themselves. Hence, any reduction in publicly funded benefits to the unemployed is going to lower the fiscal cost of bankruptcy. Bankruptcy also involves a political cost in the sense that, as voters in a democracy, unemployed workers become unhappy with the economic status quo. They will punish politicians electorally. Nevertheless, conservative governments are less sensitive than centrist or leftist governments to the unemployed as a political constituency.[40]
In general, business failure that results in liquidation of a bankrupt company entails social, economic, political and fiscal costs. A rise in unemployment is perhaps the greatest social cost, while the increased demand for social services and the loss of tax revenues together create a fiscal cost. The economic costs, of course, derive from the losses suffered by shareholders and creditors of bankrupt firms, and also are associated with the liquidation and redeployment of economic resources. All of these costs are easier to bear with a growing economy. Economic expansion supplies new jobs for the unemployed, it enlarges the tax base for government revenues, and it ensures new economic opportunities for investors and lenders. A stagnant economy, in contrast, sharpens the pain associated with bankruptcy.[41] Bankruptcy in the US is not only business in nature, it also involves some issues regarding politics and society.
US bankruptcy code
The primary purpose of the U.S. Bankruptcy Code is to provide stability and order. The U.S. Bankruptcy Code is also intended to provide the honorable debtor with a fresh start. People make honest mistakes and sometimes have plain bad luck. Someone who opens a restaurant outside a large factory may not know that the owners are preparing to shut it down. That poor misfortunate should be granted relief from crushing debt and allowed to start anew. Bankruptcy is supposed to be a way to accommodate both the debtor and his creditors regarding the payment of his debts. Bankruptcy is a right qualified by the conditions. The Bankruptcy Code provides for an orderly, negotiated, fair restructuring, or even discharge of debt, premised on and subject to the unfortunate debtor’s ability to pay. The creditors partake of whatever is left over, and the debtor starts over. But it has become a popular mechanism for attempting to evade one’s responsibilities. [42]
The Bankruptcy Code and its predecessors were intended as a more humane and orderly reallocation of the risk presented by debt. Therefore, Congress probably wasn’t primarily concerned with the issues associated with personal responsibility. The Bankruptcy Code is designed to allocate assets to pay off debt in an orderly fashion. It is only secondarily-if at all concerned with imposing notions of personal responsibility. The legal system struggles to, and in some cases does, mete out justice and force these litigants to bear responsibility for their own shortcomings. But in some cases the struggle is either a mighty one or one that is simply unconcerned with the issue of responsibility. The legal system is designed to and works most effectively to resolve disputes among good faith disputants with a bona fide misunderstanding. Although the system may ultimately deal appropriately with irresponsible or dishonest litigants, it does so by grinding faithfully through the required proceedings and finally reaching a result, with no special account taken for or punishment imposed on those who may deserve harsher treatment. [43]
The Bankruptcy Code leaves the liquidate vs. reorganize choice to firm managers, who can be expected to choose strategically so as to maximize their private gains. Since liquidation means job loss for the managers, they will seldom fail to reorganize even where this is inefficient. Creditors will anticipate management’s opportunistic behavior and will discount the promise of repayment. Because of this, the firm will not be able to finance some profitable opportunities. The resulting underinvestment costs represent a deadweight efficiency loss. [44] The bankruptcy code of the United States provides business a detailed discussion of different issues on bankruptcy and other related topics. The code provides different laws divided accordingly and these laws provide guidelines to business in solving the different financial problems they have. It provides limitations on what properties can be included in a bankruptcy case.
Adopting a insolvency regime based on the Bankruptcy Code
Advantages
The bankruptcy code can be used by Australia, its government and businesses within it as a basis for an insolvency regime. The bankruptcy code will provide a foundation on how the insolvency regime would look like and it would provide a format on how the insolvency regime would contain. Since the bankruptcy code is a very helpful means for businesses to determine what might or might not be included in the properties a bankruptcy case would involve, it might be helpful in determining what properties can be used as a payment for debts when insolvency comes. Through the bankruptcy code business encountering insolvency can determine means to build an insolvency case. The insolvency regime is not supposedly as long as the corporation’s act it should just provide important details that relate to insolvency and it should provide answers regarding insolvency.
Disadvantages
Basing the insolvency regime on the bankruptcy code may create problems for implementation of the insolvency regime. The Situation in the US is different from the case in Australia. There might be some differences on how the two countries can solve the financial problems thus different approach must be used. Another disadvantage of basing the insolvency regime on the bankruptcy code is it effects might not work in Australia. Since the basis of the law is from another country, its effectivity might not be enough for the success of the law in the other country.
Conclusion
Doing business in Australia can be a good or bad thing depending on the industry and the economic trend the country is experiencing. Business in Australia experiences things like those in other countries. One thing the different business experience is insolvency. When organization’s experiences insolvency they have no choice but to find ways to earn finances to pay for the different debt they have. Companies have different solutions for different instances of bankruptcy that befall on them. The companies not only use different strategies to solve bankruptcy problems but they request the assistance of the government in solving this problems.
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