Capital and legal structure in a company’s bankruptcy process will determine the details on the liquidation of the asset. When a company is overburdened with liabilities and unable to repay, the company should file for a legal process addressing the issue. This legal proceeding is called bankruptcy. The process usually begins with filing by the debtor or on behalf of creditors, although the latter is less common (Tuovila, 2021).
After the filing, the company will enter another process to lay a repayment plan, whether by reorganization where the company may get an extension in repayment time, or liquidation where the company’s assets will be liquidated to repay the liabilities. In the US, the reorganization is covered in Chapter 11 bankruptcy, while in the case of a total shutdown and liquidation, it is covered in Chapter 7 (Bankruptcy, n.d.).
Bankruptcy laws may differ in each country, but the process usually depends on the capital legal structure of the company. The capital structure is related to the mixed-use of securities and financing sources by a company, which mostly focused on the proportions of debt and equity (Myers, 2001). While the legal structure is related to the company’s ownership structure that will determine the risk exposure (David, 2021).
The capital structure will directly impact the liquidation process as the law will determine how the liquidated assets should be distributed. Lee (2021) explained that the law will list in order which parties should get paid first. Usually, the liquidated assets will be going to the repayment of those debts first, starting with the secured creditors and then unsecured creditors. The stockholders will get their payments after the creditors are repaid.
The legal structure will impact the bankruptcy process in terms of risk exposure. Dauderis (2021) greatly explained the three common forms of business ownership: proprietorship, a partnership, and a corporation; and how each relates to risk exposure.
In a proprietorship and partnership, the owners are not a separate legal entity from their business. In case of bankruptcy, the owner will be due to unlimited liability. It means that the owners would be responsible for the company’s liabilities. While in a corporation, the owners are considered shareholders and the company is treated as a separate legal entity. The shareholders are not responsible for the company’s liabilities, so they are said to have limited liability (Dauderis, 2021).
Stoqo: Indonesian B2B Startup went Bankrupt due to the Covid-19 Pandemic
Indonesian startup, Stoqo, was an online food logistics service company for B2B. Founded in 2017 by a former McKinsey associate and a former Amazon software developer, the company was founded by investor giants, such as Alpha JWC Ventures and Insignia Ventures Partners (Lee, 2020). In 2020, the company filed for bankruptcy due to the Covid-19 Pandemic. The company saw a rapidly declining revenue as many restaurants are forced to shut, leaving it with almost no money in the bank (Milton, 2021). The details of this case is an evidence on how important the capital and legal structure in a company’s bankruptcy process.
References Bankruptcy. (n.d.). United States Courts. Retrieved June 18, 2022, from https://www.uscourts.gov/services-forms/bankruptcy Dauderis, H., Annand, D., & Jensen, T. (2021). Introduction to Financial Accounting. Lyryx Learning Inc. Licensed under Creative Commons BY-NC-SA 3.0. David, J. (2021, April 15). What does Legal Structure Mean? FundsNet. Retrieved June 18, 2022, from https://fundsnetservices.com/legal-structure-meaning Lee, M. (2021, May 24). What Happens to the Stock of a Company That Goes Bankrupt? Investopedia. Retrieved June 18, 2021, from https://www.investopedia.com/ask/answers/06/bankruptpublicfirm.asp Lee, Y. (2020, April 29). Indonesian Start-up Stoqo Becomes Latest Casualty of the Virus. The Jakarta Post. Retrieved June 18, 2022, from https://www.thejakartapost.com/news/2020/04/29/indonesian-start-up-stoqo-becomes-latest-casualty-of-the-virus.html Milton, S. J. (2021, January 5). Covid-19: Southeast Asia tech layoffs and shutdowns. TechNode Global. Retrieved June 18, 2022, from https://technode.global/2021/01/05/coronavirus-startup-tech-layoffs-shutdowns-southeast-asia/ Myers, S. C. (2001). Capital Structure. Journal of Economic Perspectives, 15(2), 81–102. https://doi.org/10.1257/jep.15.2.81 Tuovila, A. (2021, November 15). What Is Bankruptcy? Investopedia. Retrieved June 18, 2022, from https://www.investopedia.com/terms/b/bankruptcy.asp
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