What it means for a person or firm to be declared bankrupt

Empty wallet

Rather, bankruptcy or insolvency is a state in which a person has indebtedness that exceeds the value of his assets.

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Boris Becker delighted the tennis world in the year 1985 when, aged just 17, he won one of Tennis’s biggest prizes, the men’s singles Wimbledon tournament.

He would follow this with several other victories in Tennis, including five other premier championships known as the Tennis grand slams. By the time of retirement from the sport in 1999, Becker had made earnings estimated at US$50 million. On this basis one would have expected that Becker would go on to a retirement of financial security.

But this was not to be. In 2017, Becker was declared bankrupt due to failure to repay an unpaid loan he had taken. A fortnight ago, Becker was jailed for two and a half years for concealing assets and loans from the trustees of his bankrupt estate. This leads many to ask why a superstar like Becker would be bankrupt in the first place.

Not only for the poor

However, the truth is that the legal device of bankruptcy is not only for the poor or persons of low earnings.

Rather, bankruptcy or insolvency is a state in which a person has indebtedness that exceeds the value of his assets. Put differently, a person is said to be insolvent if he has negative assets. If this state arises, then the person himself or any creditor may go to court for an order declaring him bankrupt.

This declaration by a court has the effect of divesting the debtor of control of all his property. The property is handed over to a third party who then tries to pay off the creditors. It is then that the debtor is called a bankrupt.

Being declared bankrupt in itself is not a crime. However, upon the declaration being made by the court, the debtor declared bankrupt is required to act in utmost good faith by disclosing all his financial affairs to the trustee for the benefit of the creditors. Failure to comply with these conditions is a criminal offence in most cases. This is where Becker slipped, when it was discovered that he did not hand over all his assets to the trustee. The reasoning behind this is that such acts as hiding assets defeats the real intention of bankruptcy law, which is to ensure the creditors of the insolvent person or company recover as much from the assets of their debtor as possible.

But Becker is not the only sports superstar to have been declared bankrupt. His contemporary in time, Mike Tyson, became world heavyweight Boxing champion around the same time as Becker won the Wimbledon. Tyson would go ahead to win many more fights and is believed to have earned about US$300 million within a decade. The blinding punch came to the public when, in 2003, Tyson went in bankruptcy for inability for pay his debts and taxes. The boxer blamed lavish spending for the bankruptcy and the court heard that part of the spending involved the purchase and keeping of tigers as pets!

Though often used in the common law world to refer to individuals, the term bankruptcy can also be used for companies. Companies and individuals may become bankrupt for a variety of reasons. The basic intention of the law of bankruptcy is to ensure that heavily indebted persons or companies do not continue to operate businesses and incur further debts to the detriment of their creditors. It is to ensure that creditors of a person facing financial difficulties do not lose out further. The intention is, therefore, to ensure that the Trustee collects the assets and tries to share them among the creditors in proportion to the amounts owed to them. The other reason is to provide a reprieve to the debtor from the burden of holding onto an unsustainable financial position. Thus in most countries, bankruptcy is not a lifetime status for individuals. There is often a period after which the status of a bankrupt is erased and the person is allowed to come back to restart his life. This period differs from country to country and is between five and 10 years. This period could be reduced if for some reason the assets are able to fully pay off the debts.

But it is not only sportsmen who can find themselves personally bankrupt or whose businesses can end up in a similar state. In India, Wharton Business School-educated Anil Ambani’s group of companies, including its telecoms company Reliance Communications, voluntarily filed for bankruptcy in 2019. In January this year, a Mumbai court permitted the administrator of one of Anil’s companies to sell it off after the company defaulted in settlement of a debt in the billions of rupees. This was despite the fact that as owner of these companies, Anil Ambani was said to be worth US$42 billion in 2008. In 2020, Mr Ambani would tell a court in London that his net worth is zero following the collapse and bankruptcy of his companies. It has been explained that the reason for the bankruptcy of these companies was due to poor business decisions by Mr Ambani.

During this period of bankruptcy, the bankrupt person is deprived of certain rights. His or her commercial engagements and financial dealings are monitored and managed by a trustee.

The bankrupt is incapable of being a director in any company. Though he was not himself bankrupt, the failures of his business came with somewhat similar consequences for Mr Ambani. In November 2021, the Reserve Bank of India suspended him and the board of directors of Reliance Capital and appointed an overseer of the business.

Prior to that, Mr Ambani had been prohibited by the Securities and Exchange Board of India from association with any listed company in India.

But bankruptcy is not always the result of mismanagement of financial affairs. It can be as a result of misfortune. Neither is it the case that bankruptcy forever damns an individual despite the shame that may sometimes come with it.

 Abraham Lincoln once had to seek bankruptcy protection when his partner in a grocery store he was running died and left him to bear all of the business debts. This resulted in the seizure of Lincoln’s home and other assets. He had to continue working to pay off all his debts. About a decade later, Lincoln was elected president and is today thought of as the best president the US ever had.

Shameful

Under normal circumstances, bankruptcy is thought of as shameful and has its consequences for the debtor, whether an individual or a company.

Lincoln’s story shows the other side of the essence of bankruptcy laws; that they are intended to give the debtor reprieve and thereafter restart his financial life on clean slate.

Even Tyson made a comeback from his bankruptcy and today is a millionaire again even though not at the level of his boxing career.

It proves that bankruptcy is a state that may just knock the debtor down but not out.

It is sad for Becker that his bankruptcy status has ended in a jail term for him. But like all others, he will probably come back and score a grand slam in other areas of life even if not in tennis.

That is the reason for the existence of the laws of bankruptcy.

Mr Owino is Head of Legal at Nation Media Group Plc.

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