Of course, I am not referring here to Enron, Bernie Madoff, Masterbond, Alan Bond and many others of similar ilk.
Companies or individuals can, for perfectly innocent reasons, get into financial difficulties. Poor judgement and natural disasters are often unavoidable causes of business failure. Individuals may lose their jobs and be unemployed for lengthy periods and so be unable to pay their debts. This should be seen against the background of a commercial environment where the extension of credit is a way of life - those who give credit do so for profit motives and it’s up to them to evaluate the associated risks and bear the consequences.
Individuals, who are unable to pay their debts, whether business or personal, stand to lose all of their personal assets. There are of course many cases where people who use companies as a vehicle for business operations to not have to pay the debts of their failed companies. There has been much abuse of the concept in law of limited liability for the owners of companies. Those who have suffered loss due to the failure of a company, deeply resent seeing the failed company’s owners continue to live in luxury and, in many cases, start new companies within weeks.
But let’s be adult about this. It’s entrepreneurs that build economies. In South Africa, and other countries, there have been a number of “Captains of Industry” who failed a number of times before succeeding – but their eventual success has been spectacular. Not only have they become wealthy themselves, but they have created wealth for investors, as well as many thousands of jobs. Had some law prevented them from trying again countries would have been the poorer for it.
What happens when you go down the tubes financially? Well, these days they don’t send you to jail or Australia – an old British custom. The saying, “If you owe the bank R100 000 and can’t pay you’re in trouble, but if you owe them a R100 million, they are in trouble”, has practical implications. If you owe a relatively small amount and can’t pay, creditors proceed with alacrity to suspend you by the ankles. You will often be treated with contempt, or even illegally harassed by the collection agents of respected financial institutions. Even an attempt by you to have yourself declared insolvent may not succeed. Your creditors would rather accept repayment over many years, knowing that they can apply for an increase in the rate of repayment when your financial situation improves. However, given the maximum rate of interest which will be charged on what you owe, you may never get out of your financial difficulties.
On the other hand, if you owe R100 million, you’re in better shape personally. Firstly, you will probably be dealing with your own social circle - even though the relationships may become a bit strained. Secondly, the bank is going to do its damnedest to get you out of trouble - maybe even to the extent of lending you more money. This is often done.
A bank was once alleged to have conspired with a firm that was essentially broke, to mislead other creditors so that the bank could improve its position – once the bank had most of its money back they let the company fold. This is not only naughty, but it is also illegal.
As far your house and Mercedes are concerned, they are not likely to be a target because of their relative value. So while you’re out trying to cut new deals, you can still create a good impression.
What does this all mean? Fat losers stay fat. Thin losers have to go on a forced diet.