Of companies and going bankrupt
Writer: Lord Bobo
Published: Fri, 26 Oct 2012
Back from his interlude in the spas of Opsiloson VIIUIX, Lord Bobo engages in a rate interview with FfK on the curious nature of companies.
Dear Lord Bobo. I heard that Robert Kiyosaki of “Rich Dad Poor Dad” fame got himself bankrupt! What do you think of that?
Well, dear reader. He didn’t actually get himself bankrupt. One of the companies owned by him has apparently had to file for bankruptcy, as they were unable to pay an enormous judgment owed to one of their creditors.
So, Robert Kiyosaki is not himself personally bankrupt. One of his companies is bankrupt. It’s not the same thing.
Why not? Surely as a shareholder, he must pay up?
Oh no.. ha ha ha. How naïve you are.
In actual fact, Earth is unique in the universe in creating something called an artificial entity that can actually be a person.
Companies (those things you Malaysians call Sdn Bhd or Bhd) are totally distinct from their shareholders.
So, a bunch of friends can band together, form a Sdn Bhd, and they can then run a business.
That business can be run into the ground, can incur huge debts and ruin many other people who are owed money by it, but the friends who are the shareholders of that company don’t have to pay a sen of their own money.
Of course, if you set up a company and then receive foreign funding in order to assist the downtrodden, the destitute or others suffering from human rights abuses from the might of the Government, then you can be harassed by every government agency in the country and every bureaucrat worth his salt and angling for a promotion or a pay hike will be ever vigilant to ensure you do not break non-existent laws.
But Lord Bobo digresses, as we are wont to do when talking about the wonderful world of Bolehland.
So no. Shareholders need only pay the nominal value of their shareholding in the company. This is usually the RM1 which is the nominal value of the shares which is paid to the company itself, and not the large sums of money paid to other owners of shares to buy those shares on the Bursa Malaysia.
How about directors? Surely they must pay?
Well, again, no. Directors are not necessarily owners of a company. They are the persons who hold office and run the company.
Directors have a really plum job. They run the company. They incur all the debts of the company. They are the ones who purchase 1,000 tonnes of Peruvian guano expecting to sell it a profit.
Normally, the bat guano in Batu Caves is much more valuable, and stickier. But these directors do not have to pay a sen either to the directors or the company or to the creditors who are owed money.
It is extremely difficult to prove that a director of a company must be personally liable to pay any creditor.
This is why the well informed creditor ensures that all the directors of a company they do business with sign something called a personal guarantee. The personal guarantee falls just a little short of making the director the personal slave of the creditor, and ensures all the innovations and protections of a private limited company are thrown away by the simple signature placed on a document nobody quite understands by the director.
But hey – that’s unbridled capitalism and the free market, and you are free to be rich and not take credit, so there you go.
But surely, surely, if you incur the debt, you must pay.
Ah! You poor thing. Try and get your mind around this: you didn’t incur the debt. The company did! You are just the person who owns the company, or the person who runs the company, but you aren’t the company.
The company is a separate person, even if it exists merely on paper!
Sounds ridiculous! So the creditors get nothing?
Well, normally when a company goes bankrupt, it is called being wound up. And a liquidator is appointed. The liquidator is either a civil servant called the Director General of Insolvency or a private sector accountant.
The liquidator is meant to realise the assets of the company, sell it, and then pay off the creditors based on a mix of priority payments (for the government and the employees, and of course the liquidator’s – and his lawyers – fees), and then a system of payments pari passu for all creditors, meaning each one is treated equally.
So everyone may well get only one sen for each ringgit the company owes.
Really, Lord Bobo. I am shocked. What the heck is the point of all this?
Well, it’s to encourage innovation. It’s to allow people to fail.
Without companies, and the ability to do business without the risk of totally failing and becoming bankrupt yourself , the wheels of commerce would grind to a halt.
When done properly, the creditors will get whatever little is left in the company’s coffers but the shareholders and directors will be able to go and try again.
The company is one of the greatest innovations of English law and its biggest legacy to the world of commerce in your puny planet.
Enjoy it and embrace its wonders!