Failure and Reorganization

When a business fails it can be either reorganized or dissolved depending on the circumstances. A number of ways exist for business failure to occur, including a poor rate of return, technical insolvency and bankruptcy.

A company may fail if its rate of return is negative or poor. If operating losses exist, the company may not be able to meet its obligations. A negative rate of return will cause a decline in the market price of its stock. When a company does not earn a return greater that its cost of capital, it may fail. If corrective action is not forthcoming, perhaps the firm should liquidate. A poor return, however, does not constitute legal evidence of failure.

Technical insolvency means that the business cannot satisfy current debt when due even if total assets are greater than total liabilities.

In bankruptcy, liabilities are greater than the fair market value assets. There exists a negative real net worth. According to law, failure of company can be either technical insolvency or bankruptcy. When creditor claims against the company.

Some causes of business failure include:

1. Poor management
2. An economic downturn affecting the company and/ or industry. 
3. The end of the life cycle of the firm.
4. Overexpansion 
5. Catastrophe