When an organization shows signs of insolvency, it begins. The concept of bankruptcy, the reasons for its occurrence

The market is a powerful factor in economic growth. It is also a fairly influential catalyst for the onset of economic decline and the emergence of social conflict situations in society. In a modern market economy, there is market failure and incorrect distribution of income and property.

A number of economists think that it is better for a market economy to be self-regulating due to constant fluctuations in supply and demand. A number of others are of the opinion that the state should be “present” in market processes at the right times, stimulating development processes. It is economists with a second opinion who use such a concept as cases of market failure. In the article we will analyze market failure, causes and forms of manifestation.

How insolvency manifests itself - basic concepts and reasons

Companies that operate inefficiently are subject to collapse, unable to withstand fierce competition. Those companies that improve production and produce quality goods prosper. As a result, the emergence of a large number of monopolies, which dictate the conditions and pricing policy. They increase the price of products disproportionately to the level of wages. As a result, there is a lack of motivating factors in the development of technological processes. There are no more competitors for monopolies.

The failure of the market may lie in a situation where, at some stage of development, it cannot set up the process in the correct and effective distribution of resources for their better use and productivity in production.

What affects the decrease in solvency:

• lack of competition, which is associated with a small number of producers of goods. Therefore, the latter seriously influence the pricing policy of services and products;
• a small amount of truthful information about the goods and services sold that are provided by the manufacturer-seller. This contributes to a decrease in the buyer’s competence and does not make it possible for them to make the right choice;
• market deficit - the consumer cannot use the necessary goods, despite the condition that the price of their production is an order of magnitude lower than their cost;
• problems in the legislation regarding property and, as a result of this shortcoming, there is no full provision of rights of ownership, use and disposal;
• manifestations of frequent discrepancies between social objectivity and economic results due to the discrepancy between processes in consumption and production.

A decrease in the level of solvency is manifested in externalities and market failure. When one good produces a negative effect on the output or consumption of another good.

On a note! An example of the failure of the market system can be the growth of injustice in society, when one part of the population has a significantly higher income relative to another.

There are different types of market crashes and they are as follows:

1. It is not possible to display the full production price of products.
2. A huge number of monopoly enterprises.
3. A small amount of benefits for society, such as libraries, medicine, urban transport and others.
4. Lack of ability to regulate inflation.
5. Inability to provide jobs for all willing citizens.

Insolvency of individuals

An individual entrepreneur registered in accordance with the established procedure may be declared bankrupt (bankrupt) if, due to his property status, he is unable to satisfy the requirements of creditors related to the implementation of his business activity.

If a bankruptcy procedure is introduced, all requirements for obligations related to his business activity must be imposed on the citizen. Also requirements for obligations that are not related to his business activity may be declared at the same time.

The requirements declared by creditors in the event of an individual entrepreneur being declared bankrupt are met in accordance with paragraph 3 of Article 25 of the Civil Code of the Russian Federation at the expense of property belonging to the citizen entrepreneur on which the collection can be converted, in the established priority:

• first of all, the following are satisfied: the demands of citizens to whom the entrepreneur is liable for causing harm to life or health by capitalizing the corresponding payments of time (such provision is established by Article 64 of the Civil Code of the Russian Federation regarding the bankruptcy of legal entities); claims for alimony collection;
• in the second calculations of the queue for payment of wages of dismissal and compensation with people working under an employment contract, including in accordance with the contract and on the payment of remunerations for author agreements (equally legal entities), are made;
• in the third stage, the requirements of creditors who are provided with a pledge of property owned by an individual entrepreneur are met (this provision differs from the corresponding rule that treated legal entities as a pledge of isolated property of the legal entity's funds);
• in the fourth stage, the debt on obligatory payments in the budget and in extra-budgetary funds (the same legal entities) is reimbursed;
• in the fifth calculations, queues with other creditors according to the law (equal legal entities) are made.

After the completion of settlements with creditors whom the individual entrepreneur has declared bankrupt, he is released from the fulfillment of obligations that remain related to his business activity and other requirements imposed for fulfillment, and considered in the event of the entrepreneur being declared bankrupt (clause 4 of Article 25 of the Civil Code Russian Federation).

At the same time, the claims of the citizens to whom the person declared bankruptcy are liable for causing harm to life or health, and also other claims of a personal nature are valid.

The role of the state in market failure

In order to reduce the impact of negative aspects on the economy and improve its development, the state can regulate the processes in it:

• by taxing certain activities;
• adopt the necessary laws to regulate relations between different components of the market;
• independently purchase various products or services;
• provide financial support to vulnerable segments of the population, such as pensioners, disabled people, large families.

Insolvency of legal entities

In contrast to individual bankruptcy, bankruptcy of an entrepreneur (bankruptcy) of legal entities means their complete liquidation (clause 1 of Article 65 of the Civil Code of the Russian Federation).

In addition, in case of satisfaction of the claims of creditors of a legal entity, many additional rules provided by Article 64 of the Civil Code of the Russian Federation are applied:

• the requirements of each queue are met after the requirements of the previous queue are fully satisfied;
• in the event of a lack of property of a liquidated legal entity, this is distributed among the creditors of the corresponding priority in proportion to the number of claims that are subject to satisfaction, unless otherwise established by law.

Also, the procedure and conditions for filing claims are regulated by creditors. Thus, in the event of refusal (evasion) of liquidation, the liquidation commission is authorized to satisfy the creditor’s demands by its liquidation balance of the legal entity, which has the right to take judicial measures before filing a request with the liquidation commission.

By a court decision, the creditor's claims can be met at the expense of the property that remains of the liquidated legal entity. The creditor's claims announced later that the expiration dates established by the liquidation commission for their submission are satisfied from the property of the liquidated legal entity that remained after the satisfaction of the creditors' claims announced during.

A significant difference between the transition of bankruptcy of a legal entity (compared to the bankruptcy of an individual entrepreneur) is that the conditions under which the claims of creditors are considered repaid are established by law. Firstly, this concerns claims that were not satisfied due to the lack of property of the liquidated legal entity. Secondly, claims that are not recognized by the liquidation commission are considered extinguished if the creditor has not filed a claim. Thirdly, these are the requirements, what satisfaction with the judgment the creditor was denied.

Rating of countries in the world by level of weakness

The Fragile States Index is a comprehensive indicator characterizing the ability (and inability) of the authorities of a country to control the integrity of its territory, the political, economic, social and demographic situation in the country, as well as the stability of its state institutions. Until 2014, it was called the Failed States Index.

The study and its accompanying rating are published annually by the American analytical center The Fund for Peace, which specializes in studying the causes and conditions that cause wars and makes efforts to prevent them. The study is conducted jointly with the leading American political science journal Foreign Policy. The State Weakness Index was developed in 2005 under the leadership of Pauline H. Baker, president of The Fund for Peace, political scientist and international expert in the field of conflict studies, and is positioned as a comparative tool for assessing risk and predicting intrastate conflicts. It is assumed that the Index should be used by states to analyze problematic issues in their policies, early warning of conflicts on their territory and can help unstable countries develop strategies that could reduce the likelihood of conflicts. In addition to assessing risk and predicting conflicts, the study's authors highlight its ability to provoke debate, especially in those countries that score high on the Index.

There is currently no universal definition of a “failed,” “failing,” or “weak” state. In general, this definition serves to designate both states that are in an unstable or “borderline” state, that is, balancing on the brink of an economic and political crisis, and states that have been in a state of degradation for a long time. Most researchers are of the opinion that a state can be called “failed” if it is unable to perform its basic functions and also does not have effective control over its territory and borders. Such a state cannot reproduce the conditions for its existence, although some elements of the state and its individual institutions can continue to exist. The term “failed state”, and more recently “weak state”, is widely used by political commentators and journalists, who often attach it to an evaluative, and in many cases subjective, character, which creates additional contradictions. To make the definition more precise, The Fund for Peace has proposed the following key features of a “failed” or “weak” state:

1. Loss of physical control over one's territory, or a state monopoly on the legal use of physical force on one's territory.
2. The inability of legitimate state power to ensure the process of making collective decisions.
3. The inability of legitimate government authorities to provide basic public services.
4. Failure to interact with other states as a full member of the international community.

When compiling the Index, experts analyze the countries of the world and related information flows throughout the year using a special system tool for assessing conflicts (Conflict Assessment System Tool). The analysis is carried out on the basis of 12 criteria - the so-called “vulnerability indicators” of the state, which are grouped into three groups: social, economic and political:

Social indicators:

• Level of demographic pressure.
• Level of migration of refugees and/or displaced persons.
• The presence of dissatisfied and vindictive groups.
• Sustainable and permanent emigration from the country.

Economic indicators:

• Uneven economic development.
• Level of economic instability.

Political indicators:

• The level of delegitimization and criminalization of government structures.
• Availability and quality of public services.
• Level of human rights violations.
• The level of influence of the state security apparatus as a “state within a state.”
• Level of influence of group and/or clan elites.
• The degree of intervention by other states or external political actors.

To make an overall assessment of the state of the country, experts analyze the ability of five key government institutions - the political leadership, the army, the law enforcement system, the judiciary and civil services - to ensure the security of the state and its citizens. Throughout the year, numerous information flows from open sources are analyzed and the number of negative and positive assessments for all indicators is calculated. Then experts analyze the entire set of information for each country and calculate the final Index on a scale from 0 (the highest degree of stability - the lowest possible risks and threats) to 10 (the lowest degree of stability - the highest possible risks and threats) using tenths. The overall result - the sum of all indicators (maximum - 120 points) becomes decisive when compiling the rating.

All states in the ranking are divided into four color groups:

1. Red color - states with a high level of instability (critical level of risks).
2. Orange color - states with a level of stability below average (dangerous level of risks).
3. Yellow color - states with an above-average level of stability (low risk level).
4. Green color - states with a high level of stability (no risks).

In the first edition of the Index in 2005, 75 countries were assessed; since 2007, the Index has been measured for 178 countries. In the future, the study should cover all countries of the world. At the same time, only sovereign states are included in the Index - their list is determined by membership in the United Nations (UN). A number of territories whose political status is not final are not included in the Index, although some of them are recognized as sovereign states by individual countries (for example, Taiwan, Kosovo, Northern Cyprus, Western Sahara). A detailed description of the methodology for creating the Index and sources of research data is provided in the annual report on the results of the next comparative study.

Insolvency and bankruptcy

The current legislation recognizes the concepts of “insolvency” and “bankruptcy” as equivalent.

Note 1

The main sign of bankruptcy is the inability of a citizen (enterprise) to ensure repayment of the creditor's claim for payment of debt within three months from the date of payment. As soon as this period expires, the creditor has the right to apply to the arbitration court in order to declare the debtor insolvent (bankrupt).

A bankruptcy case is initiated only in cases where the total debt of a legal entity is at least 100 thousand rubles, and that of a citizen is at least 10 thousand rubles.

Causes of bankruptcy in a market economy Causes of bankruptcy can be various external and internal factors inherent in a market economy as a whole.

External factors are:

1. Economic factors (crisis or pre-crisis state of the state’s economy, decline in production, inflation processes, increase in prices for resources and means of production, high level of taxes, etc.);
2. Political factors (instability of society, ineffective antimonopoly policy, gap in economic ties, imperfect legislation, weak implementation of the regulatory function of the state);
3. International competition arising in the process of development of scientific and technological progress;
4. Demographic factors (changes in the size, composition, population, structure of society, which can affect the size and composition of needs, as well as effective demand).

Too lazy to read?

Ask a question to the experts and get an answer within 15 minutes!

Ask a Question

Internal factors that lead to the emergence of bankrupt enterprises are:

1. Low level of technical condition of the production sector;
2. Ineffective activity of enterprises, resulting in the emergence of a shortage of own working capital;
3. Presence of excess balances of work in progress;
4. Overdue payments from the company's customers;
5. Unfavorable conditions when attracting borrowed funds, etc.

Note 2

Bankruptcy manifests itself as a result of the influence of both external and internal factors. According to statistics, in countries with developing market economies and sustainable economic development, the bankruptcy of enterprises depends 1/3 on external factors and 2/3 on internal factors.