Bankruptcies of extra-large enterprises in the Czech Republic

This paper focuses on the issue of bankrupt enterprises. Corporate bankruptcies have many consequences, including unfulfilled business goals, lost equity, unsatisfied claims of creditors, and impact on unemployment. Companies usually have more than one creditor to whom they cannot fulfill payables, and therefore the enforcement of receivables is solved collectively in the form of an insolvency proceeding. There exist several types of settlement insolvency proceedings: bankruptcy, reorganization, and debt relief intended only for individuals whose debts were not created during entrepreneurship. Institutional economics postulates that extra-large enterprises are too big to fail. This aim of this paper is to verify this postulation.

Since 2008, new insolvency law has been in practice in the Czech Republic, and therefore the available time series are compact and consistent from 2008 until now. The older data cannot be used because of inconsistent data collection methodology and different approaches to solving default. For this research, we analyze the data sample containing corporate insolvency cases according to several criteria. The main criterion is enterprise size. The size can be expressed in several ways – employees, turnover or assets. The results will show whether the “too big to fail” postulation is valid even during a crisis period. It is necessary to take into account also the proportion of enterprises in the whole economy. It is said small and medium size enterprises are the backbone of free market economies. The Czech Republic is not an exception, and therefore the share of insolvent extra-large enterprises contained in the sample is expected to be lower than the share of the small and medium size enterprises. Results will show first if the extra-large enterprises are affected less by bankruptcy in comparison to the small and medium size enterprises. Additional findings will lead to possibilities for solving insolvency, such as a liquidation procedure connected with a market exit, or a rehabilitative approach that enables the going concern principle of the affected enterprise. Reorganization as a promising approach for settlement of corporate insolvency has been connected with many expectations, such as frequency, quickness, higher creditors' satisfaction or lower unemployment, since the change of the Czech legal framework in 2008. These expectations have not been fulfilled yet. Our findings prove that the reorganization procedure is used much more often in the case of large enterprises, and therefore the impact on the whole economy is more significant than in the case of smaller insolvencies.