"In modern business it is not the crook who is to be feared most, it is the honest man who doesn't know what he is doing."- William Wordsworth

For the past two weeks, we have written a series of articles on liquidations and liquidators. In part one, we addressed the principle of a "going concern" -- the concept that business enterprises are expected to continue as ongoing business entities with an indefinite life unless or until circumstances develop to alter their normal life.

We observed that liquidations normally arise if a company is insolvent; if it is unable to pay its debts as they fall due, or if the value of the company's liabilities exceeds its assets. In either case, the company is no longer considered a going concern, and liquidation normally signals the beginning of the company's

Last week, we discussed the duties, powers, and responsibilities of the liquidator. In this final installment, we would like to Consider this... what is the impact of liquidations on the economy and what are the differences between liquidations and receiverships?

The national economic impact

Liquidations have few positive implications on the overall economy. The liquidation of a company can be described as the beginning of the end of the business enterprise because such companies are insolvent. In addition to recognizing that the business will no longer participate in the economic life of the nation, there is usually an adverse effect that liquidations pose for unemployment and the labor market. Because of the uncertainty that normally accompanies liquidations, there is invariably a negative impact on the national psyche.

Furthermore, depending on the size of the company that is being liquidated, such events normally result in a contraction in the gross domestic product, the nation's GDP. Finally, there is often a negative impact on prospective foreign direct investments.

The effect on GDP
In the case of large liquidations, such as Baha Mar, they are enormously impactful. When fully operational, Baha Mar is expected to increase the national GDP by as much as $1 billion annually. Given our current GDP of $8 billion, such a liquidation can retard the annual growth of GDP by as much as 13 percent. This is potentially monumental because many key macroeconomic and fiscal indices, including the country's foreign reserves, the national payroll, National Insurance and public sector taxes, are affected by the rate of growth in the GDP. As long as companies of the size and scope of Baha Mar remain in liquidation, the benefits of such a large business enterprise will not be reflected in the economy.

The employment effect
It is clear that the employment impact of liquidations can be catastrophic. The abeyance or loss of thousands of jobs (an estimated 5,000 full-time jobs in the case of Baha Mar) will significantly increase the unemployment rate, will severely curtail household income, and will reduce consumption and payroll-related revenue, including National Insurance contributions.

Uncertainty and its effect on the national psyche
While it is very difficult to empirically quantify, the level of uncertainty and its damaging consequences on the national psyche cannot be overstated. The level and degree of angst experienced by the impact of liquidations for the developer, affected investors and the unemployed is incalculable. The national anxiety is exacerbated by the enormous expectations that have been stimulated in the public and private sectors and civil society on the anticipated benefits that such an investment portends.

The foreign direct investment impact effect
It is equally difficult to quantify the effect that such business failures pose for prospective foreign investors. In an age of globalization where business failures are immediately reported in the international press and instantaneously issued via the Internet, potential investors carefully monitor and closely scrutinize the government's reactions and responses, quickly determining whether their prospective investments would be safe in our domestic business environment.

Foreign investors also pay particular attention to the manner in which such matters are adjudicated in our local courts and swiftly surmise whether they believe that the judicial climate is palatable for their prospective investments.

For all of these reasons, it is critically important for the government and the courts to fully appreciate that the world in watching all developments connected to this liquidation because investors need assurances that their investments will not be jeopardized either by pronouncements made or decisions taken by the government or the courts.

Differences between liquidations and receiverships
There is a fundamental difference between liquidations and receivership. Liquidations normally signal the orderly dismantling and the beginning of the end of the business enterprise. The liquidation recognizes that the life of the business has come to an end and that the company's assets must be liquidated in an orderly fashion in order to settle its debts and, if possible, provide a return of capital to the investor, albeit in most cases, such returns represent pennies on the invested dollar.

Receiverships on the other hand, represent the reality that a business enterprise needs assistance to restructure its affairs, which is often provided by a receiver whose primary objective is to enable the business to continue as a going concern until it has been reorganized in order to allow it to continue in operation.

As in the case of liquidations, the court normally appoints a receiver if a compelling case can be made that such appointment would mitigate the dissipation or misuse of the company's assets, or prevent the oppression of minority shareholders by the majority shareholders, or avoid mismanagement or misconduct on the part of the company's directors, or if such appointment is in the public interest. Unlike the liquidator, the receiver is normally appointed to allow the company to be nursed back to a healthy position in order to allow it to continue as a going concern after the receiver has been discharged.

In essence, receiverships can be described as a company being placed on "life-support" with a "corporate doctor" - the receiver - attempting to resuscitate "the patient", whereas liquidations are analogous to calling for the undertaker.

In the case of Baha Mar, we have observed the appointment of both joint provisional liquidators and a receiver, each with distinctly different mandates, and each initiated by different parties. The liquidators were appointed to oversee the dismantling of the company as a result of a pre-emptive decision by the developer to have the court supervise this activity. On the other hand, the secured creditor, China Export-Import Bank, exercised the powers under its loan agreement with the developer to protect its secured assets with a view to completing the development, hopefully nursing the investment back to health so that the development can open and continue as a going concern.

Conclusion
As we have observed, almost without exception, liquidations adversely impact the national economy. In the final analysis, it is quite likely that, in the case of Baha Mar, this will be the shortest liquidation of this scale in Bahamian history and that an agreement will be reached with the court-appointed receivers so that the development can be completed and opened for business.

While there has been considerable reputational damage to Baha Mar and to the jurisdiction in the short-term as a result of the appointment of liquidators, we believe that the damage will not be irreparable and that it will be short-lived. We also believe that a reasonable resolution will be realized for this intermittent fiasco, that the development will open in the fourth quarter of 2016, and that considerable benefits will accrue to the national economy in the long-run.

In the fullness of time, 2015 will be remembered as a year in which we collectively stared into the abyss and it stared back at us. While we teetered on the precipice of a potential catastrophe, we fully appreciated that, in the Bahamian context, this is truly a classic case of a development that was indeed too big to fail.

o Philip C. Galanis is the managing partner of HLB Galanis and Co., Chartered Accountants, Forensic & Litigation Support Services. He served 15 years in parliament. Please send your comments to pgalanis@gmail.com.

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