BizCLIR

A farmer deciding, after two rejected shipments, that the risks of producing green onions for the global market are too great and that the production of sweet potatoes for the local market would be better is effectively “closing the business” of green onion cultivation and starting another. The losses from the green onion business have already been absorbed by the household enterprise and sweet potato planting materials can be readily acquired. Such easy entry and exit characterize many agricultural enterprises in the developing world. Few legal barriers exist to prevent closure of one business and start-up of a new one.

As agribusinesses grow in scale and increase their levels of capitalization, however, entry and exit become more complicated. Significant amounts of credit, substantial investments in fixed assets, and contracts with employees need to be taken into account. Then, the option of bankruptcy becomes highly relevant to the process of closing one business and starting another. Bankruptcy law provides a “pre-determined set of rules concerned with the legal definition of insolvency, the liquidation of reorganization of the insolvent business, and the allocation of the financial consequences between stakeholders…This allows for efficient reallocation of the debtor’s resources, which itself leads to greater public confidence in the security of their investments.”1

Governments often bear some responsibility for the closure of agribusinesses in developing countries. There are two kinds of situations in the agribusiness sector that seem to engage governments and to prevent the use of normal bankruptcy procedures:

• Where the company in question holds a monopoly position (or is part of a small oligopoly) and failure would jeopardize consumers’ or producers’ interests; and

• Where the company in question has been grossly negligent and has raised issues of public and/or environmental health.

For various reasons, some developing country governments have awarded monopolies or quasi-monopolies to specific agribusinesses or have allowed limited numbers of firms in a particular area, thus creating oligopolies. In some cases, they are considered to be state trading enterprises or parastatal firms. In other cases, they are privately owned and managed but operating under special conditions. Fertilizer importers are a common example of this type of firm. State-run dairy industries or grain mills are another. Although in principle these firms are to operate along commercial lines and be profitable, in practice many of them have become insolvent. Rather than risk that there will be no fertilizer imports, however, governments intervene directly to prevent bankruptcy and the closing of the business.

The second situation could arise when a firm’s action has created a liability of such public importance that special work-out procedures are required. Companies importing day-old chicks known to be infected with avian influenza, for example, could be prevented from simply closing when the fact of infection became known. The public health liability incurred would require government assessment of damages as part of the bankruptcy proceedings.

The liquidation or restructuring of an agricultural cooperative may present a special case of bankruptcy. Where the cooperative has been constituted as a legal entity and has sound corporate governance, closing it may be relatively straightforward. It will be important to ensure that processes that assure a fair and equitable outcome for all shareholders are established and followed.

1 USAID and Booz Allen Hamilton (BAH), Commercial Law & Microeconomic Reform: A Practical Guide to Program Implementation (March 2007). This publication can be found at www.bizlawreform.com/CLIRTechPub-r2b.pdf.