We have previously emphasized the huge benefits that big data plays in the financial industry. The global financial analytics market is projected to be worth $17.1 billion by 2028.
Most of the discussions about the role of big data in finance center around actuarial models in the insurance sector and using data analytics and machine learning for stock market predictions.
However, there is another segment of the financial sector where big data can be invaluable – bankruptcy. Few people enjoy talking about bankruptcy, because it is a depressing topic. However, it is an essential area of focus and should not be omitted in discussions about the role of big data in finance.
Big Data is Essential for Managing and Predicting Bankruptcy Outcomes
Companies have to take a number of factors into consideration when filing for bankruptcy. Fortunately, big data can make many of them easier.
One of the most important issues that they have to focus on is the administrative options available to them. Companies that are facing financial difficulties have a number of options available to them. If the directors act at the first sign of insolvency, they’re often able to use voluntary administration proceedings to save the company from liquidation. Voluntary administration typically comes from within the business. How does it differ from external administration?
Big data can also help predict the likelihood that a company will need to file for bankruptcy in advance. The Institute of Electrical and Electronic Engineers points out that big data is already being used to predict bankruptcies in the construction industry.
In this article we’ll explore the two terms, how they differ and how they make up the world of insolvency proceedings. We can also cover benefits of using big data to navigate the bankruptcy process with either of them.
Big Data Issues in the Voluntary Administration Process
When a business becomes unable to pay its debts, it enters a state known as insolvency. If the directors of a company know that the business is insolvent, or if they suspect it’s at risk of becoming insolvent, they can enter into voluntary administration. Voluntary administration is a type of insolvency procedure that allows companies to access expert financial help. With the right advice and planning, voluntary administration may be able to save the business from being liquidated.
Like the name suggests, voluntary administration is usually a process that directors enter into voluntarily. However, a Voluntary Administrator can also be appointed by an external party, such as a secured creditor or Liquidator. Once the Voluntary Administrator is appointed, they will assess the company’s assets and liabilities and make a report to creditors. That report will contain recommendations on how the company should proceed. Voluntary Administrators are required to provide advice on three possible outcomes:
- Whether control of the company should be returned to the directors so that the business can continue trading while repaying its debts.
- Whether the company should be immediately wound up in liquidation, with the Administrator typically becoming the Liquidator.
- Whether the company can enter into a Deed of Company Arrangement (DOCA) to repay some, or all, of its debts to creditors.
When directors act early, voluntary administration significantly improves the chances of the company’s survival. This not only protects employees, it benefits the company and all creditors involved.
A number of big data issues can surface when a voluntary bankruptcy is being issued. The company generally has more time to plan and the company is more likely to be acquired by another firm. As a result, data is likely to be transferred to another entity. The editors of Harvard Law Review state that this can lead to legal issues, since customer data is at stake.
The process is also more likely to involve a detailed legal strategy. You can learn more about the details in these situations in our past article When Big Data Meets Big Law.
What is External Administration?
External administration isn’t a single service. Rather, the term is a general one that refers to a range of insolvency proceedings, such as administration and liquidation. As part of these proceedings, an independent ‘External Administrator’ is appointed to oversee the process. External Administrators are a class of insolvency professionals that are usually tasked with saving a business or winding it up to repay the debts creditors are owed. Some of the most common External Administration professionals include:
- Liquidators
- Receivers/Controllers
- Voluntary Administrators
- Deed Administrators
- Restructuring Practitioners
- Insolvency Practitioners
Big data can still play a role in these processes, although they may not be as obvious. The external auditor may want to use data analytics tools to discover more information about all of the stakeholders above, so they can make sure that everyone is properly paid. They may need a data analytics tool to rank the creditors based on who should be paid first, which is detailed further in the next section.
The Rights of Secured and Unsecured Creditors and How Big Data Can Affirm Them
Dealing with a business that owes you money can be frustrating, especially if they’re unable or unwilling to pay their debts to you. It’s often difficult to recover the money you’re owed in that situation. While voluntary administration usually has to come from within the business, the good news is that creditors are often able to use an External Administrator when seeking compensation. Your rights as a creditor depend on whether you hold a secured or unsecured debt to the company:
- Unsecured creditors – An unsecured creditor is any person or business that has provided goods or services without any specific guarantees from the insolvent company. Common examples of unsecured creditors include materials suppliers, contractors and employees. Unsecured creditors have fewer means of recovering their money than secured creditors, but if the debt exceeds $4,000, you may be entitled to issue a Statutory Demand. A statutory demand is a binding legal document that details the debts you are owed and requests payment within 21 days. If the insolvent company is unable to pay, you may then apply to the Court to have a Liquidator appointed.
- Secured creditors – A secured creditor is any person or business that holds a specific security over a company. That commonly includes lenders such as banks who hold secured loans and mortgages. Secured creditors have more entitlements when it comes to recovering debts. Not only can a secured creditor issue a statutory demand and apply to have a Liquidator appointed, they may also be able to appoint a Receiver or Voluntary Administrator.
Big data technology plays an important role in asserting the rights of these creditors. Companies filing for bankruptcies likely don’t have the funds to meet all of their financial obligations. Fortunately, big data can help them perform a credit scoring analysis, which makes it easier for them to do so.