Liquidating An Online Business In Bankruptcy

Online Business and Bankruptcy

Doing business in cyberspace as become more than just a novelty, many successful (and not so successful) internet businesses have become a mainstream reality.  But with the proliferation of internet commerce also comes the proliferation of bankruptcy for these types of businesses. But what happens when internet commerce meets bankruptcy courts? Let’s take a look at a few challenges of internet companies in bankruptcy and some effective solutions.

Is It Really An Internet Business?

There’s a difference between a brick and mortar company that has a blog, website and ecommerce site to buy their goods and services, and a company that only exists in cyberspace. In a recent Chapter 11 bankruptcy case in Texas, the fight over the liquidation of a website illustrated that point perfectly.  The battle began when business partners who owned a website could not resolve their disagreements.

Apparently, one party failed to fulfill their contractual obligations so the company ended up in bankruptcy. The bankruptcy court ruled that while the internet site was not tangible in the same way that real estate property or other physical property, it had intrinsic value making it saleable to interested parties.  And because the company only existed in the cyberspace world and was in fact a true internet business, the bankruptcy court seemed to move even more cautiously around contractual issues surrounding intangible assets such as the website name.

What Are The Company’s Assets?

Internet businesses could have both intangible and tangible assets such as a website name, physical servers or even information or data on those servers.  Assets could include a system or a program, which have value to customers or other people in the same or similar industry.

Debtors with internet businesses and considering bankruptcy should carefully tabulate their assets and find out if they have real value.  In much the same way a debtor would assess the value of a home or car, the bankruptcy debtor should research how much they could sell the asset for on the open market.

Since assets such as a website or software program can’t be split between shareholders, the bankruptcy trustee may opt to liquidate the property and sell it at auction, splitting the exempt proceeds between owners of the asset. This is where watertight business contracts become important.

Considering Ownership Rights Before Bankruptcy

If keeping a particular internet asset such as a website or software program is important, debtors should work with their bankruptcy attorney to negotiate with other shareholders.  Sometimes the debtor can buyout the other owner and exempt most of the value in an internet business asset before they file bankruptcy.  These pre-bankruptcy agreements can make exiting bankruptcy a much easier process for the internet business owner.