BP Can’t Avoid Paying Up with Bankruptcy, Can It?

BP, the company largely being blamed for the massive oil spill currently fouling the Gulf of Mexico, has some money troubles. It’s already spent billions of dollars on efforts to stop the leak, as well as cleaning up the spill. Once the well is finally and completely capped, stopping the flow of oil, cleanup and ecological restoration efforts will take years, if not decades, and cost many billions of dollars. And let’s not forget the coming lawsuits, inevitable settlements, and probably attempts to fight some of the suits if their lawyers believe that some of them are without merit. The settlements and court-ordered damages are going to be huge, likely in the billions of dollars. And even if they refuse to settle any of the lawsuits, and fight every one of them, and are somehow found not liable (this will never happen), they’ll have paid a bunch of lawyers from global mega-firms millions upon millions of dollars, by the time all is said and done (our grandchildren might live to see that day).

Nobody is seriously arguing that BP, one of the largest oil companies in the world, shouldn’t be made to pay for these costs. Finally, on top of all of these costs, BP also faces the possibility of criminal fines imposed by the federal government.

BP probably has enough money to pay out all of these costs, but some analysts are saying that it only has just enough. Making good on all of these debts (which they, of course, should do) could prove ruinous.

Bankruptcy is looking like an increasingly attractive option for BP. Its liability for this, when all is said and done, could be up to $40 billion. BP is estimated to have about $12 billion in cash and other fungible assets. Their stock price has plummeted since the spill began, and the company, while still worth billions and billions of dollars, has lost more than a third of its value. And let’s not forget the possibility of a runaway jury verdict that shoots into the hundreds of billions of dollars (not so inconceivable, especially if the case is tried in a state that’s been affected by the spill, with local jurors).

So, could BP file for bankruptcy and walk away? A segment of the market seems to think so. Some experts suspect that BP’s competitors are salivating at the possibility of the company becoming insolvent and having to liquidate; that’s a lot of energy infrastructure all over the world that will be available on the cheap.

But, if BP did decide to file for bankruptcy, what would that mean? Could it seriously walk away from its financial obligations? Well, corporate bankruptcy is complicated enough. But bankruptcy for an entity like BP, which spans countless nations, has mind-bogglingly huge amounts of assets, and a nigh-incomprehensible web of legal and financial obligations; it’s going to get complicated.

If BP actually becomes completely insolvent, it could file for Chapter 7 bankruptcy. Basically, this is “true” bankruptcy – the debtor’s assets are sold off (with some exemptions), and the proceeds used to pay as much of their debt as they can. This is obviously a worst-case scenario for BP (though I’m sure many people, especially residents of the Gulf Coast region, don’t really care if BP survives this ordeal) and a best-case scenario for its competitors, who could buy up its assets at bargain-basement prices.

But one has to wonder how this is in any way an acceptable result. Sure, a bankrupt BP could sell off all its assets, leaving its competitors to pick up the pieces, but a corporation is not a person, and it was the decisions of individual people that led to this mess in the first place.

The actual people who made the decisions that led to this situation could largely get off relatively unscathed, while the legal entity that is the corporation is the one that gets “punished.”

This is due to the legal doctrine in common-law countries, particularly the United States, known as “corporate personhood,” which essentially says that corporations are legal entities separate and distinct from any of the people who actually make up the corporation. It’s a fairly abstract concept, and the more one thinks about it, the stranger it seems.

However, it does lead to certain economic efficiencies, and it’s currently the system we have. Of course, there are ways to “pierce the corporate veil” and hold the actual decision-makers personally responsible for the actions of a corporation. This generally happens if a corporation is insufficiently capitalized to meet its obligations, or if there is serious negligence or other malfeasance involved.

The exact chain of decisions that led up to this disaster isn’t clear, but it is clear that some people screwed up really bad. Whether this will be sufficient to pierce the corporate veil remains to be seen.

Whatever happens, one must hope that those responsible for this disaster are made to compensate everyone who was directly harmed by their decisions is compensated, to the extent possible.