Sat, 03 Oct 2020 - 07:17 GMT
CAIRO – 3 October 2020: The year 2020 is not only the year of COVID-19, but also the year of bankruptcies for many companies around the globe. In the United States alone, more than 3,600 companies filed for bankruptcy between January and June, according to legal services group Epiq. Academics and experts speculate that the downturn will further worsen by the end of the year, as reported by the New York Times. According to CNBC, tens of millions of Americans have filed for unemployment benefits. Most of the stumbling companies filed to restructure the debts under creditor protection. Some of them can return smaller and less indebted, while others may have to liquidate and exit the market.
Bankruptcy from a marketing perspective
Bankruptcy occurs when a business is unable to repay debts. In that case, assets can be used to pay back a portion of the debt, while the rest can be forgiven. Yet, an investor has to consider the situation’s impact on consumers’ perception of the business, and on partners in the supply chain.
BP Endowed Chair and Associate Professor of Marketing Hamed Shamma tells Business Today Egypt, “In my opinion, the real cause for bankruptcy is not a financial issue. The financial issue is the symptom. The cause of this may be, and in most cases is, inadequate or poor customer experience, and this may be due to experience with employees, operational issues, or technological hindrance.”
Although bankruptcy always seems like a disaster, it can bear opportunities. “The advantages of bankruptcy are that it will stop any further drain in the financial resources for a company. It also protects a company from legal action, collection of debt from creditors and repossessing company property. It gives the chance for a company to step back, think of how [it was] doing business and what the lessons learnt are. Many consumers could be sentimental and sympathetic with brands that have heritage and have been around for years, especially if they have nice memories with the brand,” the associate professor explains. One the other hand, “the disadvantages are that it brings the business to a stop; consumers perceptions about the brand become less valuable and brand equity definitely goes down dramatically,” Shamma clarifies.
Since this is not the end, the professor highlights that “businesses can always revive at any point in time. There is no specific timeframe for this; it can take place after a few months or a few years. There are lots of good examples of companies that are reviving, such as Toys R Us and others. Apple, the most valuable company, was on the verge of filing for bankruptcy in 1997. General Motors, Chrysler, and Six Flags all [once] filed for bankruptcy; and now, they are all back to business.”
As for when it is better to return with a different identity, Shamma points out, “You can start with a new name if you have a bad history and brand perception in the minds of consumers. In many cases, businesses have a good brand perception in the minds of consumers, and actually coming back with the same name could be good.”
Communication of the bankruptcy should be handled and managed in a smart way. You should be prepared with a communication plan that will communicate the story, outline all possible scenarios for different stakeholders, keep communicating regularly, be consistent in your messages and plan for the unexpected, the associate professor argues.
He explains that there is “nothing wrong” about filing for bankruptcy, given the opportunities for reflection offered by this. “The best companies in the world have either been close to bankruptcy or have actually filed for bankruptcy,” Shamma stipulates.
Former Vice Minister of Finance for Tax Policy Amr El Monayer explains to Business Today Egypt that bankruptcy is relevant to the Income Tax Law, the Value Added Tax Law, the Law of Bankruptcy, the SMEs Law and the new Unified Tax Procedures Law. The latter was passed by the House of Representatives in August but has not been ratified by the president yet, so it will go into effect upon presidential ratification and publishing in the Official Gazette.
El Monayer clarifies that tax laws provide that when a taxpayer is going bankrupt, the priority of payback goes to taxes and the associated charges. Nevertheless, there are two exceptions. One of them is stated in Article 140 of the Law of Bankruptcy indicating that “only the tax due in the last two years before filing for bankruptcy are given the priority, so as the remaining tax is dealt with like the other types of debt,” the former vice finance minister highlights.
That applies to businesses not classified as SMEs, as the other exception is set for enterprises in this category. El Monayer underlines that the SMEs Law provides that funding entities - such as banks - get the top priority in repayment, then taxes come next.
El Monayer adds that the tax can be totally dropped in case of the absence of any assets or resources that can be used in payback as stated in the Income Tax Law, the Value Added Tax Law, and the prospective Unified Tax Procedures Law.
Another case for dismissing the tax is that the taxpayer had left the country for over 10 years.
El Monayer explains that the tax can partially or totally be dropped when bankruptcy or shutdown rulings are issued.
“The priority is given to tax repayment as that’s the right of the state...Taxes represent more than 75 percent of the treasury’s resources... It is the right of the other taxpayers,” the former vice minister of finance asserts. “However, given that the state backs SMEs, tax payback has become second in priority so that funding entities are encouraged to finance them. Also, the priority is restricted to two years for enterprises not fall - ing in that category for other parties to get their rights,” El Monayer stresses.
The Poynter Institute clarifies that creditors do not necessarily get back in full, as whatever is left has to be distributed among all owed parties. However, there can be an order in which creditors are paid. The beginning must be with “secured credi - tors” who have collateral against the loan.
In Egypt, the law passed in 2018 offers three options for stumbling companies: restructuring, creditor protection, or bankruptcy. The restructuring request is reviewed by court within 30 days since the submission date, and the duration can be renewed just one more time by the judge. The judge then forms a committee of experts who can belong to firms specialized in bankruptcy, the Ministry of Finance, the Ministry of Investment and International Cooperation, the Ministry of Trade and Industry, the Ministry of Manpower, the Central Bank of Egypt (CBE), the Egyptian Stock Exchange (EGX), the Federation of Egyptian Chambers of Commerce and the Federation of Egyptian Industries.
The committee meets with all parties concerned in order to reach a settlement. If a settlement is not reached, a court hearing is held. The ruling is final and cannot be appealed.
At any stage, the judge can form an experts committee to set a vision on restructuring, asset management, and asset evaluation. The judge determines the fees that must be paid to the committee.
The conditions to file for restructuring are that the capital be not less than LE1 million, and that company has been in the market for at least two years and did not commit any fraud. When a company’s owner passes away, heirs can file for restructuring after one year.
If a bankruptcy verdict is issued or the measures of a “creditors’ protection” have started, the company cannot file for restructuring. If the company files for restructuring, it cannot file for bankruptcy; and if it had filed for creditors protection, the measures are suspended. If the restructuring request is dismissed, the company has to wait for three months before filing again.
Restructuring is about getting the company out of financial and administrative trouble, paying back debts and figuring out funding sources for that by increasing the cash in, decreasing the cash out, evaluating assets, and restructuring debts, including those owed to the taxes and insurance authorities.
In the restructuring request, the company has to indicate the reasons behind the financial crisis, when it began, measures taken to avoid it or remedy its consequences, and suggested ways to get out of trouble by providing supporting documents.
Filing for creditor protection can go hand-in-hand with filing for bankruptcy, and it has take place within 15 days since the company stops re - paying debts. If the company is shutting down, it cannot file for creditor protection.
The conditions to file for creditor protection are that the company be in the market for at least two years, and the consent of the majority of stakeholders. If the company’s owner passes away, heirs can file for creditor protection within three months. If there are heirs who object to the step, a court hearing will be held and a ruling on whether to accept or dismiss their request will be issued.
Only one creditor protection request can be filed at a time. The request must consist of the reasons behind the crisis, reconciliation proposals, and guarantees, in addition to supporting documents showing the budget and list of creditors.
All legal procedures against the indebted company are suspended once the request is approved. Local and foreign creditors have 15 days and 30 days, respectively, to put forward the amounts owed by the stumbling company. They also have 10 days to dispute the documents submitted by the company, and 30 days to settle the dispute.
Reconciliation must be achieved first among all parties involved before the judge can issue a bankruptcy ruling.
If manipulation by the indebted company is proven, it will pay a fine ranging between LE20,000 and LE100,000.
Insights from U.S. Corporates
Fox Business reported that in the U.S., 424 corporates turned bankrupt since the beginning of the year through August 9. That is still less than the bankruptcies that occurred over the same period in 2010 as they recorded 546. The publication cited S&P Global’s speculation that the business bankruptcy figures would hit and surpass those of 2010. CNN reported that 21 U.S. major retailers have gone bankrupt in 2020.
The Financial Times further reported that 45 corporates, having assets worth $1 billion each, filed for bankruptcy within just 10 days in August. That surpasses the figures recorded over the same period in 2009 and in 2019, which stood at 38 and 18, respectively.
Furthermore, 157 companies, having $50 mil - lion worth of liabilities each, have filed for restructuring their debts since the beginning of the year.
The Financial Times underlined that the de - faults started with oil and gas companies due to declining prices of crude oil. This year, 33 of those companies filed for bankruptcy, against 14 filings last year.
For the retail sector, 24 businesses, having assets worth more than $50 million each, filed for bankruptcy in 2020; that is three times the figure in 2019. Managing Director of Corporate Restructuring at legal services group EpiqDeirdre O’Connor told The Financial Times that he estimates that bankruptcy filings will persist in the industries of large retail, energy, and transportation.
According to the Wall Street Journal, the number of companies seeking debt restructuring – a type of bankruptcy – increased by 52 percent in July compared to a year earlier. The publication reported that even personal bankruptcy filing rose, according to Epiq Systems Inc.
The Poynter Institute further indicated that bankruptcy filings rose by rose by 26 percent to be 3,604 in the first half of 2020, compared to the same period in 2019, where 2,855 filings were recorded.