THINKING ALOUD (BusinessLaw) BUSINESS RISKS: Inability to Pay Debts
We at Chrysler borrow money the old fashion way. We pay it back.— Lee Iacocca
Chén Róng’s Little English-Chinese Dictionary
- Every man for himself = zì wǒ zhuī xún.
- The devil take the hindmost. = luò hòu dé bù dào yuán zhù
- A life of dissipation and debauchery = hào sǎn shēng huó, huā tiān jiǔ dì
- Heads I win, tails you lose = yī dìng yíng
- Fishes in muddy (or troubled) waters = hún shuǐ mō yú
Hubpages do not support words written in the Chinese Language. Readers can get a free online English-Chinese translation from GOOGLE TRANSLATE OR TRANSLATED.net
I have also included ChénRóng’s Little English-Chinese Dictionary for a more precise translation of select English phrases from the article.
The writer makes no warranty of any kind with respect to the subject matter included herein or the completeness or accuracy of this article which is merely an expression of his own opinion. The writer is not responsible for any actions (or lack thereof) taken as a result of relying on or in any way using information contained in this article and in no event shall be liable for any damages resulting from reliance on or use of this information. Without limiting the above the writer shall have no responsibility for any act or omission on his part. Readers should take specific advice from qualified professionals when dealing with specific situations.
Re-structuring a Closely-held business
Writer: Chén Róng
Many readers will be surprised to learn that most companies that were wound up were done voluntarily by their own shareholders. They were most probably solvent but had to be wound up to resolve shareholders disputes. Some were trimmed to dormant status or redundant in a corporate group restructuring. Others may just want to wind up the company to return capital to shareholders. For dormant companies that have ceased to operate and have no assets or liabilities, an application can be made to the Registrar to have the company struck off.
- Winding down a business
The Asian business landscape is one dotted with family in-fighting. Such unsightly events are wrecking up otherwise good relationships between second and third generation heirs who have the good fortune to inherit massive wealth from their fore-fathers. In majority of cases, control of the family business is in the hands of a small group, ostensibly for the benefit of every member, but unfortunately, it is not always viewed as such by everyone. The family's portfolio may consist of tens of private companies owned through a number of trusts. Tearing into pieces something fathers, uncles and relatives had put together decades ago may not be an easy task. The challenge is: how to go about dismantling the business structure in an orderly way so that what remains will work for the collective interests of the family.
- Mending family rifts
A rift was perhaps inevitable. The heirs were pursuing their own careers, mostly outside the family business. They were resistant to the control of the small group of directors and their lack of transparency. These controlling directors were often being verbally accused of siphoning off family funds to enrich themselves. Younger family members are less connected to the legacy business built by their elders. It is important to be mindful of their suspicions and their different interests. In these circumstances, what should follow would be a plan, conceived by these controlling directors to reorganize the family holdings to give the heirs control over their own fortunes.
- Closing a small family business
If the breaking up of the legacy business is that of a small family business that does not involve a complex web of holding company and subsidiaries with diverse activities, things may seem a lot easier. If selling the business is the only solution to the family conflict, it pays to appoint a mediator for everyone to come away happy. A mediator serves to open the lines of communication. Being neutral, all parties will likely feel at ease to discuss all issues at hand.
When picking a mediator, always evaluate how well he/she understands the specific industry and region. The services of a valuation expert (if the mediator is not one) will include putting a price tag on the company by accurately assessing assets, cash flow, branding, local competition, etc. With a valuation, there are two possible methods to go about dismantling the business.
One way is to allow certain family members to stay in management and run the business. In this case, it is best for staying members to buy out other members using the valuation set by the appointed mediator (or valuer). If none of the current members want to work in business anymore, the business shall be put up for sale to an investor or a competitor by placing advertisements in business newspapers/magazines or the appointment of a broker.
- Closing a more complex family business
For complex family business with numerous joint ventures and subsidiary companies, the dismantling process will involve lots of haggling. A suggestion: Have the dissenting heirs collectively appoint their own lawyers. With lawyers on both sides negotiating every step, the heirs may reach a private agreement to restructure their holdings over a shorter period than one without the services of legal experts.
The execution may involve a number of phases: accounting for the biggest assets; creating stand-alone companies to establish value; and finding the right exit strategy for each, without triggering extra taxes on the companies. There may be a need for a structure to monitor the plan's progress, and a process to resolve disputes. A structural plan is one where everyone's incentives were aligned and targets had to be met. It will also have names of persons-in-charge with responsibility for execution of deals. Assets sold and names of buyers are accordingly recorded accurately. Such responsibility should go to family members who knew the businesses best.
Large asset sales may need the involvement of banks whose interest may not necessarily align with family interests. Banks may go for prompt sales and probably upset employee morale and disrupting otherwise smooth execution. Running an auction sale without involvement of a bank may be considered an alternative to private deals. This will involve considerable expenses. A private deal can save the family a tidy sum of money but some family members may question why private deals instead of running an auction to get the highest price.
- Happy Ending
Hostilities between family members will cool with sale monies rolling in and with regular updates on the plan's progress. A patient approach may be the key to a successful breakup of the business as against selling it immediately and hastily as some families do. Not all relatives are on speaking terms, but the right thing to do is to encourage them to rebuild ties within the family. Finding the right formula to re-structure the business is the way to building such family ties.
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SINGAPORE FLYER – Icon placed in receivership
Writer: Chén Róng
Dark clouds hover over iconic Singapore Flyer - a Ferris wheel. The owning company’s charged assets have been placed under receivership since May this year.
Receivership is not an enviable situation to be in. Receivership and bankruptcy are not mutually exclusive. But in the case of the Singapore Flyer, it is insolvent. If the appointed receiver is unable to find the best way to pay back loans, he will sell (liquidate) the company's assets at deep discounts to recoup some of the monies owed to the lenders who appointed him/her. Effectively, such action puts the company out of business.
There are many reasons that could have led to Singapore Flyer’s financial woes. One reason may be an ineffective business model. Insufficient working capital was said to be one big hit against the company's finances. Another cause was a defective ticket pricing system and the lack of sponsorship similar to the adoption plans for animals in national zoos. In the writer's opinion, competition from a more effective business model is an important reason for Singapore Flyer’s woes. It was the 'last straw’ of many straws that broke the camel's back, (so to speak) - the adjacent 55-storey Marina Bay Sands (MBS) Hotel and casino. Time-pressed tourists will prefer MBS as the more creative choice if they are looking for a more decent view of the city landscape. They can sleep on high -- the writer recently stayed at Suite 5317 which gives a wide-angle view of Singapore. Another enjoyable option is eating and drinking on high if one heads to the roof-top restaurant. Dip oneself in the pool and you can perch on its glass wall that gives one a floating feeling out of the tower into the blue sky.
Singapore Flyer’s hope is that the appointed Receiver-Manager operates and manages the business successfully until the company can be sold as a going concern. A potential buyer has to consider not only to change its business model but to move the Ferris wheel to a new location. But where can it be placed? Singapore is a finite island.
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Marina Bay Sands
A unique business model
Small business owners can take a leaf from the business model of big conglomerates like Marina Bay Sands (MBS). Growing your business may be the key to ensuring you are able to pay your bills. I know that talk is cheap when one is giving suggestions sitting comfortably in an armchair. It is not easy to grow if every business is at the throes of an economic downtime. Getting more customers will only help if they pay their bills and paying on time. Cash flow is the life line of business, big and small. Generating cash flow in a diversified way ensures there is more than one way in keeping the cash flow tap flowing while growing the business. MBS is showing us the way forward with its business model.
In the case of MBS, hotel rooms, its adjacent casino, convention, retail, food & beverage outlets are complementary engine of revenue growth for MBS’s business model. Unfortunately, the iconic Singapore Flyer has no place in a gaming business.
The gaming business is a primary revenue driver. Nevertheless, there is diversity with gaming-tables. This strategy works. Locals swarmed its slot machines and high stake VIPS patronized mass-table games. When customers keep going back to the casino's various slot machines and mass-gaming table, MBS reward them with complimentary rooms (so called comped rooms) free meals and drinks at its restaurants and discounts at retail stores within its building premises. My wife and I had a two-night stay at MBS because a friend accumulated substantial reward points. She and her husband insisted that we enjoyed our hotel stay in one of the two comped rooms giving by MBS to gaming customers.
Gambling does not fit in with running a business organization. I do not gamble away my money and time. But gaming is MBS’s business. This article serves to explain a business model every small business can emulate without the bosses finding themselves gaming away at casinos.
Inability to Pay Debts
Writer: Chén Róng
When a business defaults on its debt or loan obligation, this is equivalent in seriousness to liquidation. In law, liquidation is the process by which a company (or subsidiary of a group) comes an end, and the assets and property of the company redistributed.
Nope. The statement above is a little too far-fetched. Not all companies that fail to repay a debt or loan may be liquidated, and there is no automatic liquidation upon default. In fact, companies that default go into a period of re-structuring - debts, business model and management - and they may or may not be liquidated. It all depends on the laws of the country in which the business has its operation.
There is no cause for cheers over historical data. Things do change in an ever-changing business environment if the motto is: Every man for himself, and the devil take the hindmost.
- · Corporate Bankruptcy
Bankruptcy protection is not a cure-all
Bankruptcy or insolvency laws do vary with countries, Chapter 11 in USA legislation included. They offer a glimmer of hope for a business hobbling by debts it is unable to pay up. The company is insolvent. Bankruptcy filing enables an insolvent company to slim down, negotiate payments to workers and suppliers in manageable ways, keeping the business going and hence preserving jobs. Hence, insolvency laws enacted are to protect shareholders, creditors and the workers. If a corporate bankruptcy does not create that path for reorganization, many jobs at struggling companies may just disappear for good, resulting in a long and painful economic downturn for some countries, if unemployment impacts consumer spending. These are concerns of policy makers. A country's corporate bankruptcy law may embody the notion of putting people first, as it fully considers the interests of workers. Creditors have other thoughts.
Irresponsible business owners may feel elated thinking that they can afford to take undue risks gambling with other people's money because bankruptcy protection laws protect them. By simply piling on more debts (or over leveraging) and then file for bankruptcy protection, these debtor-firms are effectively forcing lenders and creditors to work out a more pleasant repackaging plan, thus wiping away some of the company's debt. Meantime, they (business owners) may still live a life of dissipation with their fat-cat executive pay and director fees, a kind of heads I win, tails you lose mentality. Those who think they can get away with such unscrupulous tactics, they are way of of track with this article.
Laws similar to Chapter 11 in USA legislation serve as a breather, blocking creditors while the business tries to find ways to return to profitability and preserving jobs to save families from going hungry.
Revamping may not come easy when business owners got a much more difficult situation in a challenging industry that lots of restructuring are needed going beyond mending its balance sheet. It forces the hand of the judicial manager to either write-off or sell unprofitable lines at low prices because the market-place is over-whelmed with similar goods. Besides, getting an investor to dish out cash or bank to lend at a time businesses in general are facing a credit crunch is next to impossible. In fact, many companies in bankruptcy protection are often teetering between whether they are able to move forward with their reorganisation or shut down because they cannot find additional funds under such circumstance. Creditors, too, may not have the patience to give a struggling company more repayment lee ways. A tight repayment schedule will leave little time to turn a business around. Shutting it down can be done a lot faster and creditors may not hesitate to take that path. Business owners beware. In liquidation, if owners have mismanaged the company, bankruptcy laws may still punish them for their wrongdoings. Heavens can wait.
Creditors are equally blameworthy
Business owners on the other side of the fence should share the blame too. Yes, we are talking about creditor-suppliers. Who is to be blamed if they choose to supply goods or services on credit to a buyer in financial difficulties? The creditor-suppliers should be responsible. As matter now stands, the buyer will likely to delay seeking bankruptcy protection because all his biggest creditors, the suppliers are now struggling in deep muddy waters with him in. He makes a quick mental calculation. While in default, he can afford to wait a little longer for better times. It is a business gamble which can go badly wrong. Muddy water can also work to the advantage of creditors. Metaphorically speaking, if the creditor fishes in muddy waters (or troubled circumstances), he is likely emerge the winner when the buyer-debtor's business goes into liquidation and he buys over inexpensively an established business and the goodwill that goes with it.
That is just one scenario. There is a flip-side to the story.
Creditors taking on undue risks may have to pay a high price. When it comes to government-link companies or subsidiaries of multi-national firms, creditors can go overboard in securing business deals by giving better than normal credit terms. Every stand-alone company is a separate legal entity. Creditors did not take this point into consideration. Unless its parent company guarantees a debt, the creditor's position is not in any way secured than his dealings with other smaller enterprises. In one recent case, when news of the voluntary provisional liquidation of a government-link company broke out, more than 700-creditors panicked over some $50 million in debt. When offered a scheme of arrangement through which each creditor would get back some 25% of the debt owed, emotions ran high. They accepted the payment scheme although it was painful. What rubbed salt into their wounds was when another government-link company took the failed company out of provisional liquidation and bought the rest of the shares it did not own! The entire exercise works to the disadvantage of all gung-ho creditors.
Seek help before it’s too late
In truth, business people need to seek help quicker, change their business plan faster, and avoid insolvency. It is the last resort and bankruptcy protection costs can only get more expensive over time. At those early stages, they should try to make out-of-court settlements with creditors, with the help of their legal advisers. This may be termed an early re-structuring of the business. Insolvency legislation probably does fix some problems, but one has to look at the odds and costs involved. There are cases where the creditors get a little more but the company collapses in liquidation. The other probability is: the bankruptcy lingers on and creditors get a little less. The result cannot get better than an out-of-court settlement where parties can move on with their lives in quick time, emotionally less drained and financially better off.
Certainly, such suggestions are but the writer's thoughts thinking-aloud.
- Foreclosure Risks
Business people should never happily lock away the signed loan agreements and never read and understand the terms on which their bankers agree to lend them money. They should be fully aware of the circumstances under which their company may be in default of loan terms and their consequences.
A company which defaults on its bank loans may face foreclosure risk. Its ability to continue as a going concern will depend on the successful outcome of refinancing negotiations with financial institutions and the support of the lending bank by not seeking foreclosure of its assets. Otherwise, the chance of an insolvent company re-structuring its debt and business model is minimal. Once borrowers have defaulted, debt covenants are triggered, giving creditor-bank the option to liquidate the company immediately upon default. In many common law countries, lending banks generally hold a floating charge over the assets of a company. In other words, it secures the total assets of a borrowing company. If the borrower is unable to meet its repayment obligations, the lending bank has the power to appoint an administrator receiver to supervise the running of the company. He also has power to put the company into liquidation with little or no consideration for re-structuring of its business under insolvency law, the equivalent of bankruptcy law in USA.
Getting a bank to lend you the project loan is just the beginning of a long story. Borrowers need to understand what lies ahead along those winding paths.
- Bankruptcy law may pose risks
Bankruptcy law is not always there to help foreign companies in re-structuring their insolvency. It may encompass a greater purpose in protecting local companies. That may be the case with emerging economies.
Business people on global trots should never assume they understand bankruptcy law of the host country. Sometimes, it is good to adopt the cautious old-fashion style of American Red Indians by keeping your ears close to the ground. Your ability to detect those rumbling noise of approaching enemies can save your days. Flaw laws -- less transparent laws may be there to invite abuse and can bankrupt even a highly profitable company - are banes to your plan to invest in a foreign country. Every company has a loan or debt that will sometimes be disputed. A financially healthy company may refuse to pay a bill which is in dispute. The creditor owes a substantial sum which should be set-off against any outstanding sum. But this was not done accordingly. A country's bankruptcy law may force settlement to a dispute. It can create a situation that a foreign debtor company be declared bankrupt, if shown to have at least two creditors and the debt owed to one of them is due and payable. The law may also suspend operations of the debtor's business until he has fully settled his debt. Often, the creditor in question may be an incompetent agent a principal wishes to replace. The principal refuses to pay agency fees until all monies the agent had collected on its behalf.
Some quirks of a country's legal system are there for political or economic reasons, and not because its legislators are incompetent in drafting suitable laws. A competitor or a country's policy maker may use this piece of legislation to force a re-structuring -- divestment of your financial interests or controlling interests in particular business unofficially deemed a protected industry.
Hedge funds or their look-alikes
Hedge funds are replacing banks as lenders to big companies. It is changing the bankruptcy protection landscape. They have a different set of goals as against traditional banks. They are less forgiving than banks in forging successful reorganisation but forcing debtors to liquidate after costly battles. Hedge funds have an entirely different set of objectives. They just want to double, triple or quadruple their money over a short period of time. Fortunately, hedge funds are not showing interest in small private enterprises. So, we will not lose sleep over them. Big companies have highly capable executives who are paid millions in salaries and bonuses -- the “firewalls” of conglomerates -- that can help cash-strapped firms to ride over rough times.
But small companies need keep their vigilance when approached by money laundering organisations dressed-up as hedge funds or private investors.
- Insolvent company controlling rehabilitation program
Companies that are confronting serious problems can barely avoid liquidation if they do not take the bankruptcy protection path. Few companies had the wherewithal of Eastman Kodak that can help them avoid bankruptcy court for many years. An insolvent Kodak underwent a long process of rehabilitation under its own control, having informally gotten together with their creditors and worked out a plan in their common interest. In other words, Kodak side-stepped bankruptcy protection and its own management retained full control over re-structuring of the group's debt, management and business model. Kodak’s ability to gain control of its own rehabilitation was largely due to the ability of the company in leveraging its billions in licensing fee from its intellectual property. Banks were willing to gamble on its success with additional funds at the company's disposal.
Small private companies and even many public listed companies cannot hope to mimic the Kodak story. They do not have the deep pockets which Eastman Kodak had to assure banks that their gamble would pay off handsomely for them.
Companies which are insolvent may teeter between whether they are able to move by selling off less profitable products lines or fold up their businesses because they cannot find additional funds. In the majority of cases, they delay dealing with their problems, wagering their default against a probable economic upturn. They are avoiding bankruptcy court if possible because they know that without access to credit, the odds of emerging from bankruptcy protection as a successfully re-structure stand-alone company are slim. The main problem faced by these insolvent companies is that their lenders may be less capitalised local banks or private equity investors just do not have it to give because they have exhausted their funds. Other creditors in the same dilemma may choose not to put in good money to chase after bad ones. Such smaller lenders may need cash quickly by selling whatever asset a bankrupt company has, to keep their jittery shareholders at ease.
Judicial Management may be the more appropriate statutory regime for the rehabilitation of commercial enterprises in common law countries. But it is not popular with an insolvent company, as its management loses control of the company to the court-appointed officer. In such cases an insolvent company must find some other mechanism to ward off its creditors and fend off any judicial management petition. This can be done by proposing a scheme of arrangement under the Companies Act putting all debt repayments in a standstill to embark on a debt restructuring program. Big insolvent companies with operations running into multiple countries will likely see most of their creditors more amenable with such self-help rehabilitation program, considering the practical difficulties a judicial manager would face if the court places them under insolvency protection. The judicial manager, without the same business contacts and historical knowledge of the company, is not in a position to turn the company round and succeed where the business managers have failed.
But some creditors may see the rehabilitation scheme as a ploy by the insolvent company to siphon funds to other subsidiaries or engage in preferential payments made to certain creditors. Or, perhaps the insolvent company may be using an unsatisfactory mechanism to direct operating cash-flow to other activities rather than meeting its debt obligations. Opposing creditors may petition a court to have the insolvent company placed under judicial management instead.
Companies which are insolvent should never consider a proposed scheme of arrangement a sure bet in reaping the benefits of a moratorium on claims. They thought the process could get them in the driver's seat controlling its own rehabilitation instead of handing it over to a judicial manager. If efforts to restructure the group's debts by consensus is unreasonably delayed or inappropriately done, a court of law may approve of any petition by creditors to put the company under judicial management.
- Writer’s concluding thoughts
At the start of this article, the writer speaking rhetorically mentioned that when a business defaults on its debt or loan obligation, this is equivalent in seriousness to liquidation. Yes, it can be serious if a bad situation is not managed effectively. Some business people may react with shock when a company goes under bankruptcy protection (or judicial management). This is understandable. Such a situation applies when a company is in difficulty. But the truth of the matter is: Bankruptcy protection may be the best option for an insolvent company under certain circumstances.
The writer opines that a company in the throes of financial woes should not delay in seeking help. There is such a thing as voluntarily subjecting itself to bankruptcy protection. Do not wait for the situation to develop to the stage where creditors move in to place the business in judicial management. Less sympathetic creditors may not have the patience to see the company back on its own feet. It may mean liquidation of the company. Creditors might not be interested in any proposed scheme of arrangement in which they accept the issuing of shares as full payment of their claims. The lack of transparency and information about the company's financial situation may be a cause. Another probable reason may be a general lack of trust between creditors.
So, when is the right time for a company to ask for bankruptcy protection voluntarily?
OK, you know how to drive a manual transmission car? You are driving on second gear at crawling speed but try accelerating to get the car pick up speed. The car engine shudders and vibrates and its gear system struggles to stay in tune. In the long run the car will be brought down owing to premature wearing out of parts. It is high time you get into the correct gear to protect your car.
Such a light-hearted illustration on a serious subject is not exactly appropriate. Apologies. When is the right time for seeking bankruptcy protection voluntarily? When there is no offer of support from its major shareholders or a parent company (if any); or no new investors are willing to back the company with fresh funds to bail it out of its financial straits. Under such a situation, voluntarily submitting itself to bankruptcy protection will give the company time to continue with its restructuring and, at the same time, gets the protection it needs from potential claims by its creditors. Always seek professional advice at an early stage to save on legal and emotional costs.
You have to struggle a bit, hustle a little, and be willing to go bankrupt. Once you're willing to do that, everything opens up and you get the freedom. My joke is that next year, I'll make the first film that costs zero dollars.— Nick Nolte, Golden Globe Award for Best Actor
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