Top ex-gov’t bankruptcy official: This is how to save the economy
A combination of government support, encouraging negotiated solutions to financial dead ends and pushing Israel’s bankruptcy laws closer to the US model may all be needed to save the country’s economy, the State of Israel’s former official receiver has told The Jerusalem Post.
David Hahn, who was in charge of bankruptcy issues nationally until 2017 and was one of the leaders of reforming Israel’s bankruptcy laws in recent years to make them more amenable to debtor-corporations reorganizing as in the US, interviewed with the Post on Wednesday.
Israel passed one of the largest reforms of its bankruptcy law in decades in March 2018, which went into effect in September 2019.
Hahn told the Post that these reforms were important, but likely insufficient for the depth and immensity of the current coronavirus-driven economic crisis.
He outlined what measures he believed are necessary to steer the economy through the torrential waves currently battering it.
“The government support in the form of delaying tax payments, providing funds for small businesses or government guarantees are all welcome measures, but will not be enough,” he said.
The country’s former chief bankruptcy officer said, “The economic hit is huge and sweeping all across the state [and globally]. So, while the governmental budget will be a major source for tackling the economic downturn, in the end it will not be [covering] all [businesses and people] and will not cover all losses for everyone.”
“Some businesses will need to handle themselves…. There will need to be some splitting and absorbing losses between the various parties to transactions in the private sector: employers-employees; lenders-borrowers; owners-lessees; contractors-purchasers” and others.
Still, “governmental intervention in the capital market, in the form of massive purchases, in order to stabilize the market in the face of such global turmoil is an important measure in order to restore the confidence of the investors and preserve the core functioning of the markets.”
Breaking down the problem, Hahn said, “If we take the service provider industry. Look at tourism. There are mass cancellations of prepurchased packages. This hurts hotels, airlines and others. We need to split the risk among the parties.”
He asked rhetorically: “Should a company or a hotel bear all the losses for the cancellation, or will it be split between the hotel and the customers who prepaid? To what extent does each side need to bear some of the economic burden? How will the crisis affect the personnel financial situation of the customer? There are a whole web of financial crises here.
“Keep in mind the severity of the financial situation. The uncertainty, the ongoing and developing situation, when we don’t know where it’s heading and for how long it will stay with us,” Hahn warned.
A major challenge will be that “it will be extremely difficult to try to... sell off assets… to generate cash, because when all of the market is down, there is hardly any economic activity.”
“If you try to sell off assets, you simply don’t have a counterpart to buy. The value of the assets will be so depreciated during this time that even if you generate some cash, it will be not enough, to say the least,” he remarked soberly.
“What is more feasible… as an alternative to receivership, bankruptcy or foreclosure on collateral would be structured negotiations” regarding financial debt, he said.
Hahn said the negotiations would balance the needs of “employees, long-term restructuring plans with some checkpoints along the road. The plan cannot just be that no one needs to pay. The creditors also need cash, but there would need to be measured steps.”
A specific idea he suggested could be “some installment payments, rather than immediate payments – to whatever extent possible.”
Part of surviving will mean that “everyone needs to take a deep breath and say ‘How can we all come through this crisis?’”
“The insolvency law allows for reorganizations as an alternative to foreclosures and liquidation. Parties can use that channel. However, there is one factor, given this crisis, which perhaps… the legislature should reconsider,” he explained.
Hahn said that under Israel’s current insolvency law, “you can go to court to get a moratorium to block enforcement actions against the company, which will give” your company breathing room “to negotiate with creditors… but then the court is required… to appoint an external trustee” to oversee the business.
He added, “That trustee in many cases will take over all of the powers and authority of management. When you are… selling a business as a going concern, then an experienced trustee will know how to deal with that. But here we are dealing with something else, because selling the assets as a whole seems less attainable.”
“There is a shortage of financing to get such an acquisition… You need the regular management of the company who know it and can manage it better than anyone else,” making it clear that current management should not be blamed for financial distress during the coronavirus period.
Instead, Hahn suggested giving companies the ability to obtain a court-authorized moratorium from lawsuits without replacing current management with a trustee – like in the US – “to pacify things for the moment” and enable a serious but balanced negotiation with creditors.
“Replacing management now could be counterproductive,” he warned.
He said that “either the legislature or the courts” could drop the idea of a mandatory trustee as a prerequisite to staying all lawsuits, which could improve coping with the current “unforeseeable situation.”