Either This Company's Dead, or My Watch Has Stopped

Some 300 bankers, lawyers, accountants and business managers crowded into the banquet hall of the Tel Aviv Hilton hotel Tuesday to hear experts and executives discuss the hottest topic in the shrinking Israeli business world. The one-day "Recovery for Companies" seminar, organized by the Globes business newspaper, focused on legal proceedings regarding liquidating companies in financial straits, the freezing of such proceedings, the appointment of receivers and trustees, and the best ways for creditors to recoup at least some of the money owed them.

One of the keynote speakers at the conference was accountant Zvi Yochman, currently serving as the trustee for the Tevel cable television company, against which legal proceedings have been frozen. Yochman spoke of the experience he has gained in the 10 months he has been managing Tevel. He complained that he had not been given even 100 minutes grace in his position.

"Do you know what happens to an accountant an hour-and-a-half after he is appointed [special trustee]? He receives a notice from the leasing company that if he doesn't pay off the leasing debt within 24 hours, all 400 of the company's cars will be on the road without insurance and will not be able to fill up with gas," explained Yochman.

Yochman likened his work to that of a doctor, noting the terms used by liquidators and receivers - "recovery," "treatment" and "rehabilitation." He said it was a mistake to think of the freezing of proceedings as the transfering of a company to a hospital recovery room, and that everything would work out and the company would go back to functioning as it had before.

"The freezing of proceedings is more like an emergency room," explained Yochman, "in which it is decided to which ward the company will be sent after a month or two - to the operating room or the morgue."

Yochman added that the court was supposed to look for "signs of life" - "a pulse" and "blood pressure." If the court finds positive signs, it is supposed to grant the company time to prepare recovery plans. "All the hospital's wards, however, are now full of companies whose rightful place is actually the cemetery."

Regarding Tevel, Yochman said that even though its situation was improving, the merger of the cable companies was still an essential condition for the company's continued operation. "Everyone knows how hard it is to find a marriage partner. In this case, we are trying to marry three partners, while one of them [Tevel - R.S.] is in an advanced stage of pregnancy and the rabbinate still hasn't given its approval for the wedding."

Luck and faith will help

Yochman enumerated the "Ten Commandments" for managers of companies in distress.

1. Try to avoid going to court.

2. Management is the key to recovery or failure.

3. Avoid trying to solve crises; learn to live with them. Survival is the key word.

4. Do not wait for better days. Like the firing of a soccer team's coach, sometimes it is worth creating a crisis to shake things up.

5. Trimming the fat is not enough; the live flesh must also be cut. Superfluous employees need tasks to keep them busy and make more work for managers. The employees expect layoffs and organizational changes. Otherwise, they will think everything is okay.

6. The creditor is the boss; respect the bank and the banker with whom you work, and do not surprise them. Sometimes you can bend the rules with the banks, but it is not worthwhile to threaten them.

7. Do not dwell on the past; look to the future. There is no point in investigating why the company collapsed. Focus on the cash flow and stop the bleeding.

8. Do not draft an over-optimistic plan. It is better to go for a conservative plan and be pleasantly surprised. There is no general plan. Put things in order item by item.

9. The recovery plan has two legs - the operational leg and the financial leg.

10. Maintain the company's name and reputation.

Luck and faith will also help.

Liquidation or Chapter 11?

One of the main issues examined by the speakers at Tuesday's conference was the difference between liquidation, from which there is no return, and the freezing of proceedings, which is supposed to lead to recovery. One of the reasons why shareholders prefer a stay of proceedings over liquidation is the fact that liquidation proceedings also open the door for suits against them and the company's executives.

The official state receiver, attorney Shlomo Shachar, spoke about the conflicts of interest between the various groups connected with a company whose affairs have been brought before the court. Shachar distinguished between the strong groups - the banks, which are usually insured creditors, the shareholders and the company executives - and the uninsured creditors, which include the company's customers and suppliers.

He noted that one of the official receiver's jobs was to take care of the small, unorganized creditors who, unlike the strong groups, are not usually represented by first-rate lawyers. The strong creditors usually favor postponing liquidation as long as possible, unlike the public, which has lost its faith in the company's management and its owners.

Shachar explained that sometimes the courts will decide to freeze proceedings instead of liquidating a company for reasons that are impractical and when the company should really be liquidated. "The words `rehabilitation' and `recovery' are sexier that `ruination' and `liquidation,'" said Shachar. "So the court tends to favor the former. There are cases in which the freezing of proceedings is actually liquidation at a pace that is more comfortable for the shareholders, the managers and the banks, so this route must be approached with caution. Frozen proceedings make the despair less unpleasant."

Shachar added that even if a company was a "dead man walking," the banks would rather freeze proceedings because they wouldn't have to make a deduction for doubtful debts.

Ehud Shapira, a senior deputy to the CEO of Bank Leumi, dismissed Shachar's view, saying that the bank's reports do not relate to companies' debts in historical terms, but rather in keeping with their current financial status. Shapira noted that there were only a few cases in which the banks managed to reclaim all their debts via liquidation. "The best way to reclaim a debt is via the company's rehabilitation," he said.

One example of this is the Gibor Sabrina company, which repaid most of its debt to Leumi following the bank's decision not to demand the company's liquidation. Even so, Shapira said that when a company's failure was systemic and not just administrative, as was the case with the Etz Lavud lumber company, it was preferable to shut down operations.

Shapira explained that during a stay of proceedings, the banks had to extend more credit, while trying not to "throw good money after bad." He concluded that the banks deserved to benefit from a company's success if it recovered - through stock options, say - because they were the ones taking the risk of extending more credit after proceedings had been frozen.