Opinion: Taking the positives out of bankruptcy

For many CEOs, the prospect of bankruptcy is the stuff of nightmares, but if done right it can lead to new opportunities
Opinion: Taking the positives out of bankruptcy
Insolvency: Chapter 11 is available to every business in the US, whether as a corporation, partnership or sole proprietorship, and to individuals
By Bernd Debusmann Jr
Fri 20 Oct 2017 10:13 AM

The proverbial phrase “when life gives you lemons, make lemonade” has been exemplified by American technology giant Avaya. Early this year it was facing a debt load of $6.3 billion that forced it to file for Chapter 11 bankruptcy to cut the company’s debt and interest payments, and transform an antiquated capital structure.

As Avaya’s new CEO Jim Chirico tells us in this week’s cover story, Chapter 11 was, in many ways, a blessing in disguise. The upheaval has been a catalyst for change that will see the company move away from significant quarterly interest payments and have cash flow with which to re-focus its efforts on emerging technologies – such as blockchain and Artificial Intelligence – that are shaping the world of tomorrow.

Until the beginning of 2017, UAE companies that found themselves in a situation similar to Avaya’s would have had little recourse. But even with the country’s new bankruptcy law – that took effect in January and is based on the US Chapter 11 legislation – few companies have used it in court.

“I think the success of a law is that it should be used,” Emirati lawyer Habib Al Mulla said in last week’s cover story, adding that negative and deeply ingrained cultural attitudes towards failure are among the likely reasons that few UAE businesses have resorted to using the new legal process, as is the fact that bounced cheques were not decriminalised and may still lead to legal charges, with courts only given the power to suspend legal proceedings in certain cases.

This attitude needs to change. Once it does, many a struggling company will be able to find a second wind with which to sail in a different direction, as Avaya has done. The Chapter 11 law on which it based, of course, is not designed to punish failing companies, but rather to help guide them through their recovery process.

Another vital issue that has prevented UAE businesses from using the insolvency law is the simple matter of whether or not businesses understand the law and how it can be used. “It’s still it’s in early stages. Once there is more awareness, there will be more application,” Ashish Mehta, founder and managing partner of the Dubai-based Ashish Mehta & Associates tells Arabian Business. “It’s only a matter of time.”

In Mehta’s view, the UAE government is ultimately responsible for encouraging businesses to make use of the law when they are facing financial difficulties, and he’s confident that they will do so. “The government is pro-business. They see and understand what is needed and accept market requirements,” he says.

For local business leaders, the proper time to begin acquainting oneself with the law is – ideally – long before it becomes necessary. Managers and directors would be well advised to seek a professional opinion early, both to understand the various options presented by the legislation, and, importantly, to understand their responsibilities and where they can be held liable.

Of course, many companies – both in the UAE and abroad – will not come out of bankruptcy in as good shape as Avaya, a still-profitable company with a loyal customer base, a deep well of internal talent and a lot of new markets to aim at. But, until companies here begin understanding and considering bankruptcy proceedings as a viable option that may result in a positive outcome, they won’t have a chance of surviving in difficult times, whatever their longer term prospects.

In the case of Avaya, the company’s bankruptcy ordeal even turned out to be a “rewarding” one, according to Chirico, having allowed the company to regroup, empower its employees and take the offense. Companies around the world should take note.

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