Kitabı oku: «Bankrupt.Me-Not. Book of Problems»

Project manager Alexey Perevedentsev

Translator Andrei Piven

Translator Irina Piven

Illustrator Vitaly Blokhin

© Yuriy Yavorsky, 2023

ISBN 978-5-0060-6444-7

Created with Ridero smart publishing system

First published in 2020.

All rights reserved. No part of the electronic version of this book may be reproduced in any form or by any means, including posting on the Internet and in corporate networks, for private and public use without the written consent of the copyright owner.

INTRODUCTION

This is more like a study guide rather than a book as such. Do you remember what a math book used to be called? A book of problems. It was easier for younger pupils and more challenging for senior ones. Either way, it contained problems to be solved. The right answers were given at the end of the book, but we had to go all the way to the solution by ourselves.

At the end of 2014, the Russian economy suffered another blow when oil prices more than halved. Naturally, the Russian ruble immediately collapsed against the dollar and the euro.

As the old Russian adage goes, “misfortune never comes alone.” It was exactly at this point that the Russian government felt compelled to take a heavy-handed approach to the economy, declaring a policy of import phaseout. The implication was that if a business can survive one misfortune, it will survive another. Those who can keep their heads above water will build the new Russian economy.

The course was set for the development of multi-level processing and high technology. The government slapped a ban on foreign materials that could no longer be used to manufacture end products for government agencies (including partially government-owned monopolies, which at the time accounted for over 90% of the country’s economy). This was impossible for many businesses, as they simply could not replace the materials and equipment overnight, nor could they invent or buy the new technology. By mid-2015, the economy had plunged to the brink of bankruptcy. Only one question remained: who would go bankrupt next?

It was far more than a disaster for millions of different businesses. It became the beginning of the end for an economy that had lived off imported materials and reselling of imported technology. That was when the most venturesome entrepreneurs ‘crash-dived’ into preparations for bankruptcy. It truly felt like a submarine dive: perfect concentration, steady nerves, unflappable composure, the whole crew ready to steer only one course – for survival.

This was not the first time, nor will it be the last. Crises are as numerous as storm waves, and we must learn to deal with them. Theory will no longer help. What matters is practice. It is for this reason that the book is based on real events. They may not be described with pinpoint accuracy, but the conclusions are sincere. You know, as the credits of a film sometimes say: “Any resemblance to actual people or real events is purely coincidental.” It is the same here. There may not have been identical situations, but the description is still 50—60% fair and square.

I believe that many businessmen and lawyers in Russia and abroad will corroborate my research. You can read a lot of books on bankruptcy and memorize almost all the legislative and judicial practice related to this tricky step, but you can never know where it may lead. Having studied a large number of related Russian and international cases, I dare to say that bankruptcy is neither death nor even an incurable disease. It is merely a vehicle for getting rid of liabilities that have suddenly become a deathly stranglehold on a business of any size.

That is why I would like to share my research results with you.

SECTION 1. MISTAKES

It’s axiomatic to learn from the mistakes of others.

PROBLEM 1

Given: no nuptial agreement. Businessmen share the ups and downs of both life and business with their families. No one would think of signing a nuptial agreement with their spouse.

Question: why is it important? Nearly everyone who one day decides to act as a guarantor by putting their signature under the text, hardly ever reads it before signing, nor will they re-read it after the hearing. However, everything given away as a present or sold during the three years, or 36 months to be precise, or 1,095 days to be exact before the court declares the company or the individual bankrupt, will be returned to the bankruptcy estate to be sold to settle the defaulter’s debts.

Solution: make sure to sign a nuptial agreement to avoid a lot а trouble for your family in the event of an unexpected bankruptcy.

PROBLEM 2

Given: consolidation of assets in the hands of a single person. It would seem perfectly logical to consolidate the successful parts of the business, to build the logistics and management systems in such a way that the business can be easy to manage and efficient. Training programs that teach that cost a lot of money, the experience comes with age and working your fingers ‘bloody’, while businesses cannot but benefit from this.

Question: why is it then, with all parts of the business legally consolidated, there is nothing a bankrupt-to-be can do once the torpedo of crisis suddenly cuts through the side of his business ship? All the bulkheads of the ocean liner that was all one just yesterday will get soaked and torn like paper under the forceful inflow of bailiffs, financial controllers, and other creditors who are out for financial ‘blood’.

Solution: de facto and de jure become very important at a time like this. The most important thing in business is that nothing that is de jure important should sit within anything else that is equally important.

PROBLEM 3

Given: underestimation of likely pitfalls. The government is always at the top of the economic food chain. There is no business in the world (and there will never be in the foreseeable future) that is absolutely and forever immune to crises, whether external or internal, and, accordingly, to the government’s decisions on crisis management or actions related to the here-and-now political goals.

Question: what can cause bankruptcy? There can always be room for betrayal, profligacy, envy, pathetic things done by the partners, owners or their families, as well as unreasonable decisions of the government or the nation’s leaders – for which there is no known cure. Natural disasters and wars, man-made woes and bad luck… The list goes on.

Solution: you must always be prepared for the possibility of bankruptcy.

PROBLEM 4

Given: no team around. If a business executive or entrepreneur is under enormous pressure in the face of looming bankruptcy and there is no team by his side, he is doomed.

Question: who can be in the team? It is not just your family in a literal sense but also your friends, acquaintances, subordinates – anyone who is prepared to help or to lose some of their material means or income, including bonuses, allowances, and other benefits, along with the business that is going bankrupt.

Solution: try to build your team well in advance.

PROBLEM 5

Given: reliance on stocks and reserves. Even when bankruptcy is imminent, you should never feel compelled to use your stocks and reserves.

Question: why won’t it help? Your stocks are always lower than the resources needed to avoid going bankrupt.

Solution: lock your stocks and reserves away until you need to start all over again.

SECTION 2. ALL OF A SUDDEN

It is not true that bankruptcy cannot be predicted.

So why does it usually strike all of a sudden?

PROBLEM 6

Given: businesses are always on the lookout for ways to survive beyond going bankrupt, often finding themselves on the brink, with all other options exhausted. Banks won’t refinance, interest is accruing on the cost of past borrowings, debts for materials exceed future earnings while wages and taxes have not been paid for months.

Question: why does the practical application of bankruptcy procedures for business turnaround in the 21^st century Russia remain at a most primal level? Why do companies avoid any procedures that can lead to a loss of assets and why do creditors try to seize those assets by hook or by crook in order to sell them for a song and get at least something back?

Solution: It is evident that the legislation and legal practices must be improved. Many entrepreneurs I know have had to prove to banks time and time again that a payment break or debt restructuring can rejuvenate their business or even make it more successful. This has been reaffirmed in practice – you must fight to the last ditch to prove that you can turn things around, go request payment holidays or refinancing, try to convince everyone that you can redress the situation, and never give up on your business if it is still alive, look for a way out. Do not initiate your bankruptcy, let the banks or tax authorities do it for you if they fail to be convinced. At least you can buy some time, which is so valuable in this fight. You will need it in the course of protecting your assets.

PROBLEM 7

Given: bank officials are indifferent and unwilling to even listen to reasonable proposals. Banks are never concessionary, so they must be the last point of contact.

Incidentally, banks are usually more alert than a soon-to-be bankrupt. Once they catch the wind of trouble in your financial affairs, they will act swiftly and professionally. They will have already got you to sign a personal surety and have made all attempts to put an obligation on each of the adult members of your family.

Nothing ever hurts an entrepreneur more than realizing that their business could cause their nearest and dearest to lose everything. Agents representing banks or other creditors often act ruthlessly, without compassion or intent to compromise.

Suddenly you realize that those with saccharine smiles who persuaded you to take out loans at extortionate interest rates of 15—25%, who invited you to free business breakfasts, discussion groups, and voluptuous parties with free buffets and champagne, where you were awarded prizes as the best business owner, have been, in fact, ‘fattening’ you until the time when your assets become more attractive to them than yourself.

Question: are you suddenly aware that this is the end? I’m sure you are. No one I know who has gone through or is going through bankruptcy could have imagined three years prior to bankruptcy that an apartment given as a birthday present to their darling daughter (if the deed of gift was executed less than 1,095 days ago) would be taken away, auctioned off, and sold.

Example one: my acquaintance once told me a story about a bank lawyer. She was certain she was entitled to slander the debtor in court and was being cynical to the point where she would not hesitate to triple the debt amount just to prove in court that the debtor was a swindler. That the debtor had been borrowing from the very same bank for more than 20 years without a single day of payment delay, largely paying back the loans taken out for business development at an interest rate of 15—25%, she would not even want to talk or hear about.

Example two: a bank has been lending money to an entrepreneur for many years, using the property built with the loans as collateral. When the crisis collapsed sales, the bank foreclosed on the entire property for a quarter of its value, refusing to revalue it and leaving the defaulter in debt to other creditors. This is how a successful property owner turned into an entrepreneur owing to everyone.

Solution: do not give up and study the intricacies of bankruptcy procedures most thoroughly. This fairly uncomplicated subject does not require a university degree, rather diligence and a competent hands-on lawyer are needed.

SECTION 3. INEVITABILITY

For many people, the inevitability of bankruptcy is a personal catastrophe above all else. Successful yesterday, bankrupt today – how do you live with it?

PROBLEM 8

Given: the issue of payment arrears inevitably looms when the difference between income and expenditure on the corkboard in your office changes sharply from positive to negative compared with the results of the previous operating month or quarter. The banking community is abundant with charlatans able to convince you consummately that all you have to do is take out a loan and all your problems will be taken care of by the bank’s capital as long as you are making timely interest payments.

Yes, there are some very talented entrepreneurs out there who are able to grow exponentially with a loan at 15 to 25% interest…

Question: but if the average profit in developed economies is less than 10—20%, how can one pay 15—25% interest rates? Only when the economy or a particular economy sector is growing, or perhaps a particular company has struck it lucky or come up with something that its competitors have not. But it is abundantly clear to the author that a business with a loan portfolio in excess of 50% of its annual turnover is inevitably heading for bankruptcy.

Solution: if a business executive or entrepreneur does not want to see a ‘black swan’ from the window one day, he should monitor the immediate future for the inevitable moment when it is no longer possible to increase the cash flow. Only a growing business can cope with borrowing, otherwise you are on a down escalator. If your turnover has stopped growing or earnings have begun to fall, the loan with its draconian interest rate must be urgently reduced or disposed of altogether.

We often believe that we are the ones to be spared. If the entrepreneur in Problem 7 (Example two – the bank foreclosed on an undervalued property for next to nothing) had sold some of his property even at a discount in good time, he would have been able to pay off the loans or reduce them considerably, and then use the remainder to invigorate his business again. But it is so hard to switch from a Mercedes to a more modest car, or to sell a country estate that is not needed at the moment! No stomach for it. And, inevitably, the entrepreneur loses the property in a court of law, with the creditors taking it away for a mere song.

Sometimes, instead of borrowing as a sole way to generate cash, you have to move your bad sellers even below cost.

Example: a friend of mine made profiles for dropped ceilings to attract customers rather than as a flagship product. He sold the profile cheaply in order to attract ‘anchor’ customers who would buy the core revenue-generating product in addition to the profile. In the end, he got so carried away with profile sales (the price was attractive and competitive!) that they far exceeded the sales of the flagship product.

The sales kept growing, but the share of loss makers in the company’s turnover shot ahead of the profitable product share.

Inevitably, a disaster called bankruptcy started looming. Before he knew it and could pull the plug on production of the unprofitable product in time – there was no money for regular payments; with the materials, rent, electricity, and wages eating it all away, while taxes and interest were piling up. The only way to stop the process was to declare bankruptcy…