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Experts warn: wave of bankruptcies expected in Israel - voila! money


Highlights: Rising interest rates and the cost of living are expected to increase insolvencies. The business rush is understandable, but proper management of the procedure can save the business. In the US, more and more businesses are turning to the courts for protection from creditors. In Israel, the sector that worries the local economy the most is real estate, where hundreds of contractors, mainly medium and small, are in conditions of uncertainty regarding their ability to survive the period in view of the decline in demand for mortgages.

Rising interest rates and the cost of living are expected to increase insolvencies. The business rush is understandable, but experts explain that proper management of the procedure can save the business

Small business owner (illustration). Drowning in a sea of debt (Photo: ShutterStock)

The cost of living has been etched in the public discourse since the summer 2011 protests, but alongside high inflation and rising interest rates trying to stop it, it is much more noticeable and threatens to push many below the poverty line.

Some of these citizens own or are employees of about 320,99 small and medium-sized businesses in Israel, constituting about 5.<>% of all businesses in Israel, and some of whom are unable to adapt to the high financing costs as a result of the increase in interest rates and to the increase in product prices, which also affects them.

These businesses are liable to reach a state of insolvency (a situation in which a person or business is in deep debt that it cannot meet and requires economic recovery), and in the process also harm the Israeli economy as a whole.

Data from the World Economic Forum indicate that inflation could make tens of millions more around the world poor. An examination of the state of business in the US, the global economic torch, may indicate what is expected in Israel, and the data are not encouraging.

In the US, more and more businesses are turning to the courts for protection from creditors (Photo: ShutterStock)

Catch America

During the first quarter of 2023, there was a 123% increase in the number of bankruptcy filings in the United States, compared to the same quarter last year, according to data from the market research division of S&P Global.

The number is even about 19% higher than the number of bankruptcy filings filed in the US in the first quarter of the COVID-2020 year (10), and the number of businesses requiring protection from creditors is only accelerating as time passes.

Most of the bankruptcies filed for that period in the U.S. were from consumer, service, and financial businesses, but also included energy, communications, healthcare, and technology companies, and Americans are on alert ahead of second-quarter data, which are due to be published in early July.

One example that went international and showed the collapse of an American business is Silicon Valley Bank, which collapsed on March <> of this year after its customers withdrew money from it, far exceeding forecasts (and the bank's capital adequacy).

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Also in Israel: for example, Jumbo Stock. that Bank Leumi asked to appoint trustees (Photo: PR)

Meanwhile in Israel

Although the Israeli market has not yet experienced a shake-up in one of its economic systems, such as the US banking system, the data in the domestic market are not encouraging. Thus, for example, the number of insolvency cases increased by about 9% during 2022, the year of exit from the coronavirus, compared with 2021, when the coronavirus was still present.

In the past six months, a number of Israeli businesses have begun to be tested, and recently these difficulties have begun to surface, such as Jumbo Stock, which last April was reported that Bank Leumi was seeking to appoint trustees, and the Shiffon Group, which acquired The Baker from Baghdad about a year ago and was reported to be in debt of NIS 62 million.

The sector that worries the local economy the most is real estate, where hundreds of contractors, mainly medium and small, are in conditions of uncertainty regarding their ability to survive the period in view of the decline in demand for mortgages (due to the increase in their price) on the one hand, alongside the increase in financing costs on the other.

The car market (private customers) is also experiencing a slowdown in view of the increase in the price of vehicles and the economic uncertainty surrounding the Israeli market, but it is relatively balanced by demand from businesses and organizations.

The biggest sufferers are the clothing and footwear businesses, transportation, electrical appliances, furniture, and even health services and pharmaceuticals, whose demand declined during the first quarter of the year by 4.6%, 7.4%, 4.9%, 6.6%, and 1.9%, respectively. This is according to the Central Bureau of Statistics.

Adv. Israel Bachar, partner and Head of the Insolvency Group at Pearl Cohen Law Office (Photo: Tomer Shalom)

Word from the experts

Adv. Israel Bahar, partner and head of the Insolvency Group at Pearl Cohen Law Office, explains: "Small and medium-sized businesses are usually in greater danger than large companies at times like these.

The expectation is that they will be the first to fall, because any business shock, even the smallest one, destabilizes them and could cause them to collapse.

Large businesses, however, are not protected from danger only because of their size, and may also experience an economic crisis, which will force them to take streamlining measures, which in turn will also affect the circles that feed on them, such as suppliers and service providers.

The areas considered risk-oriented during times of crisis are what we perceive more as a 'luxury' rather than a necessity, such as clothing and footwear, restaurants, etc. However, these days, even areas that were considered relatively immune to shocks, such as real estate and high-tech, may experience difficulties, and we are already witnessing a significant halt in real estate transactions, large and small."

Adv. Shai Bar-Nir, partner and Head of the Insolvency Department at Firon Law Office, adds: "Over the past year, many Israeli companies have been required to begin repaying the funding given to them during the COVID-19 period, and as a result have encountered difficulties.

Some companies, for example, also received financing from nonbank credit companies, which in recent months have become more expensive due to rising interest rates, and their cash flow crunch has increased. Alongside it is the growing pressure from the various financing entities, which often leads business owners to the understanding that they will not be able to meet their obligations, and usually rightly so.

The companies that are approaching insolvency at this stage come from industries where relatively small profitability is being worked on, such as the food industry, and where every single percentage peeled from the company's profitability is liable to bring it down."

Adv. Shai Bar-Nir, partner and Head of the Insolvency Department at Firon Law Office (Photo: Studio Thomas)

What can still be done?

Eddie Kaufman, CPA, a veteran of the Tax Authority and owner of Kaufman & Co., CPA, details the way in which any business can examine whether it needs an expert in stabilizing the business: "A 'going concern' note is a way for the accountants of a company or business to warn against financial conduct whose continuation may lead to insolvency.

The first and simplest sign to identify before getting there is the VAT payments paid by the business. Thus, if they have become very low relative to the turnover of the business or do not leave enough surplus for things it needs, such as paying salaries, it is immediately possible to recognize that there is a problem that requires intervention.

Of course, there are exceptions that do not indicate the rule, such as a month in which the business replenished inventories ahead and purchased goods for the following months in one month, but accountants look for repeated and consistent signs."

And while the Israeli economy is waiting for data from the Insolvency Commissioner at the Ministry of Justice to examine the magnitude of the blow, some remind us that at this time the blow has not yet landed in full force.

Bahar: "It should be noted that at this time there is no sign of an uncontrollable drift of collapsing businesses. However, the period requires a 'route recalculation' for a significant number of businesses.

And if a business feels or recognizes that it is in a crisis environment, then it must take action to survive, even if they are aggressive."

Bar Nir: "More clients are calling for advice on coping with cash flow difficulties. Whether it is day-to-day legal conduct or forward-looking planning for the continuation of business conduct.

The common advice is not to wait until the last minute, because if there is a known expected cash flow pit, and there is no financial solution to overcome it, the business owner should consider using the legal tools provided by the Insolvency Law to avoid entering the pit that awaits him.

The snowball rolls quickly when you start violating obligations and not paying, and in most cases it cannot be stopped. Business owners also have responsibility for the company's entry into insolvency, and seeking legal advice from an expert in the field is one of the protections that the legislature gave business owners against claims of liability for the collapse of the company.

It should be noted that the cooperation of the business owner will usually lead to better results in terms of the debt repayment rate, than business owners who have abandoned the 'sinking ship'. As in life, running away from coping doesn't help but can only exacerbate the problem."

Eddie Kaufman, CPA, former Tax Authority and owner of Kaufman & Co. CPA (photo: courtesy of the subjects, courtesy of the subject)

  • money


  • bankruptcy
  • inflation
  • Insolvency

Source: walla

All business articles on 2023-06-07

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