The new government initiative for a law "to prevent 'coronavirus debtors' from becoming insolvent" is as brilliant as proposing a law to prevent the sick from dying or a law to prevent unrequited love. What else is there to say? When there is no treatment for an illness, perhaps we can simply enact a law against the disease. Well, it doesn’t work that way.
Insolvency is an economic situation, in which at its core, businesses or individuals cannot meet their liabilities due to a lack of economic resources, while around them are various creditors and third parties who are influenced by the situation - each party with its own interests.
Throughout history, legislators around the world have created legal frameworks of insolvency to allow debtors to start a new chapter in their lives, while at the same time protecting the legitimate interests of their creditors. Such creditors are often also businesses or people with families waiting for their money, and without being able to collect their debts from those debtors - they would collapse too.
Needless to say, insolvency proceedings are designed to create an environment to encourage recovery, a sort of 'hospital' for businesses that have the resources to continue existing, but require temporary protection from proceedings to get there. Such protection is granted by law together with balanced rules to protect the important interests of creditors and third parties, including the prevention of fraudulent conveyance or unjustifiable distribution of the debtor's resources. This special legal framework can be supportive for a business, if and when the economic conditions are suitable for it.
The 'coronavirus crisis' will not be solved through legal means, and wholesale stays of proceedings for whoever wants it will not solve any problem. On the contrary, such an idea means abandoning employees, suppliers, landlords and third parties and dragging them all, one after the other, into the legal system as if the court can provide wishful immunity for all.
There is nothing to welcome in tagging as 'debtors' or 'bankrupt' all those who set up good businesses and were only unable to survive a two month halt in income because of an unprecedented virus. Financial support would rescue such businesses from the crisis in a much more efficient way, without humiliating business owners, without the unpleasantness of being tagged, and without wasting the huge resources of wholesale insolvency proceedings, which will only generate more frustration and more insolvency proceedings of the creditors, and their creditors, and their families … a sad domino effect that no law can prevent.
Businesses that have been hit by the coronavirus crisis need capital support through genuine financial assistance and they are entitled to expect such economic assistance from the government, rather than talking about legislation that would not solve problems, but would only exaggerate them or sweep them under the carpet with other social problems. It is only regrettable that instead of concentrating efforts on presenting economic solutions for economic problems, the government is wasting precious time and valuable resources on legislative proposals that will refer into the judiciary system people and businesses who were not supposed to be there in the first place.
The author is the founder and managing partner at Ofer Shapira & Co. Advocates
Published by Globes, Israel business news - www.globes-online.com - on May 12, 2020
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