Bankruptcy signs during the moratorium period

newsletter 01/10/2020

On October 6, 2020, the moratorium on bankruptcy expires, which temporarily protected 525 thousand companies from creditors' claims, as well as 1,6 million sole entrepreneurs. The Ministry of Economic Development and Trade is discussing the possibility of extending it, but no decision has been made to date. The cancellation of the moratorium could lead to a significant increase in bankruptcies.

The number of arbitration cases in economic disputes increases significantly during the bankruptcy moratorium period. Other early warning sign is a negative dynamics of the authorized capital.

Picture 1. Warning signs of financial distress during the period of prohibition of bankruptcy claims. Source: globas.ru Picture 1. Warning signs of financial distress during the period of prohibition of bankruptcy claims. Source: globas.ru

Reasons of the negative dynamics of the authorized capital

The authorized capital is a guarantor of the interests of creditors, and its decrease must raise questions from potential partners of the company.

If the net assets value (difference between assets and liabilities) becomes less than the authorized capital, then the company is obliged to reduce the capital to the net assets value. Thus, the very fact of a decrease in the authorized capital for this reason may indicate an increase in obligations. In addition, the decrease in the authorized capital occurs as a result of the payment of shareholder income in case of net loss, or as a result of the buyback of own shares from the market in order to keep their market value.

If the company keeps the minimum amount of the authorized capital allowed by the law, which cannot be reduced, this indicates a small scale of business or a short period of the company's activity.

Reduction of the authorized capital is not widespread

During the restrictive measures from March to September 2020, 116 companies from those that fell under the moratorium reduced their authorized capital by a total of 16,1 billion RUB. Of these, 28% of firms are engaged in wholesale and retail trade, 18% are related to the activities of hotels and restaurants, 13% are transport companies.

Crisis is a driver

The financial model of many companies that fell under the moratorium does not imply high profitability. Companies will be able to overcome the fall in demand and restrictions related to the coronavirus if they receive financial support, including by increasing the authorized capital.

Picture 2. Absolute change in the authorized capital of companies being under the moratorium on bankruptcy, March – September 2020. Source: globas.ru Picture 2. Absolute change in the authorized capital of companies being under the moratorium on bankruptcy, March – September 2020. Source: globas.ru

Despite the difficult economic situation, from March to September 2020, the owners of 3,247 companies under a moratorium on bankruptcy