Domestic Economy

Surge in Bankruptcy Filings Sparks Fraud Debate

Surge in  Bankruptcy Filings Sparks Fraud Debate Surge in  Bankruptcy Filings Sparks Fraud Debate

More companies have gone bust in the past year than in the 29 years before it, a Central Bank of Iran report suggests.

Economic conditions are harsh and many companies seem to have hit rock bottom. Amid the hordes of companies on the verge of bankruptcy, there are some who are using the opportunity to shake off past debts and walk scot free.

The latter part of the situation even drew comments from Vice President Es’haq Jahangiri who said, “Some major bank debtors are filing for bankruptcy to avoid repaying their debt, according to a study by CBI,” Tasnim News Agency reported.

Pedram Soltani, deputy head of Iran’s Chamber of Commerce, Industries, Mines and Agriculture, told Mehr News Agency that in Iranian law, “a bankruptcy filing benefits the debtor. Their debt will be frozen until a court processes their filing, which usually takes four to five years.” During this time, they avoid accumulating more debt and in a country with high inflation those debts will be more easily payable in five years.

This week, media attention focused on fraudulent filings. Officials are giving various estimates of how many of the filed bankruptcies are fraudulent. However, Iran’s conditions must be accounted for.

“The economic situation is the reason behind the surge in bankruptcy filings,” says Razi Aqamiri, a member of Tehran’s Chamber of Commerce, Industries, Mines and Agriculture.

“What can one do other than defaulting on their debt to banks, when one has become indebted to banks or the government only because they cannot move money from overseas, due to sanctions, or the government has failed to repay its debt to them?”

Speaking on national TV on Sunday, Mozaffar Alikhani, technical deputy of Iran’s Chamber of Commerce, Industries, Mines and Agriculture said bankruptcies are a normal part of business cycle. He argues that the judiciary, in charge of processing bankruptcies, is doing its job and the number of fraudulent filings in the real economy is very low.

Other policymakers hold the opposite view. MP Mohammad Ali Pourmokhtar, who was speaking on the same program with Alikhani, said bankruptcies are, normal.

“They are part of the law and the judiciary deals with them. But the number of companies that filed for bankruptcy [recently] is illogical,” he said.

“Preliminary reports show most of these filings are unreal. It seems like 80% are fraudulent filings.”

What is most surprising is that “some of these companies are now claiming that they went bankrupt a decade ago.”

  Conflicting Numbers

How many companies went bust recently? According to Pourmokhtar, who cited a report by the central bank, there were 500 bankruptcy filings in the past 12 to 18 months, but the figure was 200 filings for the past 30 years.

Alikhani revised Pourmokhtar’s statement and said “300 of the total 500 filings [in the past three decades] happened in the past year or so”. He also criticized Pourmokhtar’s estimate of fraudulent behavior by companies and said: “We must consider that these bankruptcy figures come from surveying 85,000 manufacturing units in the country. If we carry out a census today to see how many of these are out of business, over 9,500 industrial plants are not using electricity anymore. Some state agencies say that over 16 million people are unemployed in Iran and of those, six million have university degrees.”

The upside of saying you have gone bust depends on how a business or person has borrowed money. If a company borrows legally, it puts up collateral to receive the loans. This collateral is usually valued by banks at half their market price.

So, companies may file for bankruptcy so they can sell the collateral and repay their debt. Though, in cases, that will not be enough.

However, there are people and companies who have and do take out loans from banks due to their strong ties with the state without putting up any collateral. For these people, filing for bankruptcy has much higher payback, if they persuade the court they have gone bust. One can do a lot with a five-year debt freeze.

Regardless of their number, fake bankruptcies shake business confidence and may lead to mistreatment of companies that are actually bust.

The Iranian economy is in peril, but corruption is a different matter, and it is very real in Iran.

“The country’s conditions have bankrupted many companies. But what we see as an issue is people who have borrowed from banks and are using loopholes in the commercial code to avoid or postpone repaying debt,” Kazem Palizdar, head of the Committee for Fighting Economic Crimes told national TV.

“The situation has become complex. We have seen cases of lawyers advertising that they could make successful bankruptcy filings.”

The officials concerned could easily plug the legal loopholes by reducing the processing period so fakes don’t exploit the situation and take the administration for a ride.