By ASHER MEIR
Africa Israel Investments, run by Lev Leviev, is supposed to be paying bondholders about half a billion shekels imminently. The company claims that it is unable to pay the entire amount and has offered the creditors a delayed repayment schedule. The creditors in turn assert that the company has sufficient assets to pay the full amount, and negotiations have progressed from there.
This case and similar conflicts between creditors and debtors arouse interesting strategic questions and interesting ethical issues.
As long as the state of the firm is both stable and transparent, no real issues arise. Creditors are first in line. If the value of the company is sufficient to pay them, they get their cut and the owners get whatever is left; if not, the creditors get whatever is there.
When the business's state is dynamic, the situation is more interesting. Sometimes firms encounter liquidity crises. The value of the firm going forward is enough to pay creditors and leave something over, but if the company has to be liquidated right away, the owners will be left with nothing. The creditors may not really care if the company collapses as long as they get theirs.
In principle there is an ethical issue here. The damage to the owners from immediate liquidation may be quite disproportionate to the benefit to the creditors, and a compromise cannot always be reached. Perhaps the creditors should show a bit of forbearance.
In practice, the law steps in in these cases and allows a firm to seek protection from creditors if they can convince a judge that the firm should continue as a going concern. The problem is partially alleviated if the liquidation value is below the value of the debt; then the creditors themselves might want to reduce the pressure in hopes of ultimately obtaining the full debt.
Strategically and ethically, the most interesting case is when outsiders can't really know the situation of the company. This is the usual case, and it is the case with Africa Israel. If the company claims it can't make payments, creditors may worry it is a bluff meant to pressure them into extending additional credit. If it is a bluff, they should insist on payment; if it is sincere, being stubborn may cost them some of their loan.
I think an outright bluff of this kind to pressure creditors is not ethical. But in an uncertain situation it is reasonable to make a lenient interpretation of facts.
Evidently Africa Israel's creditors seem to agree that the company is using this acceptable tactic. While originally they made an external evaluation and asserted that the company can and should pay the whole debt, they quickly agreed to a compromise. Likewise, the company originally offered a comparatively small amount but quickly moved in the direction of the creditors.
The ethical considerations have a strategic dimension. Companies, and the managers who run them, would like to be in it for the long haul - and would suffer from a reputation of trying to deceive their creditors. But good managers start with a well-developed ethical instinct alongside sound strategic thinking.
ethics-at-work@besr.orgAsher Meir is research director at the Business Ethics Center of Jerusalem, an independent institute in the Jerusalem College of Technology (Machon Lev).
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