Liquidations surge as Covid, war cost SMEs dearly

Headwinds from two back-to-back major global crises – first the Covid-19 pandemic and then the Russia-Ukraine war – caused significant financial losses for companies operating in Bangladesh like elsewhere in the world, leading to a marked increase in liquidation petitions filed by firms – mostly small and medium ones – over the past three years.

According to the Registrar of Joint Stock Companies and Firms (RJSC), the number of company liquidations in the country has increased each year since the pandemic broke out worldwide in 2020, with 317 facing liquidation in the first nine months of the current fiscal year 2022-23.

The number was 301 in the entire past fiscal year.

The previous fiscal years had seen much smaller numbers of company liquidation – 173 in FY21, 93 in FY20, and 84 in FY19.

The companies that went into liquidation during the period were all small and medium enterprises and had a cumulative investment to the tune of Tk17,300 crore. Several foreign-owned companies also faced liquidation – a situation when firms shut operation and seek to sell off assets.

Infographic: TBS

Experts have attributed this trend of increasing business closures to the government's lack of proper monitoring of how registered companies are faring, limited support for small businesses, and a lack of initiatives to protect businesses.

To address this situation, they have suggested that the government and relevant stakeholders take effective steps to support small and medium-sized businesses, which are the backbone of the economy, like in developed countries.

They also emphasised the need for better government monitoring and support for businesses to avoid future closures.

The case of Arolet Bd Ltd

Sayed Ashrar Hossain, a businessman from Lalbagh, Dhaka, established a factory to manufacture PVC pipes, plastic drums, and water containers at Kaliakoir of Gazipur in 2016. To operate the factory and business, he registered a company called Arolet Bd Ltd with the RJSC.

The factory initially performed well, but in April 2018, it was severely damaged in a fire incident. Ashrar Hossain took out a bank loan to restart the business.

However, before the business could fully recover, the Covid-19 pandemic disrupted the factory's production operations and marketing in 2020. The factory had to be closed for six months during the pandemic, causing significant disruption to production and market share.

Sayed Ashrar Hossain told The Business Standard that around 250 workers were previously employed in the factory, with an additional 30 working in product marketing.

Despite resuming production with reduced workers at the end of 2020, the company continued to incur losses, he said, adding that the operating and production costs were barely covered by the monthly revenues.

In September 2021, the company took out a bank loan of Tk80 crore to resume full-scale operations. Unfortunately, after the Russia-Ukraine war outbreak last year, the import of raw materials for production came to a halt, causing the company's business to decline further, said Ashrar.

Eventually, Ashrar and his three siblings, who were directors of the company, decided to liquidate the company in September 2022. They had invested about Tk200 crore in the company, with 60% of it taken in loans from banks, he told TBS.

Ashrar said the family had to make the decision because if they continued with the business, they might have had to sell their houses in Dhaka to repay the bank loans. Currently, they run a family-run housing company.

In order to both form and liquidate a company, applications have to be made to the RJSC. According to the information provided by the RJSC, Arolet applied for voluntary liquidation and after completing all the procedures, the company was declared liquidated in November last year.

Rise in voluntary liquidations

According to data provided by the RJSC, 108 liquidation applications were filed in FY19, out of which final reports were submitted for 84 cases. Among these, 79 were voluntary liquidation applications. In FY20, 136 applications were filed, and final reports were submitted for 93 cases. Out of these, 91 were voluntary liquidation applications. In FY21, final reports were submitted for 143 out of 200 applications, with 173 of them being voluntary liquidation applications. In FY22, a total of 365 applications were filed, out of which 301 were voluntary liquidation applications. As for the current fiscal year, there have been 463 liquidation applications filed in the first nine months, with 324 of them being voluntary liquidation applications.

According to a source at the RJSC, 81 companies are currently in the process of voluntary liquidation, while the liquidation process of 11 more is ongoing by order of the High Court. Additionally, liquidation applications of 61 more companies are still pending for disposal in the Supreme Court.

One company that underwent voluntary liquidation in 2021 is Retouch Footwear Company Ltd. Parvez Hossain, the managing director, was appointed as the liquidator by the RJSC. 

Parvez cited the company's poor business condition as the reason for the liquidation.

Safeco Logistic and Management Company Ltd also underwent liquidation in 2021, with Shirazul Islam Khan, FCA, serving as the liquidator.

According to Shirazul, the foreign company was unable to conduct business in Bangladesh due to various reasons and thus applied for voluntary liquidation.

Among the other companies that are in the process of voluntary liquidation are the Chinese company Brilliance International Company Limited; Japanese company Mik Japan (BD) Company Limited; Chinese company PHFZ Company Limited; Public Clothing Company Private Limited; Poly Shipping Company Ltd; and Global Commercial Company Limited.

Does it matter or not?

Jashim Uddin, president of the Federation of Bangladesh Chambers of Commerce and Industry (FBCCI), acknowledged that some companies have closed in Bangladesh in line with the global trend of businesses facing various problems over the past three years.

However, he pointed out that among all the companies closed in the last five years, there were no large entities, and the closure of these institutions has had little impact on the economy.

Ahsan H Mansur, executive director of the Policy Research Institute, disagreed with Jashim Uddin's assessment, stating that the increasing trend of companies shutting down is not a good sign for the country's economy.

Such a high growth trend of company liquidation has not happened in any of Bangladesh's neighbouring countries, he added.

Sheikh Shoebul Alam, registrar at the Office of the Registrar of Joint Stock Companies and Firms, noted that the number of company registrations has significantly increased since March 2019, while the number of liquidations is relatively insignificant.

When asked about the reasons for the sharp rise in company liquidation over the past several years, he attributed it to the effects of Covid and the Ukraine war on ailing companies.

Who to blame?

A Harvard University Business Review study in December last year found that businesses around the world have suffered losses due to the Covid pandemic and the Russia-Ukraine war. However, in South Asian countries, businesses have struggled to recover from their losses due to a lack of proper government monitoring, inadequate business planning, and a lack of government initiatives to protect businesses.

In contrast, the Japanese government has taken steps to support struggling businesses. While 153 companies started liquidation proceedings last year, government initiatives revived 98 of these companies. The government formed a special committee to provide easy loans and tax-VAT waivers, and monitored businesses to prevent them from closing.

According to Barrister Tanjib-Ul Alam, a company law expert, directors of a company apply for voluntary liquidation when they are unable to manage it. Disputes about ownership or disagreements between shareholders can also lead to liquidation, which requires an application to the court.

Tanjib also noted that a small number of influential businessmen control many sectors of the country, often with links to the government, and smaller businesses are often disadvantaged as a result. This has led to the closure of many small and medium enterprises.

Commerce Minister Tipu Munshi countered these claims, stating that the government is providing support to the business community. The government provided stimulus loans to businesses during the pandemic, he said.

The commerce minister acknowledged that some businesses may still struggle. The government is working to identify struggling businesses and take appropriate measures to support them.