Takata: Company Behind Airbag Crisis Files for Bankruptcy

Takata has literally been sued out of existence. The Japanese based company is filing for bankruptcy in Japan and the United States after a series of product liability suits left them $10 billion in debt. The 80 year old company was determined to be liable for faulty airbags. In one suit, Takata plead guilty to a criminal charge of wire fraud. A competitor, Key Safety Systems, purchased a few departments from Takata, but Takata retains most of its massive debt.

Why is Takata Taking Such a Hard Hit?

Normally, product recalls are cause for concern for a supplier like Takata, but such recalls are not usually fatal. In 2008, Takata and Honda issued a recall of affected vehicles, ultimately totaling 42 million vehicles. Takata airbags would rupture, spraying shrapnel and metal bits at the occupants. In the United States, the airbags were allegedly the cause of 11 deaths and 100 injuries. The defective airbags and recall was bad for Honda and Takata, but survivable for such large companies.

Shortly after though, the New York Times published a story claiming that Honda and Takata knew about the defects since 2004. Instead of ceasing production of the airbags and informing federal regulators, as required, the automakers ordered their engineers to destroy the data showing the faulty airbags. The subsequent Congressional investigations, criminal charges, and civil suits lead to $125 billion in damages and legal fees. Takata settled or paid off most of it debts, but it is still $10 billion in the hole.

If the allegations are true, and Takata has pleaded guilty to some of them, the massive bills are certainly warranted. Companies cannot knowingly release a defective product into the market, cause 11 deaths and a hundred injuries, and expect to walk away without consequences. The penalty is severe though, as these suits and investigations will likely mean the end of Takata itself. Takata employees who were not involved in the design of the faulty airbags don’t deserve to lose their jobs, but unless the bankruptcy can preserve Takata itself, there may be subsequent layoffs.

Could Bankruptcy Save Takata?

With a company of Takata’s size, laying off hundreds of employees is a very real possibility. Fortunately, U.S. bankruptcy is not always the corporate death sentence it appears to be. Bankruptcy does not always mean that creditors will come in and take everything. There are different types of bankruptcy in the United States. These “Chapters” – named after a specific Chapter of the Bankruptcy Code, range from the typical liquidation usually associated with bankruptcy (Chapter 7), repayment plans (Chapter 13) and restructuring (Chapter 11). Takata has taken advantage of Chapter 11 and theoretically should be able to preserve some of its assets.

Chapter 11 bankruptcy is typically used by businesses looking to recover from the bitter taste of bankruptcy. As stated, Chapter 11 is about restructuring the business so that it becomes profitable again. This usually involves selling off parts of the company that are losing money and then refocusing the business on products and services that will allow the company to pay off its remaining debts. In exchange, creditors are expected to forgive and write-off some of the debt owed. Chapter 11 is meant to salvage a failing business, although some Chapter 11 filings can be converted into a Chapter 7, whereby the assets are sold off and the company is basically dead.

Takata has already begun restructuring its debts. The sale of key assets to Key Safety Systems is akin to chopping off an arm to save the rest of the body. Of course, the Takada family remains in control of the company. It might seem unusual that the people who crashed the business would be allowed to remain in control. Unlike Chapter 7 and Chapter 13 bankruptcy, where a neutral trustee is appointed by the bankruptcy court, in Chapter 11 the debtor is allowed to retain control of its finances. This might be appalling to the creditors and victims, but allowing a debtor to remain in control of the company is often the incentive that debtors need to file for a Chapter 11 bankruptcy. This might not feel just, but the expediency of repaying people is more important in the law.