At a time when India was facing an NPA crisis, what came to the rescue? What had the potential to be a silent guardian and a dark knight? It may have been the IBC (Insolvency & Bankruptcy Code), which was said to have a cohesive framework to deal with debt. And it’s been hailed as a transformative reform. And since being implemented in 2016, what’s the good, the bad and the ugly been like? What needs to change?
According to Cyril Shroff, Managing Partner – Cyril Amarchand Mangaldas, “Some of the more positive aspects of the IBC include timelines becoming much faster than they were pre-IBC. What used to take a minimum of 7-8 years or longer takes about 2 years on average. The average recovery is higher at 140% of the liquidation value as opposed to cases, where recoveries have either been negligible or would have taken long. What’s also changed is that we have a market for corporate control. In the equity route, namely a hostile open offer, there’s practically a non-existent market for corporate control, which perpetuates the notion that once in control, always in control. The IBC changed that by going through the debt route and yielded the ability to throw out promoters with significant equity, losing them control of the company and assets. I think that’s had a deep psychological impact on borrowers and the credit market. So, the power equation has shifted from the debtors to the creditors, because India adopted the creditor control model. In a culture where there are entrenched founders and management, that was a necessary shock to the system that was required”.
According to James HM Sprayregen, Partner & Founder – Kirkland & Ellis LLP, “In the US, where there’s a Bankruptcy Reform Act 1978, the real value is the fact that there’s a system that actually changes behaviour at the inception of the investment process. There is confidence that there is a coherent and transparent process to deal with issues. If a deal doesn’t work out, the behaviour of the players, like promoters and creditors, is influenced by the knowledge of what happens if it gets to the insolvency proceeding stage; because of that, many proceedings are avoided and there’s a proactive mindset of dealing with problems before they get worse. I think that’s incredibly positive for the development of an economy”.
But, what are the creases that need to be ironed?
Shroff remarks, “In India, there are timelines that get unduly prolonged, especially when matters land up in litigation. Unlike in the US, where the bankruptcy court deals with it, in India, there’s the NCLT (National Company Law Tribunal) and a normal court system that sits above it. So, a lot of cases, particularly the bigger ones, always land up in courts, prolonging timelines. So, I don’t think we’ve figured out the balance between the work of the NCLT and judicial review. There’s, also, an infrastructure issue with the NCLT that leaves a lot to be desired and which impacts the efficiency of a potentially super-fast regime”.
“With the US Bankruptcy Code, there have been hundreds of amendments over the last 50 years or so, some of which were good and some of which were bad. So, that’s a cautionary tale, because when fixing something like that, it’s not always done correctly and there could be unintended consequences… As the Indian economy continues to grow at a turbocharged rate, there are going to be more cross-border issues, which should get addressed”, declares Sprayregen.
And what makes a good insolvency lawyer?
“A good insolvency lawyer needs commercial acumen, so knowledge of the law is a given. There’s a lot of stuff not found in a book, it’s about applying facts, being a creative thinker and having good instincts. One would need to be a generalist with specialist skills, because they’re dealing with the tail end of a company’s life, where there would be all sorts of problems; only a generalist could tie all the loose ends. Plus, one has to build consensus amongst various stakeholders, like the erstwhile management, counterparties to commercial contracts, lenders, employees and tax authorities. By definition, there’s a shortfall, so everyone is trying to maximize their recovery from a limited pool and that requires someone who can make tradeoffs and is a good negotiator”, states Shroff.
Sprayregen asserts, “I find that the instinct of younger lawyers is to try to get the risk level down to zero, which it can never be. It’s about identifying all the risks, dealing with them and making a judgement call as to how to move forward. One could paralyze themselves trying to get a risk level down to zero. One should get comfortable in a world of ambiguity and chaos, because one would not have all the answers and would still need to make decisions. EQ skills are important to deal with people and bring them together. And one could do an incredible amount by listening rather than just talking”.
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