The Covid-19 pandemic is the defining global crisis of our times and the greatest global humanitarian challenge that the world has faced since World War II. Along with an unprecedented human toll, the Covid-19 pandemic has triggered a deep economic crisis. Given the magnitude of potential unemployment, business failure and financial-system risk, the global economic impact could be broader than any that we have seen since the Great Depression of the 1930s.
In times of economic crises, insolvency systems in economies around the world undergo innovative reforms to curb or overcome the impact of crisis. The miseries of the Great Depression of the 1930s led to the first wave of major insolvency reforms. The major recession in the post-World War-II era, in the 1970s, ushered in an era of modernisation of insolvency laws, with the US inserting the ‘debtor in possession’ based business reorganisation mechanism in its bankruptcy law.
The Asian Financial Crisis of 1997 was another major stimulus for insolvency law reform, focusing mainly on reconstruction and turnaround of non-performing assets. The global crisis of 2008 triggered by the insolvency filing of Lehman Brothers sent economies around the world into a spin, compelling the policymakers to review the insolvency framework for financial institutions.
Covid-19 has also triggered a response from economies around the world. India has announced various measures, including a moratorium against filing petitions under the Insolvency and Bankruptcy Code, 2016, to deal with the economic impact of Covid-19.
This crisis is unique. While Covid-19 itself may be behind us soon, in its aftermath it will leave behind a world that will not be the same anymore. Countries will need to prepare for a new world order likely to emerge post-Covid-19, in which the forces of uninterrupted globalisation process will likely give way to the forces of protective nationalism and self-dependence.
The emerging world order will evince more intense geopolitical competition and tension amongst great powers—most notably between the US and China. This poses a grave risk to global supply chains, which could produce negative economic outcomes in many countries. A realignment of international groups and alliances is likely.
In this changing world order, of which we are already at the cusp, there will be greater scrutiny of foreign investment. These dynamics will compel India to take many quick decisions to adjust its foreign affairs and trade policies with changing times, resulting in a churn in the corporate and trading world. Indian companies will need to rapidly remodel to the shifting goal-posts. Many companies may be unable to adapt to the change and face the risk of insolvency.
Many US corporations have announced that they intend to pull out of China and set up shop in India. But the IBC, in its current form, based on a ‘creditor in control’ regime, could be a deterrent to attracting investment from the US and its ally countries seeking to shift to India. US corporations are accustomed to a ‘debtor in possession’ law.
They would find it hard to reconcile to a ‘credit in control’ regime under the IBC, which requires surrender of management to an insolvency professional and prohibits from bidding due to restrictions under Section 29A of the IBC.
Insolvency systems profoundly reflect the legal, historical, political and cultural context of countries that have developed them. There is no one-size-fits-all bankruptcy system. Traditionally, the insolvency world has been divided in ‘credit in control’ and ‘debtor in possession’ regime. The IBC should be amended to introduce ‘debtor in possession’ provisions, alongside the existing ‘credit in control’ provisions.
In case where there is no trust deficit between the creditor and the debtor, the creditor should be free to opt for the ‘debtor in possession’ regime. Singapore adopted this approach in its recent reforms. Other countries, too, are examining if both options should be available. If India wants to attract big US corporations to invest, it is important that the IBC reflects policy choices that are of universal appeal and are not representative of one form and style of restructuring, i.e. ‘credit in control’.
The Indian $150-billion stressed asset market offers an opportunity. But to take advantage of this opportunity, some bold and out-of-the-box policy decisions are needed. This is not the time to pluck the low-hanging fruit, but to mount the tree and grab the seemingly unreachable fruits. Climbing up will also provide a clearer view of the horizon and help make long-term policies. India should neither seek status quo ante to pre-lockdown stage nor seek continuity from the past.
India should catch the bull by the horns and launch the next-generation insolvency reforms that will propel the country amongst the top thinkers on the global insolvency table and establish her leadership on the subject. A leap of faith (read: bold reforms) will also induce fresh energy in the insolvency system and galvanise the stakeholders into action.
The author is managing partner, Kesar Dass, a full-service commercial and litigation law firm