The 1997 Asian crisis forced Indonesia to replace a 93-year-old relic with something resembling a modern bankruptcy code. India took another 20 years—and its own $191 billion bad-debt
crisis—to get to the same point.
With the country’s top court backing the new insolvency code, a warped power equation between debtors and creditors is heading for a big shift. It remains to be seen if this will allow lenders to take on powerful business families, or if they’ll have to satisfy themselves with wresting assets from troubled minnows.
Take the case of Innoventive Industries Ltd, a maker of precision tubes. The Supreme Court recently awarded ICICI Bank Ltd a small but important victory against the firm. Not only did the judges dismiss the contention that Innoventive was protected from creditors’ action by a Maharashtra state law, they even refused to accept that its former directors—their rights having been arrogated by a tribunal-appointed insolvency professional—had any business seeking justice in the name of the company.
With about $150 million in unpaid debt, Innoventive’s bankruptcy is a minor event. But the court’s pro-creditor stance has implications for larger insolvencies.
Essar Steel Ltd, which is controlled by the billionaire Ruia family, failed in July to stall proceedings against it by Standard Chartered Plc and State Bank of India. Already, an insolvency professional is trying to raise fresh loans to keep the furnaces warm, hardly an easy task for a firm with $5 billion to repay. Still, as the Indian steel industry’s sagging fortunes lift, potential bidders are emerging. The local media have mentioned everybody from Tata Steel Ltd to ArcelorMittal (which had its best six months in half a decade) among suitors.
Considering that the bankruptcy code allows only 270 days before mandatory liquidation, it helps everyone to know that the clock won’t keep getting reset. Even politically connected debtors will have to find better challenges than blaming the government for broken promises, or failed restructuring negotiations. The Supreme Court has made it clear that the only way the tribunal can reject a financial creditor’s bankruptcy petition is if the debtor can prove there was no default.
All this is a relief for Indian state-run lenders struggling to repair broken balance sheets. However, now that the pendulum is swinging away from debtors, how far will it go in the other direction?
It’s possible that lenders become so emboldened they pull the plug too early, without giving management a fair chance to work out a deal. That’s unlikely, though, considering that the bankruptcy tribunal has yet to demonstrate its efficiency. The first case it brought to a conclusion yielded a recovery rate of just 6% without liquidation.
The judiciary may be trying a bit too hard to make the new law an attractive option for all creditors. On Monday, the Supreme Court asked for an interim resolution plan for Jaypee Infratech Ltd, a real-estate developer, to be prepared in 45 days. Homebuyers who parted with their life savings but never got their apartments had halted the proceedings, demanding they be ranked alongside secured creditors.
A 4.5% decline in Jaypee’s shares shows shareholders do expect the court’s involvement to mean more money for homebuyers at their expense. No big deal, maybe, but it’s a little disconcerting that judges who ought to be interpreting the new law are busy implementing it. For the sake of more predictable outcomes, that’s best left to the tribunal.
Twenty years of reforms later, Indonesia’s civil-law-based legal system still doesn’t offer that predictability—so for fixed-income investors and Indonesian companies, Singapore is the preferred destination both to raise money and to welsh on debt. But although the city-state has a much more advanced insolvency regime, it had to tweak its laws in May to allow bankrupt oil-and-gas-linked firms to get fresh funding from lenders who insisted their claims take precedence over previous
This is something India needs to do, too. Otherwise, state-of-the-art steel plants will be needlessly mothballed.