Globalization for Business Regulatory and Reputational Risks in a Globalized Marketplace

Liberalization & Globalization have accelerated the trend towards privatization resulting in more powers being transferred from the Government to the Regulatory bodies like the SEBI, IRDA, TRAI etc.

Phenomenal changes that have taken place in India in the last two decades have resulted in enormous growth in the commercial and industrial sectors. The policies of the Government have changed radically since 1991, the year in which the Indian economy was opened up for foreign investment in a big way. Privatization, liberalization

and globalization have provided an impetus to the opening up of the Indian economy. With such a surge in business opportunities, a healthy credit market is an essential requirement.

A facet of globalization is globalization of markets by increasing the size of the market which in turn has led to increased competition.

Internet has signaled the death of distance and it is no longer geography that determines the markets. Consumers can explore new markets and for better quality products which is made possible by the telecommunications revolution. Legal relations in the Globalized Economy will be regulated more by contractual terms than by public law.

Just as the advent of the industrial revolution required other institutions of the society to adapt themselves to the challenges, globalization raises new social, economic and legal issues. The impact of the breakdown of boundaries and cultural and linguistic barriers on market players is unprecedented.

In fact, globalization is not a recent phenomenon. In the history of mankind, three phases of globalization have been

identified. Globalization I (1492-1800) when Columbus set sail to discover the new world opening of trade between

the old world and the new world. A salient feature of Globalization I was muscle power dominated by the use

of wind and steam power and how best countries used them creatively. In Globalization I, nations were driven by

imperialistic or religious motives which shrank the world from large size to medium size.

Globalization II (1800-2000) shrank the world from medium size to small size and the agents of change were multinational corporations. MNCs went global for markets and labor and the first half of this era of global integration

was powered by falling transportation cost steam engines & railroads. And the second half was powered by falling telecommunication costs. Dynamic forces behind globalization II were the breakthrough in hardware from steam ships and railroads in the beginning to telephones and mainframe computers towards the end.

Globalization III from 2000-till now, shrank the world from small size to tiny flattened playing field caused by the digital revolution and convergence of computers and communication networks. This phase gave birth to new found power for individuals to collaborate and compete globally.

What does Globalization portend for Governments and

markets? Initially, it was the Government which was playing the regulator's role. But with the winds of liberalization sweeping across the globe and states withdrawing from the paternalistic mantle assumed during the collectivist era leaving the market forces to take control of our daily lives, courts and regulators must fill up the constitutional void created by vacation of the field by state agencies whose actions are subject to constitutional limitations.

Liberalization & Globalization have accelerated the trend towards privatization resulting in more powers being transferred from the Government to the Regulatory bodies like the SEBI, IRDA, TRAI etc.

The regulatory models currently governing the financial services are sector-specific and were evolved during the time when the predominant legislative trend was towards state control and state ownership. Each sector was regulated by a separate legal regime with a regulator in position. But with convergence facilitated by technology, the boundaries of regulatory turfs have been breached, rendering the

regulatory models currently governing the financial and other services which are sector specific and were evolved

during the time when the predominant legislative trend was towards state control and state ownership irrelevant.

In a Globalized economy, capital searches the globe for best returns. Bankruptcy Law reform in India is one such response to meet the challenges of Globalization. What necessitated Bankruptcy Law Reform? To answer that

query, we have to refer to the prevalent credit market in India prior to 2016. The credit market was operating

under a poor environment with Absence of Debt Financing, the Bond Market. The natural financing strategy in all countries is for large companies (e.g. the top 500 firms) to obtain all their debt financing from the bond market. This channel has been choked off in India, partly owing to the fact that corporate bond holders obtain particularly bad recovery rates under the present legal framework.

Secondly, there was misplaced emphasis on secured credit. At present, many lenders are comfortable giving loans only against (some) collateral. The concept of looking at the cash flows of a company and giving loans against that is absent. This has created an emphasis on debt financing for firms who have fixed assets.

Thirdly, SARFAESI, does not allow the firm to survive as

a going concern. When a firm has secured credit, and fails on its obligations, the present legal framework (SARFAESI) emphasises secured creditors taking control of the assets which were pledged to them. Thus, the present legal framework does not allow for the possibility of protecting the firm as a going concern while protecting the cash flows of secured creditors.

Fourthly, hurdles in current liquidation process constituted a stumbling block causing destruction of value of assets and the reasons were many.

1. Inordinate Delay

From the viewpoint of creditors, a good realization can generally be obtained if the firm is sold as a going concern. Hence, in liquidation, the realization is lower when there are delays. Hence, delays cause value destruction. Thus, achieving a high recovery rate is primarily about identifying and combating the sources of delay.

2. Sources Of Delay

(a) Lack of information about assets and liabilities of the debtor

There is asymmetry of information between creditors and debtors. Under the present arrangements, considerable time can be lost before all parties obtain this information. Disputes about these facts can take up years to resolve in court.

(b) The second important source of delays lies in the adjudicatory mechanisms. There is a multiplicity of fora giving rise to cross litigations.

(c) The third factor was the lack of mechanism

for early recognition of financial distress which is very important for timely resolution of insolvency. Present Net worth Erosion test prescribed under the SICA has proved to be a failure because by the time 51% of the net worth erosion takes place, the firm revival would have become impossible.

(d) Fourthly provisions

relating to insolvency and bankruptcy for Companies can be found in different statutes like the Sick Industrial Companies (Special Provisions) Act, 1985; the Recovery of Debt Due to Banks and Financial Institutions Act, 1993; the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002; the Companies Act, 2013. Provisions Relating to Insolvency of Individuals & Partnership Firms are found in the Presidency Towns Insolvency Act 1908 and the Provincial Insolvency Act 1920.

How does the Insolvency and Bankruptcy Code 2016 address these shortcomings?

Firstly, by creating dedicated tribunals for insolvency jurisdiction for corporate and partnerships and individuals and restricting the scope of judicial review of the decisions as to the solvency or otherwise of an enterprise which will be a market decision. Secondly, by prescribing strict timelines for the different stages of the proceedings; 180 days plus 90 days. Thirdly, by providing for early detection of sickness by emphasizing on inability to pay a debt rather

than on 51% erosion of net worth. Fourthly, by recognizing a new breed of insolvency professionals. Fifthly, by

recognizing Information Utilities which ensures symmetry of information between creditors and debtors and lastly,

by establishing a Robust Regulator viz. the Insolvency and Bankruptcy Board of India.

The Code like any Act of legislature cannot anticipate for all possible contingencies. How to deal with unpatterned situations which the Code does not address? "It is when the colors do not match, when the references in the index fail, when there is no decisive precedent, that the serious business of the judge begins," wrote Cardozo. Faced with an unpatterned situation where there is no law, no precedent, how does a judge decide? According to Cardozo the answer lies in the "Reading of life". The Reading of life lies in understanding the spirit of the law, according to Cardozo.

Every Act of legislature contains a body and a soul - the letter and the spirit - and it is the spirit of the law that guides the trajectory of the Act. The spirit of the Code is manifested in the long titles of the Code which can guide the judges to seek answers to hard cases. The long provides as follows-

"An Act to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a timebound manner for maximization of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto."

According to Ilbert, a statute has to be read as a whole because the language of one section may impact the construction of another. Thus the Code has to be read as a

whole document.

Finally, judges should rely on Mischief Rule of interpretation often referred to as the "rule in Heydon's Case" reported by Lord Coke and decided by the Barons of the Exchequer in the 16th century laid down the following rules which states as follows:

"That for the sure and true interpretation of all statutes in general, be they penal or beneficial, restrictive or enlarging of the common law; four things are to be considered –

1) What was the common law before the passing of the Act?
2) What was the mischief and defect for which the common law did not provide?
3) What remedy the Parliament hath resolved and appointed to cure the "disease of the Commonwealth"
4) The true reasons for the remedy.

And then the office of all the Judges is always to make such construction as shall suppress the mischief and advance the remedy."

Need For Cross-Border Insolvency

The Code did not address the problem of cross-border insolvency because the requisite ecosystem for servicing

cross-border insolvency cases was lacking under our legal framework. There were no dedicated bankruptcy tribunals,

resolution professionals were non-existent as well as information utilities. With all these requirements are now

available, we need a law to address cross-border issues.

Many of the debtors' assets may be located in foreign countries. So might be creditors who have security interest in these assets. If such assets of the corporate debtor and a personal guarantor are located in a country with which there is no bilateral agreement, and evidence or action relating to such assets is required in connection with such resolution process or liquidation proceeding, the RP or the Liquidator will be left helpless and the insolvency proceedings would be compromised. Ideally, adoption of the UNCITRAL Model Law will address all these cross-border problems.

The UNCITRAL MODEL LAW on Cross-Border insolvency permits courts in the enacting country to cooperate more effectively with foreign courts and foreign representatives involved in an insolvency matter; authorizes courts in the enacting country and persons administering insolvency proceedings in the enacting country to seek assistance abroad; provides for court jurisdiction and establishing rules for coordination where an insolvency proceeding in

the enacting country is taking place concurrently with an insolvency proceeding in a foreign country; and establishes rules for coordination of relief granted in the enacting country to assist two or more insolvency proceedings that may take place in foreign country regarding the same debtor.

To supplement the requirements of MODEL LAW, guidelines for communication and cooperation between courts in cross-border insolvency matters has been adopted by the Judicial Insolvency Network Conference in 2016. The said Guidelines have been adopted by England and Wales on 4 May 2017. Interesting part of the Guidelines is Annex A which relates to Guidelines on the Conduct of Joint Hearings by courts of different jurisdictions. These Guidelines originated in a conference held in Singapore in October 2016 which was attended by leading judges from a significant number of jurisdictions including the United Kingdom (Lady Justice Gloster), the United States, Canada, Australia and Hong Kong. These Guidelines build on earlier guidelines, including those issued by the American Law Institute and the International Insolvency Institute, and provide a modern framework for the efficient conduct of insolvency proceedings which involve the courts of more than one country. Enactment of a suitable cross-border law will strengthen the Insolvency and Bankruptcy Code 2016 and would place India in the Global Financial Market as an

important player.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.