OUT OF THE FRYING PAN, INTO THE FIRE
How India-Based Debtors Can Stand Up to Aggressive Global Lenders in a Post-COVID World?
The loan moratorium period set by the Reserve Bank of India in the wake of the COVID-19 pandemic was a much-needed source of relief for borrowers seeking to navigate the crisis with their assets intact. However, as both the Indian economy as well as markets around the world attempt to pivot back to the "normal" economic cycle, the expiration of loan moratoria will in turn lead to the calling in – and enforcement of – existing debt.
Of course, the unprecedented nature of these times will mean that there is likely to be more of a culture among banks to be more understanding and tolerant when it comes to the restructuring of debts, especially when interest rates on global money markets are so low. That said, some lenders, particularly those coming from outside India, won't be so forgiving.
In order to avoid any "out of the frying pan, into the fire" situation, debtors in India will need to understand the relevant risk exposure that comes with being on the wrong end of a cross-border debt enforcement campaign.
For Indian companies and individuals, borrowing from a major global institutional investor – such as a bank or private equity fund – could amplify these risks by scattering pressure points across borders.
Perhaps most importantly, debtors need to understand that there are still plenty of legal tools in the toolbox for them to use as leverage. Whether it's bargaining with the lender or fighting back against attacks, Indian debtors must understand what steps they can take to increase their leverage and fortify their defenses against financial giants in a global counteroffensive campaign.
USE MARKET UNCERTAINTY TO YOUR ADVANTAGE
In addition to the legal tools outlined below, one initial factor worth consideration is the inevitable confusion that is likely to ensue as markets attempt to return to normal. As previously mentioned, it is not unreasonable to assume a more lenient position amongst banks with regards to debt restructuring – especially as global interest rates remain quite low. For example, the pending expiration of the benchmark Libor at the end of 2021 is likely to trigger waves of market confusion amongst cross-border lenders and borrowers alike. While the more prudent strategy is to "hope for the best, expect the worst" from lender positions, debtors could potentially use this confusion as a point of leverage to further stave off creditor claims.
GET TO KNOW/EVALUATE/RECONSIDER YOUR WEAK SPOTS
When a debtor first enters into default, some lenders may choose to delay collection in exchange for the debtor's giving up certain rights or property in a forbearance agreement.
As a general rule, any debtor that finds themselves in a defensive position needs to take stock of their assets, identify vulnerable areas that could potentially be susceptible to seizure, and take proactive protective steps. One way to go about this is through the legitimate creation or restructuring of asset protection and holding structures – such as, for example, repatriating assets to an Offshore Asset Protection Trust (OAPT), which has more appeal to parties that wish to maintain an interest in the assets of the trust while protecting the interest from their creditors.
On the other hand, for debtors with any existing protective asset structures, "stress testing" – whereby experienced counsel evaluates the structures from a creditor's perspective to try and find vulnerabilities – is also worth significant consideration.
MAXIMIZE YOUR LEVERAGE WITHIN FORBEARANCE AGREEMENTS
When a debtor first enters into default, some lenders may choose to delay collection in exchange for the debtor's giving up certain rights or property in a forbearance agreement. Debtors should fight as hard for better terms in these agreements as they would for any other contract.
For instance, debtors should push to include "cure periods" in the event of further defaults, which oblige the lender to give both a written notice and a grace period. In addition, lenders will likely require a debtor to make periodic representations and warranties affirming the legal and commercial basis of the agreement. For debtors, it is better to make only repeated legal representations (e.g. affirming there are no ongoing litigation proceedings) rather than commercial ones (e.g. the status of the debtor's customers) to avoid giving too much away. Debtors should also fight for objective tests for how an event of default is determined, rather than subjective determinations made at the whim of the lender.
BUY AS MUCH TIME AS YOU CAN
For many debtors, oftentimes the real solution to their immediate problem is simply more time. Beyond a forbearance agreement, debtors can take other steps to delay a lender's decision to collect or sue, such as demanding time for a re-valuation of any pledged collateral. Given the amount of time passed since the loan agreement was first signed, the value of collateral will almost certainly have changed.
Owners of a debtor company can also sell the debtor company to a third party, which launches a new set of time-consuming legal processes for the creditor. This can also reinforce the concept of "corporate separateness" from the debtor. Finally, should the parent company or third party become a secured creditor to the debtor, this has the added effect of subordinating the original lender in the event of insolvency.
Know the difference between a default and "end of default." Use it to your advantage.
Beyond the above defensive steps, debtors may be able to find areas where they can go on the counteroffensive. In their zeal for collection, lenders may sometimes miss the difference between a default (an act that breaches the terms of a loan agreement) and an event of default (the point after a default when a lender can exercise their rights and remedies).
If a lender acts prior to an event of default, courts in some jurisdictions – such as the United Kingdom – might hold them liable for wrongful acceleration, potentially reversing their efforts to collect. Even better, if the original loan agreement contains a cured default provision, a savvy debtor might even be able to stop a lender after an event of default by curing the default at any point.
STAND UP TO OVERBEARING LENDERS
Lenders often become involved in the business operations of their debtors when working out distressed loans, but sometimes they may overstep by interfering with management decisions. This is a mistake debtors can leverage in both re-negotiations with the creditor as well as litigation.
In certain jurisdictions, including several U.S. states, courts have held banks liable for threatening to send a company into bankruptcy if it did not keep its bank-appointed CEO, or for making the funding of a construction project contingent on inspection on the progress of construction. In rare instances, a lender may exercise so much control that a court may find a fiduciary relationship to exist, thereby imposing on lenders far greater duties toward the debtor.
Leading institutional lenders are no strangers to aggressive enforcement measures and are willing to deploy all possible legal tools at their disposal in prosecuting against debtors. Pre-emptively preparing a defensive strategy that considers the tools these lenders are most likely to take – and how to respond – will require both an in-depth understanding of the relevant jurisdictions, as well as the ability to anticipate the mindset of an aggressive creditor.