Does success fee affect the independence of insolvency professionals?

In Jayesh N. Sanghrajka, Erstwhile R.P. of Ariisto Developers Pvt. Ltd. v The Monitoring Agency nominated by the Committee of Creditors of Ariisto Developers Pvt. Ltd., the NCLAT decided regarding the validity of agreements that stipulate a “success fee” for insolvency professionals. The decision refers to inputs by Mr. Sumanth Batra (acting as Amicus Curiae) and is worth reading for its insights on the law dealing with the remuneration of insolvency professionals in India.

I quote two short extracts of the decision here:

Para 32:

In our view, if the Resolution Professional seeks to have success fee at the initial stage of CIRP, it would interfere with independence of Resolution Professional which can be at the cost of Corporate Debtor. If success fee is claimed when the Resolution Plan is going through or after the Resolution Plan is approved, it would be in the nature of gift or reward.

Para 38:

For the above reasons, we hold that ‘success fees’ which is more in the nature of contingency and speculative is not part of the provisions of the IBC and the Regulations and the same is not chargeable. Apart from this, even if it is to be said that it is chargeable, we find that in the present matter, the manner in which, it was last minute pushed at the time of approval of the Resolution Plan and the quantum are both improper and incorrect.

I agree with the idea behind this decision i.e. that the independence of the Resolution Professional is very important. I would even add that the appearance of independence is equally important. I also agree that approving something like this towards the end of the process looks more like a gift or a reward. So this looks like a great decision in this case. I however, do wonder if future cases (where the success fee is approved at the outset) could decide otherwise, and distinguish this decision on the facts. Also, on principle, I’m not sure that a success fee (that is decided upon early on) should necessarily affect the insolvency professional’s independence. As some insolvency professionals are sought after more than others, perhaps a success fee is the way to court these individuals.

An article in the Business Standard had reported in January 2020 that it had become common to see a success fee “in the range of 0.1 to 2 per cent of the winning bid amount after approved by the National Company Law Tribunal.” The article quoted two unnamed experts. One said: “It can take away the focus of the RP from the majority of his work, which is running the stressed company. More importantly, they can find the motivation to leak information and try to get someone to take it”. Whereas another says: “There is concern that by charging such fees, the RP might forego the concerns of creditors. But RP is only a conduit between the committee of creditors and an acquirer, and cannot make any decision”. I mostly agree with the second quote. As for the first quote, unethical practices like that will ultimately affect the outcome of the process when they are brought to the court’s attention. Besides, only those professionals with a strong reputation will be able to have such a success fee approved. Such individuals are likely to be incentivised to preserve their market reputation and thus avoid such unethical practices.

Corporate purpose, culture, and employees

I’ve been reading Liftoff by Eric Berger for a while now. It’s a great book but other commitments have interfered with my pleasure reading. Anyway towards the end of the book Berger discusses a paper by Zurbuchen (who later became the chief of science exploration at NASA) in an Aviation Week article published in 2010 which found that half of the best students from the University of Michigan’s graduate program in space engineering had ended up working for SpaceX rather than the “industry’s leading companies”. These former students said they took pay-cuts to work at SpaceX because they “believed in the mission”. I think this reflects a corporate mission or purpose that employees could be invested in. In fact, they could believe in it enough to take pay cuts. If the mission statement was mere window dressing, it would not impress employees enough to take pay cuts.

Company culture seems to be another factor that employees seem to value enough to take pay cuts for. A 2020 Glassdoor survey found that employees (particularly younger ones) valued culture above pay, both when applying for a job and when deciding to stay on in the firm. The same survey also found that a majority of employees wanted their firm to have a clear mission and purpose.

So having a positive company culture and a clear mission/ purpose is important. I’d say it is more important that any stated mission or even statements about firm culture need to be backed up with genuine will and action. This is because employees have enough first-hand information to not fall for empty virtue-signaling or “stakeholder-talk” as Bebchuk and Tallarita call it.

Diversity in space – what and why?

I have thought a lot about what we mean by the term diversity in the context of corporations and corporate governance. As I explain in my article Defining Diversity in Corporate Governance, although the dictionary meaning of diversity means both different views and different types of people, we seem to fixate on the latter. There may be good reason for this if we are intending to diversify corporations with the goal of making them more equal and fair. Even if this is our only goal, we should broaden our focus to more types of diverse people. At present we mostly seem to think of women and minority races. What about other types of diversity like immigrants, those living with and fighting a serious illness like cancer, etc? I’m thinking of these types of people after reading about the passenger list of the first spaceflight by SpaceX. Marina Koren writes in the Atlantic:

Isaacman is bringing with him three people who, not long ago, were complete strangers to him and one another. Hayley Arceneaux is a physician assistant who works with children with cancer at St. Jude Children’s Research Hospital. She had cancer as a child herself, and has said that she’d never meet NASA’s physical requirements for spacefarers because of a titanium rod in her leg. (Isaacman is raising money for the hospital, and wanted to bring one of its employees.) Sian Proctor is a geoscience professor who was once a finalist in NASA’s astronaut program; she says she felt like Harry Potter finding out he was a wizard when she found out she would be going to space. (She won an online competition that Isaacman had set up.) Chris Sembroski is a data engineer, an Iraq War veteran, and a self-described space nerd. (A friend of his won a raffle that Isaacman had organized and gave Sembroski his spot.) 

I think this list is amazing because it is bring the dream of space flight to so many different types of people. I think this is important at this time when spaceflight is still something special. As Koren writes later in the article:

Someday, there might indeed be a crew of pilot buddies, or maybe even a bachelor party. But on this first flight, the crew is a wholesome, starry-eyed bunch, imbued with a sense of awe at what they’re about to do. In many ways, their mission marks the beginning of a new era in American spaceflight.

So in a sense, the diverse crew “merits” inclusion in this first space flight because they are passionate about the new venture and what it could open up; which really is what this first spaceflight (for SpaceX) is all about. This takes me back to my arguments in the corporate governance space where I think people with different viewpoints “merit” inclusion because board decisions informed by many perspectives are likely to be better considered.

Homebuyers under the Indian Bankruptcy Code

I recently participated in the launch event of Jindal’s insolvency law working paper series. I serve on the editorial board of the series and look forward to reading papers coming out of that. If you are interested in submitting a paper, here are the submission guidelines. Today’s post is a quick summary of my comments (which you can listen to here) regarding Uday Khare’s paper on the homebuyer issue in Indian insolvency law; and some further thoughts.

For those outside India and not aware of the homebuyers problem, you can read Khare’s paper and/ or a short post about this in the IndiaCorpLaw Blog. My super-quick summary is that homebuyers (or people who had made payments to real estate developers for an apartment in the building to be constructed) did not find a place in the scheme of the IBC because they were neither financial creditors nor operational creditors. Judicial intervention followed by legislative amendments have now resulted in classifying homebuyers as financial creditors.

This is concerning because it opens the door for other stakeholders to ask to be classified as financial stakeholders too. In my comments, I referred to an article by Professor Virginia Torrie and Vern DaRe which outlines how Canadian courts have given certain social stakeholders ‘participatory rights’ in special situations (I also hosted Torrie on The Creditors Bargain Podcast to chat about this article). These right do not include voting rights. Instead, it seems to be a way for the court and other parties (debtor company and creditors) to understand the concerns of the stakeholder group in question and account for that in the plan. Much of this sound similar incorporating mediation into the insolvency resolution process which is in fact some I and Aparajita Kaul recommend in an article we have co-written. The solution to the homebuyers problem would have been to co-opt home-buyers into the process. (We will post the article soon – watch this space.) If the real estate companies wanted to continue in business they would have to attract new customers so it would be in their interest to agree on a resolution plan that addressed the concerns of homebuyers.

Khare also outlines how it skews incentives in the negotiations within the CIRP process. He also outlines the collective action problems faced by homebuyers – not enough incentive for each individual homebuyer to participate in the process. While we are all familiar with the creditors bargain theory and the more stakeholder-oriented ideas on two ends of the spectrum, I think that using Professor Casey’s idea (his article proposes the New Bargaining Theory which conceives of the bankruptcy process as a framework to facilitate renegotiation of contract terms) in helpful in this context. Giving the homebuyers voting rights has not allowed for such an effective framework by this measure.

Do watch the panel discussion on the link to listen to the entire discussion. This post only gives a brief summary of my comments.

What is the alternative to diversity quotas?

I have not been able to blog in a while which means that there are a few different ideas marinating in the pipeline. I’ll go with the last one first.

As many readers of this blog or of my other work will already know, I support diversity (including cognitive diversity) in corporations; but not mandatory quota laws. We have seen laws imposing quotas for the appointment of women (in rare cases it may include other categories like race) on the board of directors (in rare cases it may include management positions). I recently read an article which argues against quotas. The author professor Leanne Fuith argues that “the difficulty lies in attempting to legislate the hearts and minds of individuals in a society that has long viewed women as secondary.” She then refers to 1963 speech by Dr. Martin Luther King, Jr.:


Now the other myth that gets around is the idea that legislation cannot really solve the problem and that it has no great role to play in this period of social change because you’ve got to change the heart and you can’t change the heart through legislation. You can’t legislate morals. The job must be done through education and religion. Well, there’s half-truth involved here. Certainly, if the problem is to be solved then in the final sense, hearts must be changed. Religion and education must play a great role in changing
the heart. But we must go on to say that while it may be true that morality cannot be legislated, behavior can be regulated. It may be true that the law cannot change the heart but it can restrain the heartless. [Reference omitted.]

Fuith then draws upon this quote to argue that the hearts and minds of the people within corporations can be changed by education and engagement. I mostly agree with Fuith and think this is worth highlighting (as I do in my work-in-progress book project, The Corporate Diversity Jigsaw). I would also add that ‘education and engagement’ should include responsible media, academic, and policy discussions on diversity. Practices like emphasizing studies which only show correlation between diversity on the board and firm profits, while ignoring conflicting studies, focus on numbers rather than corporate efforts to address underlying problems should be discouraged. Amongst other things, this type of discourse encourages corporate short-termism on diversity.

The Chair – Quick takes (may include spoilers)

I saw a lot of twitter talk about The Chair on Netflix and decided to watch it. I know it is meant to be a commentary on the struggles of women in academia generally, and women of colour in academia more specifically. Yes there are very good and humorous depictions of some aspects of those issues (glass cliff, glass ceiling and additional barriers for coloured women, work-life balance for women with children, and the disparities with the experiences of men, etc). But in this post, I want to focus on two issues that have resonances for the corporate sector – first, and more briefly, how a lot of the issues faced by diverse people can be seen in the corporate context; and second, the issue of the faculty’s administration taking short term decisions to appease protestors even when the underlying cause of protest is not true.

As someone who researches on diversity in the corporate sector, the comment from the Korean American female department chair about how she thinks she hasn’t been handed an English department, but rather a ticking bomb reminds me of a number of glass cliff stories in corporations. The young black woman struggling to get the older white man to support her tenure application makes me think of all the great work highlighting the role of mentorship and networking to move up the corporate ladder.

Interestingly, the show depicts student protests against a white male professor for something that did not actually happen. The administration responds by simply making a termination offer (with a golden handshake settlement) to the professor in question. I found this interesting because there are parallels with how corporations have been reacting to social media pressure with knee-jerk reactions without attempting to address the real issues. I have done a series on corporate short-termism in response to social media pressure on this blog. Obviously such short-termism makes for some dark comedy in reel life, but not so great decision-making in reality.

Podcast episode on virtual assets and insolvency law and some additional thoughts

I recorded an episode with Myles Bayliss on the Creditors Bargain Podcast. We discussed his paper Virtual Assets, Real Insolvency issues. You can listen to it here.

Towards the end of the conversation, we raised the issue of how volatility of some virtual assets should be dealt with insolvency. I later remembered that I had a brief paragraph discussing this in my article commenting on Ruscoe and Moore v Cryptopia Limited (In Liquidation). I extract a paragraph of the comment below:

Although it has been determined that they have the legal status of property, the high volatility of cryptoassets would mean that processes like asset sales within a liquidation must be re-examined. The Mt. Gox liquidation, in particular, illustrates this issue. Creditors in that case suffered because the price of bitcoin had fallen during the sale (and continued to fall as a result of the sale). Eventually, creditors opted to be paid in Bitcoin after the process was converted into a rehabilitation. Although McDermott calls for a global solution to this issue, courts in different countries will simply have to respond to cases that come before them. [Footnotes omitted.]

On the volatility point, an Insol International special report has the following advice for insolvency professionals:

…the insolvency professional needs to be aware of the impact a large disposal of cryptocurrency will have on the value of the asset. Without a credible strategy in the disposal of the cryptocurrency, the insolvency professional’s actions could devalue the cryptoasset and this would be a breach of duty of the part of the insolvency professional who has a duty to consider the interests of the creditors as a whole. In order to avoid a situation where the actions of the insolvency professional are called into question by the creditors, it is advisable that any disposal or the decision to hold the cryptoasset is validated by an order of a Court with relevant jurisdiction.

On the point of multiple jurisdictions, I refer (in my case comment) to some interesting suggestions made by Haentjens, de Graaf and Kokorin:

A recent article has proposed that the amended version of the Hague Securities Convention should be used to determine the applicable property law and appropriate framework if an account holder’s claim for the retrieval of cryptoassets from a cryptoasset exchange is proprietary in nature. Under this framework, the contract between the account holder and the cryptocurrency exchange will be given priority. Where the contract does not provide for applicable law, the applicable law will be that of the place of incorporation of the cryptoasset exchange. [Footnotes omitted.]

There are more episodes to come on this issue so stay tuned to the Creditors Bargain Podcast.

The quota solution/problem

The SEC approved Nasdaq’s board quota (via listing rules) for a female candidate and another candidate who is either from an under-represented minority or lesbian, gay, bisexual, transgender or queer. Together with California’s board quota, this seems to be a step in the direction taken in many European countries.

I am going to refer to some passages from an interesting 2017 article which looked at the then divergent routes taken by Europe and US in this regard:

Recent empirical evidence…indicates that – although the gender-diversity shareholder resolutions brought forth in the US do indeed typically fail to be formally adopted – they nonetheless have a positive significant future influence on corporate board gender diversity (Marquardt and Wiedman 2016; Dobson and Rastad 2017). This influence may not be as blatant and headline grabbing as government mandated quotas, but it is in reality just as powerful. In short, failed gender-diversity resolutions, brought by shareholders in US companies, are in fact bringing about board gender diversity in liberal capitalist economies at about the same rate as mandated EU government quotas are in coordinated capitalist economies (Catalyst 2016; EUFactsheet 2016).

There is also a stigma against those appointed via quotas. Many (including me) have written about this but the same article cited above also makes this point:

Women will not get the respect they deserve from men and from other women because of the uncertainty of their qualifications: “The preliminary results [of a laboratory experiment] reveal that the quota significantly biases the evaluation of women’s performance even for women who are not direct beneficiaries of the quota” (Neschen 2016, p. 2).

Having pointed out these concerns re quotas (there are other problems too), one thing to be said in favour of both the California and Nasdaq quota requirements is that they go beyond gender and also make room for some other types of diversity. However, it still leaves out the idea of cognitive/ viewpoint diversity which is very important for corporate governance.

Defining diversity for firms (Olympics edition?)

Why is it so hard to define diversity? Why are we not able to identify all the facets and provide a neat matrix that companies are able to check off? The answer is that there are many avenues from which diverse thinking can come to and firms should be open to that. Andrew Hill wrote a piece recently in the Financial Times about sports people having trouble entering the workforce after retiring from the sport. He quotes one athlete saying that ‘it can be a surprise to realise that not everyone in the office is trying to “be the best they can be” every day’. The same athlete goes on to say that business has a get-the-job-done mindset which can chill creativity or collaboration. Hill goes on to talk about how retired athletes could be an asset in the workplace:

Retired athletes, even if they are late to the workplace and short on technical skills, have much to offer employers in terms of drive, resilience and analytical nous, quite apart from the reflected glory of their medals.

This again goes to the diverse thinking they can bring to teams within the firm. Yet, we don’t think of them as a category while thinking about diverse thinking, although we often mention experiential background. It might ultimately be best to leave the term open ended so that firms can be open to diverse thinking brought by different people. In an article that is now a few years old, I discuss our troubles with defining diversity in the corporate governance space. A newer version will form part of my book project.

Aims of insolvency law

What is the goal of insolvency law? This question came up recently at a INSOL Younger Academics catch-up. Apparently, there has been some discussion in this in the EU. That was interesting because I had been thinking of this from the perspective of the Insolvency and Bankruptcy Code in India when Dr. M.S. Sahoo (chair of the insolvency regulator in India) said that the only aim of the IBC was resolution of the corporate debtor, and not recovery. I thought that this cannot always be true. Sometimes, it maybe in the interests of all stakeholders to liquidate the firm. But when I dug backwards, Sahoo seems to have made a somewhat similar statement in in 2018. He said that the ‘objective [of IBC] is to keep the firm alive, to maximise the value of the asset and balance the interests of all stakeholders’ and ‘definitely not liquidation’.

Interestingly, even the focus on resolution has not played out in a way that allows debtors to propose a plan which restructures the firm but allows the debtor to stay in control. Renuka Sane observes that the process under the IBC has in effect, come to ‘require that resolution plans be exclusively in [the] form of bids to purchase the firm’. She further points out that ‘there is a general understanding among creditors that they should accept the highest bid rather than assess operational and management plans for firms’. So the IBC seems to have become (in practice) focused on one type of resolution alone.

With this background, I was curious about the EU discussion on this. Giulia Ballerini  pointed me to some Excellent material on this and I’m grateful to her.

In Chapter 4 of the JCOERE Project, the authors make note of the two goal – resolution (also called rehabilitation or rescue) and liquidation. They then note that there is some resistance to rescue amongst European commentators. One of their arguments against rescue seems to be that ‘a going concern sale can be achieved as easily through liquidation’. For example, Nicolaes Tollenar writes in his book that ‘the going concern value of the business can also be realised through liquidation’ [47].

I find such strong opposition to rescue curious; in the same way that I find strong promotion of rescue as the only goal. Perhaps the EU commentators were simply pushing back against similar regulatory focus on rescue? Indeed the authors of the JCOERE Project note that the EU preventive restructuring framework seems to have endorsed rescue. Rotaru notes that ‘the final Report of the European Law Institute on “Rescue of Business in Insolvency Law”, which laid the foundation of the Restructuring Directive, explicitly sets the protection of jobs and of debtors in some specific industries as legitimate objectives of the’ preventive proceedings.

I think such focus on resolution without allowing commercial factors like viability to determine the route taken is not productive and commentators are right to push back. At the same time, the benefits of resolution, where this is suitable, should not be ignored either. Sean Lee, from Singapore, seemed to echo a similar case specific view when the issue was discussed at the INSOL Younger academics catch-up. In any case, this debate in the EU is an interesting one and worth paying attention to in India as well.