Regulated by one’s competitors

There are many good arguments against professional licensing. One argument is that it can sometimes takes away a person’s livelihood. In a recent New Zealand High Court case, an insolvency professional, Mr. Grant was denied membership of Restructuring and Insolvency Turnaround Association New Zealand (RITANZ) which meant that as per the newly introduced Insolvency Practitioners Regulation Act 2019 (IPRA) he would be unable to practice in his chosen profession (i.e. that of a liquidator) of 14 years.

The IPRA has introduced a co-regulatory model under which accredited professional bodies are responsible for licensing. As per the IPRA, insolvency professionals should be a member of the New Zealand Institute of Chartered Accounts (NZICA). There are some exceptions to this requirement, one of which is that the person should be a member of a “recognised body”. RITANZ is a recognised body as per the IPRA and since Mr. Grant is not a chartered accountant, his only route to being licensed is through membership of RITANZ. Membership decisions at RITANZ are made by empanelled members of an elected board in accordance with procedures set out in Section 5 of the Association’s Rules. One of the rules under this section states that the applicant must, amongst other things, “be of good character (as determined by the Board in its absolute discretion)”. Also listed amongst the Association’s rules is one that states that the Board is “not required to give any reason for determining not to admit an applicant to membership”.

In other words, RITANZ can make membership decisions which might determine a person’s right to practice as an insolvency professional without needing to give any reasons. This is already problematic without adding the additional fact that the market for insolvency professionals in New Zealand is a small one. Thus, what we have is a small community of professionals well-known to each other making decisions about the ability of members’ of the community to practice the profession. The court recognises this latter point when it says, “the involvement of other industry professionals (even, in a literal sense, competitors) in the decision-making process is an inevitable consequence of the statutory regime” while discussing the IPRA as against the scheme of regulation for legal professionals in New Zealand. This comment is however supplemented by a footnote where the court notes that “in the present case, …only a minority of the Panel (Mr Fisk and Ms Johnstone) were themselves insolvency practitioners. Their evidence was that, professionally, their paths seldom crossed those of Mr Grant”.

Mr. Grant had a criminal history, by his own admission. As Justice Muir notes, “in summary the position is, therefore, that Mr Grant has a serious history for dishonesty offending, albeit that the last such offences occurred 27 years ago”. However, Mr. Grant has not re-offended since 1994 and the court makes much of presenting him “as something of a “poster boy” for reform”. I reproduce the court’s words regarding his reform story below:

In prison, he recommitted himself to earlier academic studies, enrolling with the Open Polytechnic. On release, he completed his Bachelor of Commerce Degree and Honours Degree in Economics. He then worked in the gas industry. In 2006, while a consultant to that industry, he accepted his first appointment as a liquidator. He then undertook extensive private study in respect of insolvency law and practice. That is the genesis of what is now Waterstone Insolvency – a firm of which he is the principal and sole director and which has now grown to in excess of 20 employees. Mr Grant has himself been appointed to over 800 insolvencies (i.e. liquidations, receiverships and voluntary administrations). His current appointments number approximately 200.15 He says that over the last three years he has been appointed in respect of approximately three per cent of all insolvency applications in New Zealand and approximately five per cent of all non-IRD appointments.

(Footnotes omitted.)

Now, getting back to the matter of his RITANZ membership application, the said application was made after the IPRA was introduced and subsequently rejected with no reasons given for the rejection. Mr Grant then commenced judicial review proceedings which were resolved by way of agreement on the part of RITANZ to conduct a rehearing of the application. As per the agreement Mr Grant could attend the rehearing in person with counsel and RITANZ also agreed to provide a written decision with reasons within 14 days. His application was however again declined after the rehearing. As the court notes, in the rehearing, there was a “significantly greater focus on Mr Grant’s past, including the genesis of his offending, aspects relating to his apprehension and plea, the extent of any amends etcetera, than on his subsequent history as a successful member of New Zealand’s commercial community”.

In response, Mr. Grant has brought the current application for judicial review arguing that (i) the decision was made in error of law, was (ii) unreasonable and unlawful because it took into consideration irrelevant matters and failed to adequately consider relevant matters, and (iii) that the decision involved an unfair process, apparent bias and predetermination. Elaborating on the third ground, Mr. Grant submitted that “the approach adopted in the decision was in each case to focus on the most negative aspects and most negative interpretation possible and to minimise the overwhelming body of evidence indicating reform and thus present good character”. He submitted that this was indicative of apparent bias, “the origins for which may ultimately lie in the fact that Mr Grant was in direct and sometimes adversarial competition with some of the decision makers – both those involved in the initial decision and those empanelled for the rehearing”.

The court concluded that the decision was indeed problematic on the first two grounds in Mr. Grant’s submissions. With respect to the third ground however, the court said that there was no evidence of bias in the decision-making. Ultimately, the court said that although the Panel’s decision was quashed it will not substitute its own decision and make an order admitting Mr Grant to membership of RITANZ. Mr. Grant’s application was remitted to RITANZ for reconsideration.

One aspect highlighted by this case (if not by the judgement) is that professional licencing and regulation is complicated by the fact that a professional is regulated by her competitors. Although Justice Muir says at one point in this judgement that he “would not have been prepared to quash the decision on the grounds of apparent bias arising out of the professional status of the Panel members” that is simply the limitation contained within the statute and within the principles of judicial review. As Justice Muir goes on to note, “the statutory regime precludes challenge on the grounds that those adjudicating the application (or at least some of them) may (in the broadest sense) be considered competitors in Mr. Grant”.

From a policy perspective, we need to need to reconsider whether professional licensing decisions should be made by the competitors of the person about whom the decision is made. Justice Muir seems to be aware of this issue when he says that the reconsideration of Mr. Grant’s decision by RITANZ “may well be a case where the Board would benefit from the appointment of senior counsel assisting”. Justice Muir further seems to be conscious of the adverse impact of a delayed decision in this case. He notes that “Mr Grant is currently unable to accept further professional appointments” and “within 10 months he will not be able to continue to act in respect of existing appointments”. This is exactly the kind of case that should make us carefully weigh the benefits versus harm of professional licensing regimes.

Oppression remedy meets disputed debt

An interesting matter came up in Vance and Millard as trustees of the Orana Trust v Vey Group Ltd and Fugle [2020] NZHC 2592.

Bringing proceedings under the oppression remedy (s 174 of the Companies Act, 1993) cannot be used as a debt recovery proceeding, claimed one of the parties in this case. While the court agreed with this basic premise, it noted that the resolution of disputes relating to the debt was would impact the valuation of shares where the remedy (under s 174) was for minority shareholders to be bought out. It notes as follows [19]:

… the valuation prepared for Mr Fugle on the basis of the 2019 financial accounts included the Orana debt. For the purposes of this valuation, the valuers discounted the Orana debt to $1,078,433 on the basis of evidence from the trustees in support of the s 174 application. In other words, including the Orana debt as a liability has reduced the net asset value of the company and, in turn, the value of the minority shareholding in Vey. This confirms the view taken in the High Court and the Court of Appeal that a buy-out of the minority shareholding will not be achievable on a fair basis without resolution of the Orana debt. (Emphasis mine.)

The cat lives (Metlifecare takeover)

I had blogged a few months back about Asia Pacific trying to use the MAC clause to get out of an agreement to buy shares in Metlifecare (Shrodinger’s arrangement). As it turns out, a new agreement was entered into and approved by the court. Some interesting arguments regarding the role of hedge funds came up in litigation regarding the new agreement.

Asia Pacific was set to acquire shares in Metlifecare at $7 per share as set out in a Scheme Implementation Agreement (SIA) prior to the onset of Covid19 and its consequent impact of the economy. Asia Pacific had attempted to use  the MAC clause in the SIA to terminate the agreement. While this matter was still being litigated, Asia Pacific made a new non-binding offer which offered $6 per share. A revised SIA indicating the new offer price was entered into. The earlier litigation was settled as a condition of entering into the new SIA. A shareholders meeting to consider and vote on the new SIA was then convened. The new offer price was still kosher as per the independent audit report which set the price of Metlifecare’s shares in the range between $5.80 and $6.90 per share. The resolution was passed with 90.7% majority and Metlifecare sought the High Court’s approval of the scheme as required by s 236 of the Companies Act.

One shareholder, ResIL opposed the resolution. Although ResIL later withdrew its application, Lang J noted that the court must still consider it while determining the application to approve the SIA. One of the things considered was the Takeover Panel’s no-objection statement. As Lang J said, “the fact that …the Takeovers Panel has independently concluded that Metlifecare provided shareholders with sufficient material to satisfy Takeover Code requirements is obviously a matter of considerable significance in the present context”.

However, ResIl’s arguments with respect to the role played by hedge funds are interesting. REsIl argued that the hedge funds and other foreign institutional investors had acquired shares in Metlifecare after the first Asia Pacific offer was made and were now pressuring the board to accept the offer on the table so as to make a profit on the shares they had acquired. ResIl argued that shareholders were not informed of the role of hedge funds in pressuring the board to agree to the new offer price until the meeting where the resolution to approve the Scheme was put.

The Metlifecare board’s version of what transpired is that although the board came under pressure to enter into the replacement transaction with Asia Pacific from at least one hedge fund shareholder, the hedge funds did not force it to enter into the new SIA. “Rather, the directors unanimously considered it was in the interests of shareholders to consider the new proposal and made the decision to enter into the new SIA for that reason”.

Lang J went on to say that the Scheme booklet (provided to shareholders) need not have contained the level of detail about institutional investors as argued by ResIl. He further says [at 36 and 37]:

It was for shareholders to decide whether to vote for or against the scheme based on their own circumstances and not those of other shareholders. As Mr Arthur points out on Metlifecare’s behalf, in any publicly listed company the aims and aspirations of shareholders will inevitably differ. Some will acquire shares with a view to realising capital gains and/or dividends over time whilst others will hope to sell within the short to medium term. The respective positions of these two groups may be irreconcilable where, as here, an offer is made for the acquisition of all the shares in a company for a cash consideration.

Metlifecare’s shareholders therefore needed to consider their own positions when deciding whether to vote in favour or against the resolution. They did not need to know the identity of the institutional shareholders who had already indicated their support for the scheme or why those shareholders held that view. If individual shareholders were interested in those issues they were free to attend the meeting and to ask questions about them.

ResIl had also “whether the scheme was such that an intelligent and honest business person might reasonably approve it”. The court noted that “an intelligent business person would also have been aware that rejection of the scheme would inevitably cause the company’s share price to fall sharply in the short and medium term”. The price could even fall lower than the share price prior to Asia Pacific’s second offer because the institutional investors would have sold their shares once it was clear that the scheme would fail.

Ironically, as the court pointed out, ResIl was itself not a long term shareholder and had only bought the shares after Asia Pacific’s offer had been announced.

Does litigation funding amount to abuse of process if the funder has an ulterior motive?

The High Court of New Zealand recently considered this question in Cain v Mettrick [2020] NZHC 2125. The question is an important one in New Zealand where the market for litigation funding is still developing (less than 10 litigation funding companies are currently in play). It is also important because the Law Commission in New Zealand is presently undertaking a review of class actions and litigation funding. Although Cain v Mettrick involves litigation funding in the context of liquidation which is less controversial, the allegations of ulterior motive add an interesting layer of complication and the decision of the High Court offers clarity even though it held that there was no evidence to support the alleged ulterior motive.

As a preliminary step, the Court referred to Waterhouse v Contractors Bonding Ltd [2013] NZSC 89 to note the recognised categories of case that will attract the court’s intervention on abuse of process grounds:

(a) proceedings which involve a deception on the court, or those which are fictitious or constitute a mere sham;

(b) proceedings where the process of the court is not being fairly or honestly used but is employed for some ulterior or improper purpose or in an improper way;

(c) proceedings which are manifestly groundless or without foundation or which serve no useful purpose; and

(d) multiple or successive proceedings which cause or are likely to cause improper vexation or oppression.

The argument in this case was that Mr Meehan (the person in control of the litigation funding entity) has a vendetta against Mr Boult (one of the defendants) and intended to interfere in his election as Mayor for a collateral purpose of influencing Council activity in respect to Mr Meehan’s commercial interests. [21]. Amongst the evidence provided in this regard, mostly consisting of affidavits and depositions, Mr Boult deposed that Winton (company controlled by Mr. Meehan and funding the litigation) has never before been a litigation funder in any normal sense and the funding of this litigation is inconsistent with its business model. [23]. On the other hand, it was argued on behalf of Mr. Meehan that Winton was funding the litigation for a commercial return on its investment. Although Winton had not previously been involved in litigation funding of this kind, it had looked into such opportunities. [28] Mr. Meehan further argued that the funding agreement was entered into by another entity, PLF, to provide anonymity for Winton since he wanted to avoid allegations of favoured treatment by the Council for Winton-related entities and equally to prevent Mr Boult (who was also the mayor of the Queenstown Lakes District Council) negatively influencing consent applications to the Council. [30].

Discussing when an ulterior motive amounted to abuse of process, the court stated that the “plaintiff’s purpose must be shown to be “not that which the law by granting a remedy offers to fulfil, but one which the law does not recognise as a legitimate use of the remedy sought”.” Further, it stated that “where a plaintiff has multiple purposes for bringing an action, including some that might be condemned as a collateral advantage, it will be sufficient that one of those purposes is legitimate”. [31] Citing Broxton v McClelland [1995] EMLR 485, the court stated that “where a plaintiff’s action is funded, the funder’s purposes and motivations will not be attributed to the plaintiff”. [31]. In the current case, the court held that the liquidators were pursuing genuine causes of action to obtain compensation on behalf of the companies in question. [33]. It further held as follows:

They do not seek any advantage beyond that which the law allows. There is no criticism of the manner the proceeding has been conducted (apart from the issue of funding). The Liquidators and PLF have a common commercial interest in seeking the payment of compensation. It is from the success of the proceeding, or a settlement, that PLF will receive the Services Fee. [33]

About Mr. Meehan’s motives, the court simply held that his purpose in funding this litigation was to make a profit. Even if Mr Meehan had “a subordinate purpose that may be achieved as a by-product of the litigation, that is not an abuse of process, nor can such purpose be imputed to the Liquidators to taint this proceeding”. [34]

Shrodinger’s Arrangement

There’s been a lot written about MAC clauses in M&A in the recent days. Essentially, one of the parties to a merger agreement aims to walk away citing the Covid-19 pandemic and its impacts triggering the MAC (material adverse change/ effect) clause. Whether the party is successful in walking away will depend both on how the MAC is drafted and on the interpretation by courts in each country.

Until a determination is made by the court do the two parties have an agreement or not?

In a recent case, Metlifecare Limited v Asia Pacific Village Group Limited [2020] NZHC 1184, the High Court of New Zealand  wrote [24]:

It follows that, as matters currently stand, one party contends the arrangement remains in existence and the other party denies that it is. The arrangement for which orders are sought may therefore still be in existence or it may not.

So, it appears that we have a Shrodinger’s arrangement. (My words, not Justice Lang’s!)

This case arose in the shadow of Asia Pacific attempting to terminate a Scheme Implementation Act (SIA) it had entered into with Metlifecare on the basis of the emergence of Covid-19 constituting a MAC. (It also alleged that some acts of Metlifecare triggered another clause, the Prescribed Occurrences clause under the SIA.) On the other hand, Metlifecare initiated court proceedings seeking a declaration that the SIA remains in force (the termination litigation). While the termination litigation still pending, Metlifecare has now filed the instant application seeking directions under s 236(2) of the Companies Act, 1993 which deals with the court’s ability to make orders relating to approval of arrangements, amalgamations and compromises. Asia Pacific opposed this application.

As Justice Lang explains [20], “these provisions contemplate an applicant seeking approval for a scheme under Part 15 of the Act in two stages”. First, applications are made for initial orders under s 236(2) where “the applicant sets out the procedure it proposes to follow in calling a meeting of shareholders to consider and, if appropriate, approve the arrangement”. If the of shareholders approve the arrangement as required, “ the applicant applies for final orders under s 236(1) so the scheme can be implemented”.

The current application for orders under s 236(2) is unusual because Metlifecare is seeking orders with respect to a Shrodinger’s arrangement.

Justice Lang notes that although the court’s powers under the provision are discretionary, the parties usually are “willing participants” to the arrangement. Justice Lang found that the uncertainty of the arrangement in this situation was fatal to the application. Further, since the termination litigation was not likely to be decided before January 2021, there seemed to be no reason for Metlifecare to obtain approval from its shareholders about the possible arrangement with Asia Pacific. Instead, Metlifecare is probably aiming to get shareholder approval for the termination litigation. That issue, Justice Lang holds [at 33], is not within the scope of s 236(2). Instead, Metlifecare could simply obtain shareholder approval at a general meeting. Thus, Metlifecare’s application was dismissed.

Although the court did not dwell on it, it is interesting to note that one of Asia Pacific’s concerns [16] about this application was that the market would interpret the making of initial orders as the Court giving its endorsement to both the scheme and the litigation.

My interview on quotas for women on boards and an incidental viewpoint diversity argument

In my writing, I have taken the view that quotas for women on corporate boards will not necessarily result in gender equality in companies. A quota is a cosmetic fix at the top. Unless there is willingness to go and fix the various reasons for women not progressing up the pipeline, we will not fix underlying issues.

In a recent article for the Conversation (New Zealand edition), I wrote that “quotas, whether imposed by governments or market players, tend to result in companies appointing diverse people from within their own networks”. I have instead argued in favour of viewpoint diversity on boards, to strengthen board decision-making. To have people with different viewpoints, and the willingness to challenge the CEO when required, boards should be looking to appoint outside existing networks.

I was interviewed by an RNZ podcast, The Detail, based on my article in the Conversation (referred to above). The podcast aired this morning and also included an interview with Rob Campbell, a prominent businessman in New Zealand. You can catch the podcast here.

I have to add here that the article accompanying the podcast does not make any mention of me or my argument. I wasn’t sure if this meant that they are against highlighting women interviewees or against highlighting an unpopular view.

When I wrote to the person who interviewed me, he said that the written piece is a teaser for the podcast and that the “written pieces focus on ONE talent and ONE angle to the story, and due to word limits this tends to be the simplest and most easily digestible angle, as the point of it is to encourage people who read the piece to listen to the more nuanced podcast”. However, he has accepted that I’m “quite right” that my “name should be in there as part of this preview”. He says it is an oversight and RNZ will amend it.

This has allowed me to stress that viewpoint diversity is important, albeit in a different context. The article accompanying the podcast would have read much better had it been balanced and mentioned both views and both interviewees.

Update: Three hours after posting this blog on social media, RNZ has mentioned me, my argument and my institution at the bottom of the written piece accompanying the podcast. But they call me Ms. Kamalnath instead of Dr. Kamalnath. I welcome the acknowledgement of my contribution, but was hoping that it would be a respectful one.

Look if you had one shot or one opportunity to seize everything you ever wanted in one moment would you capture it or just let it slip?

The New Zealand Court of Appeal in 90 Nine Ltd v Luxury Rentals NZ Ltd [2019] NZCA 424 dealt with the issue of whether liquidation was proportional remedy to unpaid debts especially in cases where amount of indebtedness is not very significant.

In this case, 90 Nine Ltd (appellant) had issued a statutory demand to Luxury Rentals NZ Limited (respondent) for a debt of $1000. Having received no response, as outlined in the statutory demand process, 90 Nine Ltd sought an order for liquidation. The High Court dismissed the application saying that the liquidation order was disproportionate to the indebtedness and that 90 Nine Ltd should take other steps to recover the debt.

On appeal, The NZCA was largely sympathetic with the appellant’s argument that creditors ought to have a clear understanding about how they may enforce debts and the threshold quantum that is appropriate. It noted at [22]:

We consider that there is considerable merit in Mr Norling’s point that the utility of the statutory demand process would be substantially undermined if corporate debtors perceived that such demands could be ignored with comparative impunity. Hence creditors must have available to them the ability to obtain liquidation orders when there is a failure to respond to a demand. Consequently we consider that the issue of proportionality between the amount of indebtedness and the deployment of an application to wind up a debtor company is one for the creditor and liquidator. Absent the prospect of an abuse of the court’s processes, the issue of proportionality is not a relevant consideration for the court in the determination of the application. As the Associate Judge relied on this factor in dismissing the application and because we do not consider there is evidence that this proceeding is an abuse of the court’s processes, the appeal must be allowed.

The court also discussed the nature of the court’s discretion under s 241(4) and expressed agreement with the decision in Commissioner of Inland Revenue v Newmarket Trustees Ltd  [2012] NZCA 351. As Baragwanath J pithily said in that case, “… the insolvency policy of the companies legislation is clear: (1) insolvency results in winding up; and (2) insolvency is proved by inability to establish a substantial dispute over the debt or by way of cross-claim.”. The court also endorsed the approach taken in Feltex Carpets Ltd v N & I Investments Ltd (2006) 3 NZCCLR 714 (HC) which stated that “even if it is unlikely that there will be any assets available for distribution to unsecured creditors, the Court regards the liquidator as serving useful functions in the investigation of the company’s affairs and acting as a guardian of the interests of unsecured creditors.”

The decision takes on new significance in light of the COVID-19 related insolvency reforms introduced in New Zealand and elsewhere. An important feature of these reforms has been increasing the minimum amount of debt being required for a statutory demand to be made. Clearly, it is for the government and not the court to increase the threshold amount for a statutory demand.

Pots of gold

The Supreme Court of Canada, in 9354-9186 Québec inc. v.  Callidus Capital Corp., 2020 SCC 10, has provided useful guidance on interim finance and third-party litigation funding in the context of insolvency rescue procedures. Although the decision interprets the Companies’ Creditors Arrangement Act (CCAA), the decision will be useful guidance to courts in Australia and New Zealand, while dealing with corporate insolvency cases with a view to promote rescue and restructuring.

The decision holds that litigation funding agreements may be one form of interim financing [109]. Quoting Professor Janis Sarra, the court defines interim finance as “the working capital that the debtor corporation requires in order to keep operating during restructuring proceedings, as well as to the financing to pay the costs of the workout process”. [85]

Further, the court offered a helpful pointer to distinguish between a litigation funding agreement and a plan of arrangement. This distinction is significant “because, if the agreement was in fact a plan, it would have had to be put to a creditors’ vote”. [99]

Wagner C.J and Moldaver J, writing for the court, explain the difference between the two at [102]:

For our purposes, it is sufficient to conclude that plans of arrangement require at least some compromise of creditors’ rights. It follows that a third party litigation funding agreement aimed at extending financing to a debtor company to realize on the value of a litigation asset does not necessarily constitute a plan of arrangement. We would leave it to supervising judges to determine whether, in the particular circumstances of the case before them, a particular third party litigation funding agreement contains terms that effectively convert it into a plan of arrangement. So long as the agreement does not contain such terms, it may be approved as interim financing pursuant to s. 11.2 of the CCAA.

Comparing a litigation claim to a “pot of gold” (borrowing the phrase from the Court of Appeal in its decision in Re Crystallex, 2012 ONCA 404, 293 O.A.C. 102), the court further explains at [111]:

Plans of arrangement determine how to distribute that pot. They do not generally determine what a debtor company should do to fill it. The fact that the creditors may walk away with more or less money at the end of the day does not change the nature or existence of their rights to access the pot once it is filled, nor can it be said to “compromise” those rights. When the “pot of gold” is secure — that is, in the event of any litigation or settlement — the net funds will be distributed to the creditors.

Courts in Australia and New Zealand will be dealing companies attempting to restructure under the Voluntary Administration process (or under New Zealand’s new Business Debt Hibernation process). As Scot Atkins has noted, Australian courts could consider allowing interim debt financing while exercising their discretionary power under s 447A of the Corporations Act. Third party litigation funding has already been used in Australia and to a lesser extent in New Zealand in the context of insolvency processes. Interim debt financing could be another handy tool for the COVID related insolvencies that courts will have to deal with very soon. Distinguishing such proposals from a formal plan will be important too. Canada’s Callidus Capital case will offer useful guidance in making these determinations.

Don’t suspend IBC filings!

I recently wrote about how India, like many other countries, has raised the threshold requirements for creditors to initiate insolvency proceedings against companies, and more recently decided to suspend the insolvency resolution process under the new Insolvency and Bankruptcy Code (IBC) for a period of 6 months to 1 year. I had argued there that any alternative like prepacks should be available in addition to the existing resolution process under the IBC. It would seem obvious that the need of the hour, since companies are affected by the COVID crisis, is a reorganization and rescue mechanism; and thus counter-intuitive to suspend the available mechanism.

I argued that although the increased number of IBC filings might clog the system, the answer was not to suspend the resolution process itself but to channel some of the cases to alternative channels like a prepack mechanism.

On further investigation into the functioning of the NCLTs during the COVID crisis, it becomes apparent that the situation is quite different from courts in other countries which have started functioning online. In India, courts have gone online but are functioning on an “urgent-only” model. The tribunals where IBC cases are heard, the NCLTs and NCLATs on the other hand, announced in March that its  benches would be shut down till the end of the month. The NCLTs were allowing email submissions regarding urgent matters but no video conferencing was mentioned. Thus, it seems that the tribunals were simply not equipped with video conferencing facilities to start hearing matters online. This is the practical reality against which India’s decision to suspend IBC filings should be understood.

What are the options in the absence of video conferencing? One option would be for the NCLTs to allow email filings and where appropriate, recommend that a mediator be appointed to facilitate negotiations. IBC procedures in India are heavily litigated and appointment of a mediator may instil a more cooperative attitude amongst parties. (Colombia has recently introduced the appointment of a mediator for insolvencies as part of the COVID-19 measures, so this is worth looking into by Indian lawmakers.) Prepacks could be an additional option available to parties.

While all these options will certainly help, another important issue in India is the availability of financing. As Pooja Mahajan noted, the market is not right for financing and that many cases would result in liquidation which would indeed not be desirable. New Zealand’s Business Debt Hibernation (BDH) might be an option worth looking into. A summary of the proposed BDH is below:

As the term suggests this regime will provide a moratorium on enforcement of debts.

To enter this regime, the first step is for directors to have to meet a certain threshold. This threshold is yet to be provided but the government has said it will involve solvency prior to COVID-19, prospects of trading returning to normal in the future and the hibernation being in the best interests of the company and creditors.

Step 2 is to notify their creditors that they will seek a six-month moratorium. This notice will immediately trigger a month-long moratorium for pre-existing debts.

Step 3 brings creditors to the table (electronically of course). If at least 50% of the creditors agree, the moratorium will be extended for another six-month period. Creditors are also able to impose some conditions and if they do, the moratorium will be subject to those conditions being met. This moratorium would be binding on all creditors except employees. If the 50% vote cannot be secured, the BDH will not be available to the company. However, other options like creditors’ compromise, voluntary arrangement and liquidation are still open to the company.

Once a company has availed itself of the BDH regime, to further facilitate its business continuity, the government has proposed that any further payments, or dispositions of property, made by the company to third party creditors would be exempt from the voidable transactions regime. This exemption would only be available where the transactions are entered into in good faith by both parties, are conducted at arms-length, and without an intent to deprive existing creditors.

(For a full discussion of New Zealand’s proposed insolvency measures, see here.)

Although New Zealand has not proposed a suspension of other available restructuring options like India proposed to do, making a similar debt hibernation model available to companies, while the IBC stands suspended, would be another option that India could add to its tool box. Since creditors have a role to play in the BDH process, it may also eventually lead to a prepack.

All of the alternatives proposed here are meant to be alternatives for companies to choose from. Insolvency professionals have played a very important role in India since the introduction of the IBC and their role will again be important for the proposed options to work.






What is essential? (A tale of restaurants and auditors)

As many countries have imposed shut downs/ lock downs to prevent the spread of COVID-19, they have all allowed “essential services” to continue working. It is a no-brainer that medical services are essential in the middle of a pandemic. Since people have to eat, it also not controversial that groceries have also been deemed as essential services.

Beyond this, there have been a few amusing (or annoying) policy choices in what services the government of each country chose to designate as essential. For instance, Australia allowed restaurant deliveries while New Zealand didn’t (under Level 4). Australia’s choice has allowed many restaurants to redeploy some of the workforce into delivery, thus adapting to the lock down. It is unclear what is behind the stricter policy choice in New Zealand but at least one restaurant, Burger King no less, has entered receivership claiming that the lack down created cash flow issues.

In India, the market regulator (SEBI) has recently sought the Ministry of Corporate Affairs’ (MCA) help in requesting the government to allow auditors of listed companies to operate during the lockdown. The reasoning given by an unnamed official is this:

Auditing of financial results involves site visits, physical verifications and interactions with the management of the companies whose financial results are audited. This would take time and effort.

Although SEBI had extended the deadline for listed companies to comply with their annual disclosure results, the same unnamed official says that it would be useful for the results to be disclosed on time because they contain “crucial information with respect to financial performance of a listed company and help investors to take informed investment decisions”. Such disclosures become doubly crucial during such uncertain times.

Obviously, this will be an issue in other countries as well and it will again be interesting to see comparative responses. AICPA Chief Auditor Bob Dohrer has offered some ways to substitute site visits. Unsurprisingly, one of the suggestions is video calls.

The overriding question is, can we use video to observe the inventory? And I think the answer is “yes.” I think some of the special considerations are around how well trained the personnel using the video equipment and technology are and what type of video you are going to use. There is great variety in video capabilities. A GoPro camera can be strapped to a person’s baseball cap or hard hat, and they can walk around and perform counting. A lot of warehouses also have security cameras that record and can be remotely controlled to focus in on different areas of the warehouse. That’s a different option for video. The other alternative that we’re hearing some firms are considering is a situation where client personnel go out and make a video recording of the counting of inventory.

These are indeed challenging times where out of the box solutions are required. With restaurants, contact less delivery has taken care of safety concerns. For auditors too, it may be a matter of putting in safety measures like face masks, maintaining the required distance between the people required on the visit, etc.