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Block insiders in credit committees: Bryan Marsal, CO-CEO, Alvarez & Marsal

ne of our largest cases Essar Steel is just coming out now. There are many people looking at the first guinea pigs coming out of the process.

Feb 27, 2019, 07.27 AM IST
There will be a lot of distressed funds which want to have an advantage over other similar funds in buying and selling claims.
You give advise on bad loan resolution across the world. Our law is relatively new. How does it compare?
I think it is very progressive. The hand has not been fully played out as yet because there are still some aspects to be understood. But some other markets like Italy and China where there is a large NPA build-up, can learn from this. This law has been a real coup in terms of getting on a sound economic footing. The success so far is very positive in terms of the results and everyone acknowledges it whether they support the current administration or not.

Just about a quarter of the cases have been resolved and remaining are dragging on or gone into liquidation. How do you see the litigation in India?
One of our largest cases Essar Steel is just coming out now. There are many people looking at the first guinea pigs coming out of the process, but what is clear is that if you now default and you do not persuade creditors that you are going to restructure your debt in 180 days, you are going to be liquidated. That’s good because now a creditor knows where he stands. In the past, it sat there and grew and nobody benefits from that except the sponsor. No money was lent, capital spending was diminishing and assets were deteriorating. There is no good other than buying the sponsor some time.

What is happening with the new law then?
With this there is an opportunity to clean up and move forward on a disciplined basis. If you default, you lose your company. This is a new law and is evolving. People who are aggrieved are litigating to prevent the company going in the process or delaying the process once the company is in insolvency with the hope that they will get their company back. In the US, the first ten years were pretty rocky and they even thought of repealing it. In the UK, they took 5-7 years to settle down. So, India is actually doing pretty well given the situation.

Last year, we moved to the ‘one-day default’ system. Industry is criticising it saying it is onerous.

In the US when you have a default, it does not in itself throw you into bankruptcy.

You have to have a default coupled with a demand for payment. If that demand occurs the next day, the defaulted party will either seek a judgement or the company will file a voluntary bankruptcy proceeding. If the creditors demand immediate payment, the judge gives the company an exclusivity period of 120 days. At the end of it, if they do not have a plan and the judge does not give them an extension, the judge permits creditors to file their own plan which will be a liquidation plan. The company gets not more than 18 months to finish the process.

Directors of companies are also being allowed in the creditors committee. Won’t it compromise on confidentiality?
Unless there is some impropriety anyone including a former sponsor has the right to bid. The objective of the judge is to first make sure that no one cheated anyone and, secondly, to get the highest possible recovery for the creditors. The biggest issue I wrestled with when I was on Lehman was making sure that creditors’ committee had the right motives. There will be a lot of distressed funds which want to have an advantage over other similar funds in buying and selling claims. You don’t want to have people in the committee with the inside information being able to buy or sell claims. If you are on the committee don’t buy the claims. Don’t take the information and benefit from it.

In India. we have seen some cases where winning bidders failed to pay up. How do you deal with such cases?
In the US, one has to put up a bond or letter of credit demonstrating that one can buy the asset. In some cases in India, they do not ask for a bond or a financial guarantee and the bidders do not put up the cash. In the US, if there is a higher bid, you are obligated to take that. When you go to the court and the transaction is to be approved, if there is a bid on that day, it will be accepted. Under the law, you have to go to the higher bidder. The responsibility of the court is to maximise the recovery for the benefit of the creditors. In India as well, the objective is maximising the value but they have not been sacrosanct in the process. The bidding process has been defined abroad. No one can submit bids past the due date. The system here has to evolve.
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