Courts not a forum for mere policy commentary | Business Standard

Somasekhar Sundaresan: Courts not a forum for mere policy commentary | Business Standard:

The Doing Business 2013 report published by the World Bank and the International Finance Corporation is out. India now ranks a lowly 132nd out of 185 jurisdictions all over the world in the ease of doing business. The good news is that India ranks 27th out of 50 countries that marked an improvement since 2005. The horrible news is that India continues to have a pathetic record in the area of ease of enforcement of contracts – a shameful 184th out of 185 nations.

The report, now a keenly-awaited annual feature, studies how easy it is to start and run a business. This column will mainly focus on the chapter on enforcement of contracts across jurisdictions. “A judicial system that provides effective commercial dispute resolution is crucial to a healthy economy. Without one, firms risk finding themselves operating in an environment where compliance with contractual obligations is not the norm. While using alternative dispute resolution systems may have benefits, Doing Business focuses on how public institutions function in the case of a commercial dispute,” says the report. The study seeks to measure the time, cost and procedural complexity of resolving a commercial dispute between two domestic businesses. The study takes up a notional dispute – and interestingly, a small dispute between two domestic businesses.

“The dispute involves the breach of a sales contract worth twice the income per capita of the economy,” says the report. Twice the per capita income means a really small dispute – nowhere near the Vodafone type litigation, where parties have the luxury of engaging expensive senior counsel, whose skills and standing can attract greater attention of the courts. The study assumes that the court hears arguments on merits and that an expert provides an opinion on the quality of the goods in dispute. “The time, cost and procedures are measured from the perspective of an entrepreneur (the plaintiff) pursuing the standardized case through local courts.”

India ranks better than only Timor-Leste, an infant republic. For measuring India as the last but one rank in the world in enforcement of contracts, the performance of the Bombay High Court has been taken as the basis. Here is the report card: It takes 1,420 days to get a contractual dispute of this nature enforced in Bombay High Court – twenty days just to get filings and service completed, 1,095 days for trial and judgement and 305 days for enforcement. This is just a tad higher than the longest time taken by any nation – Suriname, with 1,715 days – and India ranks sixth from the bottom.

Taking close to four years to settle a dispute over a claim of a fraction of a lakh of rupees is a pathetic record, which is why most sensible lawyers are unable to advise clients to litigate unless the stakes are exponentially higher. Besides, the study does not take into account appeals. Appeals from a decision of a single judge to a division bench, and then to the Supreme Court, can take lives of their own.

There is worse to follow: The costs of such a dispute works out to 39.6 per cent of the claim – another pointer to litigation for enforcing a contract being meaningless unless the stakes are high. India ranks 40th from the bottom. Fertile ground for private commercial versions of khap panchayats to flourish. Little wonder why Indian movies and television serials depict the local police station or the local underworld (not necessarily always in competition) as the forums that are approached for effective justice. It takes an average of 46 procedures for a dispute enforcement process in India – 25th from the bottom, and only a wee bit higher than the 55 procedures applicable in Syria (which ranks the worst in the number of procedures).
Patriots may quarrel the choice of an over-burdened court, but such opposition would be misplaced.

The Bombay High Court is a good choice, considering that Mumbai is considered to the commercial capital of India. Besides, there is little point in assuming the forum to be an ideally-burdened court like Sikkim High Court, where the intensity and scale of economic activity of the territory it presides over is just not fully reflective of India’s economic standing and scale of growth.

The report also has a sub-national analysis. Pertinently, Mumbai comes out the worst and the next worst is another hub of commercial activity – Ahmedabad.Here, the time taken is 1,295 days, the procedures are 46 in number and the cost of enforcement is 30.9 per cent of the claim. Mumbai and Ahmedabad represent an enormous chunk of the tax-paying base of the nation. Without more focused and urgent attention to judicial reform, our courts will remain a mere forum for commentary on high national policy, forgetting its prime reason for existence – enforcing the rule of law among a nation’s subjects.

(The author is a partner of JSA, Advocates & Solicitors. The views expressed herein are his own.) Email:somasekhar@jsalaw.com


'via Blog this'

Kingfisher Woes Show Need for Bankruptcy Law: Corporate India - Businessweek

Kingfisher Woes Show Need for Bankruptcy Law: Corporate India - Businessweek:
By Karthikeyan Sundaram
Source - http://www.businessweek.com/news/2012-10-31/kingfisher-woes-show-need-for-bankruptcy-law-corporate-india

Kingfisher Airlines Ltd. (KAIR), controlled by liquor tycoon Vijay Mallya, is struggling to resume services after five straight years of losses and mounting debt forced it to ground planes. India’s bankruptcy laws aren’t helping.
The carrier can’t emulate U.S. airlines that have gone through court-led Chapter 11 restructuring, as India doesn’t have any similar procedures for service providers. Under the existing law, a government body only oversees rehabilitation of companies with licenses to run factories.

Kingfisher’s troubles highlight how India’s corporate laws have failed to keep pace with growth and emergence of new businesses in Asia’s third-biggest economy. Lack of a modern legal framework makes it slower for struggling companies to renegotiate debts and cut cost, said Jai Pathak, partner-in- charge at Gibson, Dunn & Crutcher LLP. in Singapore.
“India needs a comprehensive bankruptcy law that will allow financially distressed companies to revive faster,” Pathak said. The existing system doesn’t “provide a framework by which companies can take preventive measures to avoid a further downward spiral.”

Current rules allow companies that operated for at least five years and holding a factory license to approach the Board for Industrial and Financial Reconstruction if accumulated losses equal or exceed their net worth. The recourse is available under the Sick Industrial Companies (Special Provisions) Act of 1985.

‘Outdated Tool’
Under the Indian Companies Act of 1956, firms can voluntarily wind up operations or a court can order their closure. In a court-ordered shutdown, an official liquidator will be appointed to oversee the process and distribute the proceeds from sale of assets to creditors.

“BIFR is the most outdated tool available under law in India,” Kishor Ostwal, managing director at CNI Research Ltd. in Mumbai, said. “There are examples where companies have applied for rehabilitation and it has taken several years for even the plan to be approved. It’s next to impossible.”

BIFR took almost four years to approve a rehabilitation plan for Windsor Machines Ltd. (WML), which was declared a ‘sick’ company in June 2006. By the time the revival plan got approval from the agency in April 2010, the company had made quarterly profits.

World Ranking
India ranked 116 among 185 economies when it comes to ease of resolving insolvency, according to Doing Business 2013 data published by International Finance Corp. and the World Bank. The nation’s ranking fell from 109 in 2012. India scored 132 for the overall ‘ease of doing business’ in the latest report published last month.

In 2001, as an alternative to the BIFR process, India’s central bank allowed companies and their creditors to enter into a debt recast arrangement to help businesses return to financial health. The mechanism was limited to firms that had borrowed more than 200 million rupees ($3.7 million) from a group of lenders.

Kingfisher in 2010 restructured 77.2 billion rupees of debt it had run up by ordering aircraft and buying a budget carrier. It can seek a second round of debt recast if a majority of its lenders agree, said Avinash Gupta, head of financial advisory services at Deloitte Touche Tohmatsu India Pvt. The carrier has been seeking more loans and investments at least for a year after losses widened and debt swelled to 86 billion rupees.
Shares of the airline gained 4.4 percent to 13.15 rupees at 9:51 a.m. in Mumbai today. Kingfisher shares have slumped 38 percent this year, compared with a 20 percent gain in the benchmark Sensitive Index. (SENSEX)

Lengthy ProcessDebt restructuring may offer little help for distressed companies because of the lengthy procedures, said Thomas Britt, a Hong Kong-based partner at Debevoise & Plimpton LLP.
“Negotiations with creditor banks take place in a time- consuming Reserve Bank of India-supervised process and only after the company has reached a state of severe financial crisis, if not a complete collapse,” Britt wrote in an e-mail. That makes “the prospects remote for that company’s return to financial health and viability.”
India’s Civil Aviation Minister Ajit Singh said he will push for an overhaul of the bankruptcy laws to help companies like Kingfisher restructure operations. He didn’t say what changes he is seeking in the rules.
“It’s not just the owner who suffers, it’s also the employees, the creditors and the consumers,” Singh said in an interview in New Delhi on Oct. 27. “Reform of the companies law will not only offer protection from creditors, but also from labor unions and other agencies.”

Prakash Mirpuri, spokesman at Kingfisher Airlines, didn’t respond to an e-mail seeking comments.

Delta, American
India’s aviation regulator suspended Kingfisher’s license on Oct. 20 after the carrier failed to provide a plan to resume operations that were halted Oct. 1 because of a strike by pilots and engineers. The employees resumed work last week after management promised to pay their salary dues. The carrier will soon prepare a “comprehensive” revival plan, Mallya said in New Delhi Oct. 30.

In the U.S., carriers including Delta Air Lines Inc. have used bankruptcy protection to restructure debt and shed costly pension and retiree benefit plans in the years after the 2001 terrorist attacks. In November last year, American Airlines parent AMR Corp. filed for bankruptcy after failing to secure cost-cutting labor agreements. With the filing, American became the final large U.S. full-fare carrier to seek court protection from creditors.

India has been planning to update company laws for almost a decade. A new Companies Bill that proposes to replace the 1956 Act with easier restructuring rules has been in the works since at least 2004. The Bill needs to be passed by parliament. Its previous versions have been introduced in parliament at least three times.

Absence of bankruptcy laws means Mallya has very few options to revive Kingfisher unless he wins investments, said Pathak at Gibson, Dunn & Crutcher. He can either seek to restructure the debt or try to reach a compromise with the carrier’s creditors after getting approvals from a high court.

“Had Kingfisher been a U.S. carrier, the natural choice for it would have been to seek Chapter 11 bankruptcy protection,” CNI Research’s Ostwal said.


To contact the reporter on this story: Karthikeyan Sundaram in New Delhi at kmeenakshisu@bloomberg.net
To contact the editor responsible for this story: Neil Denslow at ndenslow@bloomberg.net


'via Blog this'