IBC Laws in India: Strategic Growth Opportunities for Businesses Simplified
Ramakrishnan Viraraghavan
Barrister, UK | Senior Advocate @ Supreme Court of India | Taxation, Commercial Litigation, Corporate Law
I enjoyed participating in a panel discussion at BW Legal World’s fourth edition of Global Legal Summit and Legal Leaders Awards on Saturday, 26 June 2023, in the session on ‘IBC Laws and Strategy for Business: Simplified’.
IBC Laws in India present an opportunity for businesses to pursue inorganic growth and law firms to look at the attorney-client relation from a different lens of strategic growth advisor besides being a lawyer.
Liquidity indicates the health of the business
A business is about topline, bottom-line, solvency, and valuations. However, liquidity is the trigger under IBC laws. Liquidity is the ability to pay debts without default. Too often, a business with great valuations goes into insolvency due to liquidity problems. This is like a celebrity with huge biceps and six-pack abs dying of cardiac arrest during a workout. A business focused on improving valuations should also pay attention to liquidity.
Advantages for Financial Creditors
Financial creditors must be paid before the operational creditors if liquidity becomes an issue. A financial creditor is like James Bond. He is licensed to kill. It is tough to win if a financial creditor initiates the Corporate Insolvency Resolution Process (CIRP). On the other hand, operational creditors are like Inspector Clouseau. The chances of a business winning against operational creditors are much higher.
If liquidity becomes an issue, the business strategy is to improve liquidity by using money due to operational creditors to pay financial creditors. The business must initiate arbitration proceedings or file a suit against the operational creditors even if there isn’t much dispute. The process of triggering an arbitration dispute or filing a lawsuit will give the business a breathing period of about two years to avoid payment to the operational creditors. However, this must be done well in advance. Disputes cannot be initiated after the operational creditor issues an insolvency notice.
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IBC Laws: Opportunities for Inorganic Growth
IBC laws offer great opportunities to acquire businesses and assets at attractive valuations. Companies must keep their eyes open for opportunities in CIRP or liquidation processes under the IBC Laws. Companies need to build up an acquisition fund in advance. Opportunities cannot be seized without preparation, just as a couch-potato cannot run a marathon overnight.
Time for Law Firms to become Live-in coaches and trainers
Law firms have an important role to play and should stay close to their clients. Law firms can no longer remain occasional strategic advisors. They must become live-in coaches and lifestyle trainers to their clients. With such handholding, businesses will not die of insolvency triggers and can win insolvency marathons.