Impacts of Global Events on the International Insolvency Practice

Day Two of last week’s International Insolvency Institute Conference featured an impressive panel of economics and insolvency experts, who discussed the impact of recent global events on the insolvency practice and made predictions for what’s to come. The panel described how issues ranging from the return of labour market power, to zombie companies, to emerging economies, have the potential to impact the market and insolvency systems going forward.

Participating in the panel were:

• Amanda Lang, Journalist, BNN Bloomberg, Toronto, Canada

• Antonia Menezes, Senior Financial Sector Specialist, Insolvency & Debt Resolution Team of the World Bank Group, Washington D.C., USA

• Benjamin Tal, Deputy Chief Economist, CIBC Capital Markets, Toronto, Canada

• James H.M. Sprayregen, Partner and Founder of Worldwide Restructuring Group, Kirkland & Ellis, Chicago, USA

• Sumant Batra, Insolvency Lawyer and Senior Consultant to the IMF, World Bank Group and OECD, New Delhi, India

Bargaining Power of the Labour Market

The panel identified labour market power as the most significant factor currently impacting insolvencies. Benjamin Tal predicted that the rate of business bankruptcies will rise higher than in 2019, as labour costs continue to increase. He spoke about how the Covid-19 pandemic changed the nature of employment – virtual work allowed for more flexibility, low wage jobs were lost, and the new jobs that were created were largely for highly skilled workers. This phenomenon, combined with the inability of businesses to supply products or services as a result of supply chain issues, have caused a number of otherwise viable companies to go out of business. Benjamin also predicted that interest rates will continue to rise in the next cycle, and described how mid-large companies, which profited from cheap labour and globalization in the last two decades, will face margin pressure in the years to come.

James Sprayregen contrasted the current situation with insolvencies of the past, when companies were forced to lay off thousands of employees due to low demand. Now, there is a demand, but a lack of supply. Sumant Batra described the situation in India, where employees are accustomed to traveling thousands of miles to find a job. During the pandemic, most of them left their jobs and were unwilling to return after the lockdown was over. As a result, businesses had to send coaches back to the villages to bring the workers back to the cities and, over a period of a few months, the employees eventually returned.

Zombie Firms

The panel also discussed the impact of zombie companies on the economy. Antonia Menezes explained how stimulus measures and government support during the pandemic led to a decrease in insolvency filings, but also created new problems given the dramatic increase in levels of public and private debt and the prevalence of zombie companies.

James cautioned against continuing to help these companies, arguing that the opportunity to fail is a necessary part of a healthy capitalist society. He was also critical of the emphasis on speed in some insolvency proceedings, pointing out that companies that emerge from 1-day pre-packs can exit insolvency protection with a suboptimal balance sheet.

The rest of the panel agreed with James, with Antonia citing empirical evidence of the corrosive impact of zombie firms on economies as a whole, and explaining how good insolvency regimes can filter these companies out. Benjamin likewise predicted that recession will clean the system out, which will ultimately be good for the economy.

Emerging Markets

Sumant described how the Covid-19 pandemic affected businesses in India, advising that SMEs were the hardest hit, as they were already struggling due to changes in trade policies. However, given the resilient nature of Indian enterprises, which do not depend on the state or the financial sector for support, and instead rely on support from their families, the country has not seen a wave of insolvency filings. In fact, the recently introduced pre-pack DIP regime has rarely been used, with only four companies filing a pre-pack petition in the last year. Sumant shared that India has not operationalized insolvency law for individuals other than those who have provided guarantees for companies, and stated that he does not see this changing in the future.

Antonia pointed out that other emerging markets are also developing insolvency regimes, and are looking at informal restructuring tools and the role of technology to modernize their systems. She also indicated that we are seeing a lot of regional cooperation in the insolvency space, and cited the example of Caribbean countries looking to Canada’s Bankruptcy and Insolvency Act as a model. In the case of India, Sumant explained that the country has a more inward-looking economy, but that this policy is not to the exclusion of international cooperation.

Key Takeaways

The panel concluded by discussing what we have learned from this period of economic turmoil and what we should take forward. Key themes included the move away from formal filings and a new focus on workouts and turnaround – creditors are exploring pre-insolvency resolutions and preventive insolvency toolkits, which means that insolvency professionals who were used to getting formal appointments should focus on getting work elsewhere. The panel also emphasized the need for global cooperation, information sharing and a holistic insolvency regime to deal with struggling companies in the future.