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240,000 CHINESE COMPANIES RECENTLY FILED BANKRUPTCY CASES

Author – Yashasvi Kanodia, Intern at Dave and Rizvi, Advocates

“The World Health Organization (WHO) on March 11, 2020, has declared the novel coronavirus (COVID-19) outbreak a global pandemic.” This undoubtedly sent the first shock wave across the sea of Global Economy with its impact becoming intelligible and almost every country severing their ties with the one who should be taking cognizance for it all, China.

Closer home, the Indian economy which has been considered to be insulated because of well-regulated financial sector, has also found itself inflicted by the global financial meltdown. Its difficulties have arisen on account of the shrinkage of demand for its export and slackening of capital inflows from these economies on which India’s economic growth, during last one and a half decade, came to be critically dependent.

India being a technologically backward and a labor intensive country, must gear up to face what might be a severe downpour of business risks in the future. If the lockdown gets extended any further, insolvency risks will be a major possibility with more than 240,000 Chinese companies recently filing bankruptcy cases. Amidst the dominant income inequality, small scale businesses might be affected the worst. The government might be introducing financial securities for such businesses but will they be willing to invest in such risky ventures? The coeval market however, may be a very good occasion for investors to purchase diversified shares at bargainable prices because the odds of surging stock prices in a few years are quite a possibility.

Insurance Companies which are habitually considered as safe keepers are now revisiting clauses in their insurance contracts. ‘Force Majeure’- a term used to characterize uncontrollable and unanticipated risks to a business and thus, accounts for the risk of losses incurred during non-performance of business during these situations. The issue is that this clause defines specific circumstances which qualify as Force Majeure, which majorly include Acts of God and constitutes for loss of property. So, will Insurance companies provide for claims asked by the companies? Well, resistance is most likely to prevail as overall economic recession entails. IRDAI plans to regulate the losses incurred by Indian Businesses, but this might accompany an expansion of regulatory fear among future newcomers. Were you aware that Insurance companies often tend to be providers of income inequality in an economy?

Further, there is a developing worry for fraud risks both externally and internally. Few major attributes that administer evidence include criminal gangs updating themselves through burglary, loss of transportation infrastructure, WFH programs causing emerging allurement for data misuse, diminished job security, unwarranted payment of invoices, reduced employees and cyber-attacks. After the situation gets back to normal, the regulators will not only transitorilycurtail financial boundaries but will also advocate competition which will indirectly affect business corporations

The virus has not just afflicted a halt to public activities but also reduced cash flows of almost all the industries, excluding the healthcare sector; and with stock costs and bond yields plunging. Mundane recollections of The Great Depression of the 1930s, the Financial Crisis of 2008 or even the Indian Demonetization in 2016 start intruding one’s peace of mind in the retrospection of recent history, as they translucently depict business failures and this scenario seems no different other than the fact that it may go down as the worst of the lot.

As supply chains globally are disarrayed, reports warn that the complete concussion is yet to be felt. Business leaders must equip themselves for the effects on production, transportation and logistics, and customer demand. These include a plummet in demand from consumers leading to inventory “whiplash”, as well as parts and labor deficits due to manufacturing plants shutting down or dwindling capacity.

The crisis has created an optimal storm. The combination of all such shocks is making way for severe slumps and a great halt to productivity. It is contemplated that after the lockdown is lifted, the demand will be back on track, but it will take time to dawdle because people have endured a pay cut and are abandoned with lesser money to spend on wants, and owing to the shortage of imports from China, people will have to pay more for the same than they paid earlier. However, India may be the next best location after China; because India has a lower labor cost and is conveniently accessible to other countries.

The Covid-19 situation is no less than a human tragedy and the only lesson India and other nations may master from this, in the words of Dennis E. Adonis is to “never restart a journey and use the same road that failed you before.”