Insolvency Law in India and Other Countries – A Comparative Study
- Blog|Insolvency and Bankruptcy Code|
- 5 Min Read
- By Taxmann
- |
- Last Updated on 8 May, 2024
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What is Insolvency Law? Insolvency law governs the process by which individuals or organizations that are unable to meet their financial obligations are dealt with, either through reorganization or liquidation of assets. The purpose of insolvency laws is to provide a legal framework for addressing situations where debtors cannot pay their creditors, ensuring a fair distribution of the debtor's assets to the creditors, while also giving the debtor an opportunity for relief and rehabilitation if possible.
Table of Contents
1. Introduction
A decade ago, India turning into a top business destination seemed like a dubious dream. Any person willing to start a venture in India had to undergo arduous processes. Further, once the businesses got established, under unfortunate circumstances, winding the business operations in India seemed like a challenge; thus lowering confidence among the investors.
In the course of business, there might arise a situation when an individual/company can no longer meet its financial liabilities to pay-off the lenders as debts become due and the same is referred to as Insolvency. Further, a situation wherein a court has declared a person/entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors i.e., a legal declaration of one’s inability to pay-off debts is referred to as Bankruptcy.
As a part of simplifying the business ecosystem in India, the Insolvency and Bankruptcy Code (IBC) was enacted in India in 2016 and it replaced all the then existing laws with a uniform procedure to resolve Insolvency and Bankruptcy disputes. It allows creditors to assess the viability of a debtor as a business decision and agree upon a plan for its revival or a speedy liquidation.
India’s ranking in the ‘Ease of Doing Business Report’ published by the World Bank, has gone from 142 in 2014 to 63 in 2022, with the introduction of Insolvency and Bankruptcy Code, 2016 since it acted as a game changer in resolving insolvencies which used to be considered as one of the hurdles of venturing into businesses in India. The purpose behind IBC, 2016 is to revive a business; if a company is going into insolvency, maximize the value of its assets by aiming at reorganization rather than liquidation of the Corporate Debtor.
Internationally, Insolvency and Bankruptcy laws have been in place for a long time as against the Indian IBC, which is quite young and evolving and thus, a comparison of Indian IBC with Insolvency and Bankruptcy laws across the globe has been discussed here.
2. Comparative Analysis of Insolvency Law Globally
The Insolvency and Bankruptcy Code, 2016 – An International Comparison
| S. No. | Basis of Comparison | Description | Insolvency and Bankruptcy Code, 2016 (India) | UK Insolvency Act, 1986 (UK) | Chapter 11 of US Bankruptcy Code (US) |
| 1. | Initiation of Corporate Insolvency Resolution Process (CIRP) by Creditors/Corporate Applicant | Creditors usually initiate the insolvency process, however, there may be a reversal of this process too. Creditors may include financial, operational, secured and unsecured creditors. |
|
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Debtor Company |
| 2. | Period of Insolvency Proceedings | Insolvency proceeding is a time-bound process. | 180 days extendable up to 330 days with Adjudicating Authority one time extension. | 12 months with creditors consent/can be further extended up to 6 months with court’s approval. | 120 days extendable up to 18 months on genuine grounds. |
| 3. | Management Control during Insolvency Proceedings | Control may be retained by the Board of Directors (BOD) or Resolution Professional (RP). | Adjudicating Authority appoints the Insolvency Professional as IRP/RP. BOD gets suspended with the appointment of IRP. | The daily operations of the entity remain in the hands of the directors, whereas management control is taken over by the Insolvency Professional/Administrator. | Debtor in Possession (DIP) approach is adopted and thus, the entity continues its operations. |
| 4. | Resolution Plan | Resolution Plan is primarily adopted by the Committee of Creditors which usually suggests quick measures viz, sale of assets/entire business to liquidate the entity. | Based on the information memo prepared by the RP as per section 29, the resolution applicant submits the resolution plan under section 30 to the RP. As per section 30(4), the Committee of Creditors (CoC), can approve the resolution plan by 66% voting share and the Adjudicating Authority (AA) under section 31, may by order approve the said plan as approved by the CoC. | The approval of resolution plan requires a majority in value of the creditors present and voting. | Resolution plan known as living will, describes company’s strategy to mitigate its situation of financial distress. The plan requires at least 2/3rd members voting to a majority. |
| 5. | Moratorium | It is a period wherein no judicial proceedings against the Corporate Debtor can be initiated for recovery, sale/transfer of assets, enforcement of security interest, or termination of essential contracts. | NCLT on acceptance of the application for insolvency proceedings, may declare the moratorium period and continue till the approval of the resolution plan. | Moratorium starts once the courts appoint the administrator. | After filing of the petition in the Bankruptcy Court, the moratorium period starts under the US Bankruptcy Code. |
| 6. | Cost of Insolvency Proceedings | Costs incurred during proceedings are usually borne by the person initiating the same. | If Corporate Insolvency Resolution Process (CIRP) is initiated under section 7 (proceedings initiated by financial creditor against corporate debtor) or under section 9 (proceedings initiated by operational creditor against corporate debtor), cost is borne by creditors. In case, CIRP is initiated under section 10 (proceedings initiated by corporate applicant), cost is borne by debtors. | Cost of proceedings is borne by debtors. | Cost of proceedings is borne by debtors. However, lenders may provide finance to debtors against lien over the assets which have not been pledged to other lenders. |
3. Conclusion
Indian Insolvency Law is a progressive law, having its main focus on the resolution process. The US law lays down a “Debtor in Possession” approach, wherein the management remains in control on running the company as against Indian and UK laws that envisage the management of the entity through the Insolvency Professional. Both the scenarios have their own advantages, for instance, US laws are based on the belief that the management is best suited for running the entity for a rapid reorganization plan rather than relying on a new person who will have own learning curve along with cost; however, Indian and UK laws foresee the Insolvency Professional as the best option for running the company under such circumstances over the entity’s management.
Insolvency and Bankruptcy Board of India (IBBI), the insolvency regulator is cautiously addressing the emerging situation, which is quite remarkable and the advent of IBC has brought a culture change in corporate India. Squarely, all the laws look for a resolution plan on a going concern basis rather than liquidation of the entity.
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