Indian Insolvency Law Vis-A-Vis Developed Nations

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  Page | 1 -   CA Aditya Gupta The three most important aspects for any country to create a robust ecosystem for ease of doing  business are “ Easy entrance, Smooth Continuation, and Easy Exit ”.  The Insolvency law of a country dictates the growth of entrepreneurship in a country which deals with easy exits. The Insolvency framework of a country should be capable of offering rescue procedures for the rehabilitation of the financially distressed companies. Before the introduction of the Insolvency and Bankruptcy Code, 2016 (“IBC”) , the legal, as well as regulatory framework regarding insolvency, was grossly inadequate. It is only after the IBC that the concept of ‘ Corporate Insolvency Resolution Process (CIRP) ’ was introduced. The main objective behind bringing of the code was to have a single legislation in place to cater for resolution of insolvency of corporate debtors and also individuals/partnership firms promptly. The procedure was designed to strike a  balance between the interests of the creditors through collective resolution and the interests of the debtor according to its financial difficulties. This process aims to extract maximum value aimed at aiding the business operations. It is interesting to see a comparison of the Indian Insolvency ecosystem which is in its nascent stage in comparison to other countries which have far more developed Insolvency law:  Page | 2 1. USA The insolvency regime in the United States aims to protect the insolvent company or individual (the provisions for individual  bankruptcy are not yet notified in India) from the creditors and balancing their interest as well. In the US, the municipalities are aiding and assisting the restructuring of debts, unlike India where this job is taken care of by Insolvency Professional. The method of filing for bankruptcy is advanced as compared to India as the same can be done through computer-based forms like B101,B101A,B101B etc. In comparison to Indian laws, debtors in the US have more say in the business and restructuring  plans. Earlier, India also had the debtor-in-possession model under the SICA Act  which failed to address the issue of reviving the sick industries. The courts in the US hear what the creditors have to say, although ultimately it is the court that determines whether the proposed restructuring plan is to be carried out or not. However, under IBC the powers of the creditors are widened to vote for the passing of the proposed plan. According to the laws in the US, Debtors are responsible for proposing the resolution plan which is not the case in India. The US bankruptcy code provides that the federal bankruptcy court can supervise the financial reorganization in case of bankruptcy of individuals. The proceedings in the US are conducted by the Bankruptcy Court and in India by National Company Law Tribunal (“NCLT”) . One of the major differences is that in the US there are numerous State laws governing insolvency and bankruptcy whereas in India the number is comparatively limited which ensures less conflict  between the prevailing laws. Also, the language of Section 238 of the IBC has conveyed that IBC shall prevail over other laws in India. Text of the Section is as follows:  Page | 3 “ The provisions of this Code shall affect, notwithstanding anything inconsistent therewith contained in any other law for the time being in force or any instrument affecting under any such law .”  2 . UK The UK has a single adjudicating authority dealing with the corporate insolvency matters which is the Chancery Division of the High Court. The Ministry that is responsible for the insolvency matters is the Ministry of Business, Innovation, and Skills (BIS) in the UK. The rules regarding insolvency professionals in the UK are strict in comparison to India. Moreover, insolvency professionals in the UK are required to provide a surety bond and the same requirement might be incorporated soon in the IBC. Furthermore, the license provided to the insolvency  professional is for a lifetime in India but in the UK it needs to be renewed annually. In India, there is a limitation period of maximum three hundred and thirty (330) days for the committee of creditors to approve the submitted resolution plan however, no such period is specified under law in the UK. 3 . SINGAPORE The model of Insolvency Law and the common law traditions of Singapore are quite similar to that of India despite its high ranking in “Insolvency Resolution” area of the World B ank’s Doing Business Report, 2018. Singapore Companies Act, 2006 has  provisions for liquidation as well as reorganization whereas erstwhile Companies Act, 1956, of India has a complicated and indirect  process for reorganization and insolvency. Now India has come up with the Insolvency and Bankruptcy Code, 2016  which has attempted to cover the lacking issues.  Page | 4 In Singapore, the voluntary liquidation takes place through a shareholder resolution while the compulsory liquidation is triggered upon default on dues over SGD 10,000  within three weeks of the demand or inability to pay debts as they fall due. However, in India voluntary liquidation happens when a special resolution is passed by the shareholders of the company for winding up, with no declaration of insolvency  which has to be in consultation with creditors. In Singapore, a single adjudicating authority, the High Court deals with the corporate insolvency matters. For non-corporate insolvency cases in Singapore, a judicial manager is appointed to manage the firm and to propose the reorganization plan and he can take any actions that are in the best interest of the creditors. 4 . UAE In the United Arab Emirates, bankruptcy proceedings  before being governed under UAE Bankruptcy Law Federal Decree were governed by Chapter V of Federal Law No. 18 of 1993 (Commercial Code). Even though the UAE Bankruptcy Law and the IBC came into existence in December 2016, the structure and approach adopted by UAE is entirely different from that of India. According to the previous law in the UAE, bankruptcy in UAE could give way to initiation of criminal proceedings , imprisonment, asset stripping of the personal properties of the management of the debtor company. This became the reason for the parties opting for out of court settlements and therefore the court procedures were hardly ever used. While India has two relief procedures i.e. insolvency resolution process and liquidation, the UAE has three relief procedures namely  Preventive Composition Procedure, Bankruptcy Proceedings, and Liquidation . The condition for insolvency in UAE is determined through cash flow test or balance sheet test , unlike India where the occurrence of default in repayment of a debt by the corporate debtor is the condition. In the UAE, apart from the debtor and the creditor, the Public Prosecutor  can also make application under the Bankruptcy procedure. In India, the application for the initiation of the
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