In this article, Tejaswi does a comparative analysis of Insolvency Laws of India and The United Kingdom. A Chartered Accountant student, Tejaswi writes about things that he cares about. He loves to live a Professional Life (like #HarveySpecter). Works in QuickCompany which deals in Company Registration and Other Legal Activities.
The Insolvency and Bankruptcy Code, 2016 is obviously a reformatory move by the Indian Government as prior to its implementation, the then existed bankruptcy framework in India was unclear and was overlapping with many Acts and laws. There was no certain law to regulate insolvency or restructuring of companies in India. The lenders were unconfident with laws in India related to the recovery or restructuring of the defaulted assets.
To regain the confidence of the creditors and to promote entrepreneurship, availability of credit, and balance the interests of all stakeholders for maximization of value of assets, the new Code is introduced. The new Code consolidated the laws relating to insolvency and restructuring of corporations, individuals and partnerships. The Government has the view that such consolidation would aid great clarity in debt default laws and would facilitate the application of consistent and coherent provisions to different stakeholders affected by business failure or inability to pay debt.
Experts in the field are in the opinion that the Code assented by the President on May 28, 2016, closely mirrors the UK Insolvency Regime. It may be a fact to agree, that there were a couple of laws which were formed at the time of British rule in India were in practice prior to the launch of the new Code. The outdated laws and overlapping laws planted India in the rank of 136 on resolving insolvency. Insolvency resolution in India took 4.3 years on an average in India is self-explanatory for the worst conditions experienced by creditors.
How to repair was a big challenge for Bankruptcy Law Reforms Committee (BLRC). Adopting a successful and proven regime could be the best choice made them think that UK regime can be a better reference. As per World Bank, recovery in the UK is at a rate of 88.6 cents per dollar and that too within a period of 1 year on average, compared to 25.7 cents per dollars in India.
However, the Indian Code of 2016 cannot be exact as those of UK’s, certain key aspects of the UK legalisations may not work in Indian scenario and thus are customized to fit for Indian climate.
This article will have a close evaluation on how the Indian Code and UK Code relates to each other.
Adopted
- Control:- Under the old laws and acts, the debtors had the upper hand to control the insolvency process. The new law has made a remarkable effort to switch the debtor in possession regime to a creditor in control. As per the new Code, now a creditor or group of creditors can initiate the insolvency process by filing an application to the Adjudicating Authority when a borrower is in default. However, the legalisation vested with the debtors has not been lifted, a borrower or debtor can still initiate the process by filing an application in the respective authority. The regime was adopted from the UK laws which is considered to be the most internationally recognized system.
- Professionals: The appointment of a licensed professional is another key aspect adopted from the UK regime. As per the new code, the consortiums of creditors on regulatory clearances appoints an interim Insolvency professional to oversee the insolvency process. Three sets of Resolution Professionals are sought to be appointed – Interim Resolution Professional, Final Resolution Professional and the Liquidator. Under the oversight of the Board, the Insolvency Professional will develop professional standards, codes of ethics and exercise a disciplinary role till the end of the process. Insolvency professionals would handle the commercial aspects of insolvency resolution process. Insolvency professional agencies will develop professional standards, code of ethics and be the first level regulator for insolvency professionals members leading to the development of a competitive industry for such professionals.
- Freeze: During the insolvency process, when the creditor action has stayed, the Adjudicating Authority on the recommendation of the Resolution Professional can grant Moratorium. As per the Code, during the period of Moratorium, no suits can be instituted or recovery action can be initiated.
- Priority: The new Code adopted distribution of payments in priority as outlined in UK regime, during the liquidation of the company. Based on the vote of the majority of the creditors, on failure of the submission of resolution plan within the prescribed period, the liquidation process is initiated. The assets held by the debtor are recovered during the liquidation process and will be distributed by the liquidator in the manner of priorities laid in the law.
- Cross-border:As per the provision of the code, the Government of India can enter into agreements with any country outside India for enforcing provisions of the Code and notify applicability of the same from time to time. Further, assets of the debtor located outside India may also be included for the purpose of the insolvency resolution process and/or liquidation before the Adjudicating Authority.
- Others:There are certain other parts also can be seen in the Code, which are similar in the UK regime, including the period of antecedent transaction of upto 2 years, license examination for insolvency professionals etc.
Amended or Added
- Control:During the insolvency process in India, the insolvency professional appointed shall obtain approval from the creditors on various matters related to the insolvency process. Section 28 of the Code detailed such matters which require creditor approval. Whereas, in UK regime, generally the approval is required only at the time of appointment of such professional.
Though the creditors in India enjoy such privileges during the process, there voting rights are limited. As per the Code, only secured or unsecured creditors vote in a creditor committee, whereas in UK, all creditors including trade creditors have voting power in the creditor committee. Apart from that the 75% of the secured or unsecured creditors will have to approve the resolution plan proposed, whereas the creditors under UK regime a simple majority can approve the plan during the insolvency process.
- Professionals:In India, an individual or a group of agencies can act as an Insolvency Professional upon approval from the creditor’s committee. However, in the UK only licensed individualsare eligible to become an Insolvency professional. Also, in India, an Insolvency Professional is not required to provide a surety bond or professional insurance whereas the counterpart demands so. There are distinctions in the licence renewal though both demands a licensing or examination process to become an Insolvency Professional. The licences obtained in India are of life membership in nature whereas in UK it should be renewed annually.
- Freeze:As per the Code on failure of the submission of resolution plan within the prescribed period or if it is not approved by the creditors within 180 days, the liquidation process would automatically get initiated. However, in UK, no such timeline has been specified under the law and is valid for the entire period till plan is approved, if rejected only the liquidation process shall be initiated.
- Others:In India, there are specialized courts to deal with Insolvency as the new Code established the formation of two tribunals to act as adjudicate Authority and deal with the cases related to insolvency, liquidation and bankruptcy process. The Debt Recovery Tribunal to oversee insolvency, liquidation and bankruptcy process of individuals and unlimited partnership firms, whereas National Company Law Tribunal to administer those of companies and limited liabilities entities.
As per the Code, In India, the remuneration paid to the liquidator could be decided by the creditors and would be decided based on the scale of realization and distribution. However, in UK regime the remuneration is fixed on consensus of creditors and the insolvency professional appointed, in default the court may intervene to fix the remuneration. It is important to note here that the liquidator in India is required to liquidate the assets within a period of two years, whereas no such requirement in the UK for the liquidator.
The UK regime has influences in formulating the Insolvency and Bankruptcy Code in India, but the Bankruptcy Law Reforms Committee has made commendable efforts in customizing it to Indian Scenario. The move is expected to help India move up from its current rank of 130 in the World Bank’s ease of doing business index.
