INTRODUCTION
When a company is insolvent, it indicates that it is unable to settle its debts with its creditors in a timely manner. When a person or business’s liabilities exceed its assets and income, it is said to be insolvent. When liabilities are totaled up and they are greater than the combined available resources, insolvency results.
Although bankruptcy and insolvency are sometimes used interchangeably, they actually refer to different circumstances. In order to recover unpaid debts from the debtor or release the debtor from some or all of its duties, the Court may compel the debtor to file for bankruptcy. The bankruptcy process aims to relieve the debtor of the burden of repaying debts that he is already unable to pay while also providing relief to the creditors.
The Insolvency and Bankruptcy Code has altered how corporate business transactions are conducted. The United Kingdom’s Statute of Bankrupts, or “Statute of Bankrupts,” was the first piece of law to ever address bankruptcy and insolvency issues. All other countries thereafter began enacting bankruptcy rules because they saw the need for them. Because they were once British colonies, India and the United States of America largely adopted and upheld the laws that were established in the United Kingdom. Both nations have recently implemented important changes that reflect the spirit of the times and the free spirit.
HISTORY
In India, separate Insolvency and Bankruptcy Code was introduced in 2016. Earlier, matters relating to insolvency and bankruptcy were dealt with under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, Companies Act, 1956, and Sick Industrial Companies (Special Provisions) Act, 1985. The new act of 2016 was introduced with the motive to overcome the shortcomings of other pieces of legislation in the Insolvency procedure. In the U.S.A., the first bankruptcy law was introduced in 18001 and was repealed afterward in 1803. Subsequently, many insolvency laws were introduced and repealed thereafter. Modern Bankruptcy law was introduced by the Bankruptcy Reform of 1978 and the Chapter 11 of the Code provides an insolvency framework. U.S. Bankruptcy Code of 1978 is also known as Title 11. The U.S. Bankruptcy is further divided into six chapters under Title 11. These chapters are 7,9,11,12,13 and 15. The six chapters contain provisions ascertaining the rights of individuals and corporates to file a petition seeking relief. Bankruptcy Abuse Prevention and Consumer Protection Act, 2005 is the most recent amendment made to the 1978 law.
2016 saw the introduction of a distinct insolvency and bankruptcy code in India. The Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act of 2002, the Companies Act of 1956, and the Sick Industrial Companies (Special Provisions) Act of 1985 previously addressed issues connected to insolvency and bankruptcy. With the intention of improving upon previous legislation’s deficiencies in the insolvency process, the new act of 2016 was established.
The first bankruptcy law in the United States was passed in 1800, and it was later abolished in 1803. Numerous insolvency laws were subsequently enacted and then repealed. The Bankruptcy Reform of 1978 brought forth modern bankruptcy law, and Chapter 11 of the Code establishes an insolvency framework. Title 11 of the U.S. Bankruptcy Code of 1978 is another name for it. Title 11 further divides the U.S. Bankruptcy into six chapters. 7, 9, 11, 12, 13, and 15 are those
chapters. The provisions in the six chapters establish the rights of both persons and corporations to submit a petition for redress. The most recent change to the 1978 law is the Bankruptcy Abuse Prevention and Consumer Protection Act, which was passed in 2005.
INITIATION OF PROCEEDINGS
In India, the Insolvency and Bankruptcy Code, 2016, allows both creditors and debtors to initiate resolution proceedings. If the resolution procedure is launched by financial creditors, an application for resolution is presented to the National Company Law Tribunal after giving the debtors 10 days’ notice. Debtors must file the consent of the Board of Directors as a condition antecedent before filing for the resolution process. If the debt exceeds 1 lakh to 1 crore rupees, a resolution process might be begun.
The Code recommends two approaches: 1) liquidation and 2) the Insolvency Resolution Process. The debtor’s assets are liquidated to pay off the liabilities during the Liquidation procedure. The Insolvency Resolution Process takes a more reasonable approach by allowing the business to be reclaimed. Financial creditors have the option of determining whether the debtor’s business is recoverable or not. If the Resolution procedure fails, the option of liquidation is available to cover the losses.
In the United States of America, the debtor firm or individuals can submit a petition in bankruptcy court under chapters 7, 9, 11, 12, 13, and 15 attesting to the company’s creditors, assets, and liabilities. Chapter 7 deals with asset liquidation. The Bankruptcy Court appoints a trustee to collect the liable assets to sell and deliver the proceeds to the creditors under this chapter. Chapters 11, 12, and 13 contain provisions for business reorganization.
PROCEDURE
In India, following filing the resolution, the Adjudicating Authority selects an Interim Resolution Professional (IRP) to begin the Corporate Insolvency Resolution Process (CIRP), and the IRP is n charge of the corporation. According to Section 18 of the IBC, the IRP’s responsibilities include gathering all information on the business’s assets and liabilities, forming the Committee of Creditors (CoC), managing the firm’s finances, and reviewing creditors’ claims against the indebted company. IRP works until the Resolution Professional is selected, and with the Committee of Creditors’ approval, even IRP can become the Resolution Professional (RP). The IRP’s role is temporary, and he handles the case until the Resolution Professional is chosen.
The procedure for the reconstruction of the debtor’s assets is outlined in Chapter 11 of the United States Bankruptcy Code. This provision is available to businesses, partnership firms, and even individuals, but corporations and partnership firms are more likely to use it. The company’s management continues in a regular phase under the requirements of this chapter, and the debtor retains possession of the indebted company and the majority of its assets. This method is referred to as Debtor in Possession. This strategy is used in the United States because the management of an indebted corporation becomes extremely complex when an outsider is given the authority to govern it. Newcomers experience ups and downs in their learning and understanding, which affects the company’s usual course of management. Furthermore, granting leadership to an outsider will undermine the confidence of those affiliated with the organization, making it harder to resurrect the indebted corporation.
The debtor can substantively sell the assets of the firm to recover from the debt under US law, but in India, because the management is overseen by IRP and RP, only they can sell the assets with permission from the Committee of Creditors.
TIME PERIOD FOR INSOLVENCY PROCESS
According to Section 12 of the Insolvency and Bankruptcy Code, 2016, the insolvency process must be completed within 180 days after filing the application with the NCLT. Proposals for rejuvenation will be made to the NCLT during a 180-day period. The debtor has 330 days from the date of filing to file the resolution plan. The Resolution Professional shall file an application to extend the period for the insolvency procedure beyond 180 days if the instruction was given by a resolution passed by a majority of 66 percent of the voting shares in the meeting of the Committee of Creditors. The Debtor has 120 days to file the resolution plan under Clause (b) of Section 1121 of Chapter 11 of the United States Code. The time period may be extended by the Court for up to 18 months, but under no circumstances may it be prolonged for more than 18 months.
Moratorium: Section 14 of the IBC provides that the Adjudicating Authority has the authority to proclaim a moratorium. For the present being, it is illegal to sue the corporate debtor and collect assets, security, or any property after the insolvency procedure has begun. In the United States of America, the Corporate Debtor is granted immunity by the moratorium after submitting an application in Bankruptcy Court.
Management: According to Section 16(1) of the IBC, the Adjudicating Authority shall appoint an Interim Resolution Professional on the day of the beginning of Insolvency. The interim Resolution specialist will be in charge of the Corporate Debtor’s operations. Accountants, officers, managers, and other debtor officials must report to the Interim Resolution Professional and submit all relevant documents and reports. The Board of Directors or the corporate director’s partners, as well as all of their powers, are terminated. According to Section 17(2), the IRP has the right to act on behalf of the Corporate Debtor and performs an act as described by the Board, and has access to all of the company’s records. Section 18 outlines the IRP’s responsibilities.
The Debtor retains possession of the corporation and is entitled to conduct all operations save the investigative functions and duties performed by the Trustee, according to the United States Bankruptcy Code. The Court has the authority to appoint a Bankruptcy Trustee to manage the Debtor’s estate and meet the debtor’s demands. The trustee cannot act without the Court’s consent. The trustee’s responsibilities and duty vary depending on the circumstances. In Chapter 7 cases, the trustee has the authority to manage the debtor’s nonexempt property and distribute the proceeds to the creditors. The Debtor in Possession must also report to the Trustee on monthly income distribution, expenses, creating new bank accounts, and tax payments. If the Debtor in Possession fails to comply with the reporting requirements, the Trustee may take action against him as well as file a petition with the court to have the case dismissed.
Committee of Creditors :The Committee of Creditors in India is made up of Financial Creditors. In the absence of Financial Creditors, the Committee of Creditors can be formed by operational creditors and one representative from workers and employees. The argument behind giving Financial Creditors preference in forming CoC is that their debts and finances are far larger than those of Operational Creditors. In the presence of Financial Creditors, operational Creditors will only be admitted to the Committee of Creditors if the amount of unrecovered debt exceeds 10%. The IRP will preside over meetings of the Committee of Creditors. The Committee of Creditors is in charge of passing the Corporation’s resolution plan. It has the authority to confirm the position of IRP as a Resolution Professional and can also substitute insolvency professionals for resolution professionals. The CoC determines the corporate debtor’s restoration. The resolution plan must be approved by the CoC. If necessary, the Committee can make changes.
The situation is different in the United States of America. The unsecured creditors and the seven highest unsecured claims against the debtor are represented on the Committee of Creditors. The Committee is formed by the United States Trustee. According to Section 1102, the Committee of Creditors, along with the Trustee, is in charge of running the business and keeping an eye on the Debtor. The Committee is also in charge of developing the resolution plan. According to Section 1103 of Chapter 11, by court order, the Committee of Creditors can hire an attorney or any other expert needed to fulfill the task or help the committee.
INSOLVENCY RESOLUTION PROCESS FOR INDIVIDUALS AND PARTNERSHIPS
The reorganization or insolvency resolution process entails the debtor devising a strategy for repaying creditors. The strategy is essential to obtain creditor approval. If the plan is approved, the Debt Recovery Tribunal (DRT) issues an order that binds both the debtor and the creditor to the plan. When the plan is rejected, either the creditor or the debtor may file for bankruptcy. After receiving confirmation from the Board, the DRT is obliged to appoint the resolution professional. Following the examination of the insolvency report, the Resolution Professional shall send the report to the DRT. DRT must accept or reject the report within 14 days and notify creditors of their claims within 21 days of receiving the report. Creditors are told to file claims with the Resolution Professional. When Resolution Professionals receive claims from creditors, they must compile a list of all creditors. The Resolution Professional is expected to schedule creditor meetings to pass, reject, or make revisions to the resolution plan. Decisions about the modification, approval, or denial of the resolution plan can be reached with 75% of the votes cast. The Resolution Professional draughts and submits the minutes of the Creditor meetings to the DRT.
Insolvency Resolution Process for Individuals and Partnerships is covered in Chapter 11 of the United States Code. Individuals must meet some additional conditions for the Resolution procedure. In contrast to the Indian Bankruptcy Code, which requires creditors to register claims, Sections 301 and 303 of Chapter 11 of the Code require the debtor to file the liabilities and assets with the court. Attesting to the specifics of current income and expenditures, financial documents, executory contracts, and leases that have not yet expired. Individual debtors must also file the certificate of Credit Counseling and, if prepared, any debt repayment plan developed during Credit Counseling, a statement of an anticipated increase in income following the filing procedure, and details of interest the debtor has on the federal educational institution on tuition accounts.
CROSS BORDER INSOLVENCY
The mechanism and legal foundation for establishing a Cross Border Insolvency mechanism have been established by the United Nations Commission on International Trade Law (UNCITRAL). Currently, however, India exclusively serves domestic demand and handles domestic insolvency issues. In State Bank of India v. Jet Airways (India) Ltd., the National Company Law Tribunal emphasized the importance of adopting the UNCITRAL model for cross-border insolvency in 2019.
The UNCITRAL model for cross-border insolvency was adopted in Chapter 15 of the United States Bankruptcy Code. It explains forth the method and requirements that must be met before the Cross Border Insolvency can begin. To begin the action under Chapter 15, the representative must file a petition for recognition. Attesting a copy of the document or any other evidence of international proceedings and naming a representative to represent the debtor in the proceedings. The question then becomes whether the foreign proceeding is main or non-main, and the court must determine. The proceeding is non-main if it is outstanding at the location where the debtor has only one establishment; it is major if the “Centre of Main Interest” is located at the location of the proceeding. When determining cases of cross-border insolvency, US courts use international treaties to back up their decisions and ensure that they are in conformity with the legal framework set by UNCITRAL and the European Union. After determining whether the process is main or non-main, the court can grant relief to the debtor based on the representative’s request. Depending on the circumstances of each instance, relief can be either provisional or automatic.
SUMMING UP THE PROCEDURE
In India, the insolvency procedure must be completed within 180 days of its inception and can be prolonged for up to 90 days, failing which the court has the authority to impose asset liquidation. More specifically, after accepting the resolution plan, the debtor is relieved from all previous obligations save those specified in the plan. If the plan is not approved, the bankruptcy process will begin in accordance with Chapter 7.
CONCLUSION
Prior to the introduction of the Insolvency and Bankruptcy Code in 2016, India had no separate law governing insolvency procedures, which were governed by the Companies Act, Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, and Sick Industrial Companies Act. However, the United States was well ahead of its time when it passed its first insolvency legislation in 1800. Despite the fact that many revisions were made and the statute of 1800 was later repealed. Even though the current law is very ancient, the rules are wide and incorporate innovative ideas such as Debtor in Possession as well as processes for Municipality insolvency and Cross Border Insolvency.
India still has a long way to go, and given that it is a developing country, significant reforms in the law are required. As evidenced by previous examples, it is past time to integrate the idea of cross-border insolvency in the Insolvency Code. Despite this, there are significant parallels between the Indian and US bankruptcy codes. Both statutes provide for different procedures for individuals and businesses, culminating with plan approval or plan disapproval.
REFERENCES
- Md Rashid Shamim, Bankruptcy Laws: A Comparative Study of India and USA, International Journal of Management, 10 (2), 2019, pp. 247-252.
- Dr. Binoy J. Kattadiyil and CS. Peer Mehboob, Corporate Insolvency in India and Other Countries- A Comparative Study, IJMER, 7(9), 2020
- Shashank Gupta, India & U.S.A: Comparing the Conundrums of Insolvency Resolution Process, IJALR (July 04, 2021) https://www.ijalr.in/2021/07/india-usa- comparing-conundrums-of.html
- Rahul Sakia, Corporate Bankruptcy Resolution: Juxtaposing the U.S. and India, Financier Worldwide (March 2020) https://www.financierworldwide.com/corporate-
bankruptcy-resolution-juxtaposing-the-us-and-india - Aghion, Phillipe, Oliver Hart and John Moore (1992). “The Economics of Bankruptcy Reform”, Journal of Law, Economics, and Organization.
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