Growth of entrepreneurship in a country is largely dependent upon its insolvency laws. Insolvency framework of a country must offer rescue procedures for the rehabilitation of a financially distressed company, as a potential insolvency is not always a sign of a death knell. This article examines the insolvency laws of India and UAE, which have been reformed recently by incorporating the internationally recognized best practices within their framework.
Prior to the introduction of Insolvency and Bankruptcy Code, 2016 (“IBC”), India did not have a robust insolvency law to deal with the state of indebtedness of a business enterprises, winding up being the only insolvency procedure available. Historically, the Companies facing financial difficulties would be pushed into liquidation by its Creditors, as there were no provisions related to reorganization. Thus, the earlier laws were neither effective nor efficacious and hence, proved inadequate for resolving corporate insolvency in an effective manner.
In United Arab Emirates (“UAE”), prior to the introduction of the UAE Bankruptcy Law Federal Decree No. 9 of 2016, bankruptcy proceedings were governed under Chapter V of the Federal Law No. 18 of 1993 (Commercial Code). Under the Old regime, bankruptcy could lead to initiation of criminal proceedings, imprisonment, asset stripping, etc. of those who manage the debtor company. Court driven procedures, therefore, were rarely used, companies preferred to settle their claims by resorting to out of court procedures.
Coincidentally, both IBC and UAE Bankruptcy Law came into effect in December, 2016. While the objective of both the Codes are similar, the structure and approach for achieving the same differs.
INTRODUCTION OF INSOLVENCY LAW REFORMS: OBJECTIVE
The main objective behind introduction of IBC is to provide a single legislation for resolution of insolvency of individuals as well as Corporate Debtors in a time bound manner. It was designed to bring in place the insolvency procedures that strike a balance between the need to address the debtor’s financial difficulty vis-a-vis the interests of the Creditors through collective resolution of all claims against a debtor. It is aimed towards continuance of the business enterprises as going concern, including its business operations during the resolution process to ensure that maximum value is realized through the resolution process.
In order to decriminalize bankruptcy and remove the impediments to the restructuring of Corporate entities, the UAE Bankruptcy Law was enacted. It introduced various modern-day reorganization procedures such as preparation of plan for restructuring and priority funding during the restructuring for continued business operations. The Law applies to traders, both Corporate entities and individuals. The new Bankruptcy Law, is not applicable to Dubai International Financial Centre (“DIFC”) and Abu Dhabi Global Market (“ADGM”), which have their own comprehensive Commercial laws.
ANALYSIS OF THE MAIN CHARACTERISTICS OF THE INSOLVENCY PROCESSES IN INDIA AND UAE
Insolvency of a company is described as bankruptcy in UAE and insolvency in India. Whilst the IBC and UAE Bankruptcy Law have some similarities, they differ in certain ways. Main characteristics of the Insolvency laws of both the countries are compared below:
COMPARISON OF INDIAN AND UAE’S CORPORATE BANKRUPTCY LAWS
|1.||Forms of Procedures/Reliefs available||Two reliefs: Insolvency resolution Process, Liquidation||Three Reliefs: Preventive Composition Procedure (“PCP”), Bankruptcy Proceedings, Liquidation.|
|2.||Conditions for Insolvency||Occurrence of default by the Corporate Debtor in repayment of a debt of more than one lakh rupees in value||Insolvency is determined either through cash flow test (a state of cessation of payments for more than 30 consecutive days) or balance sheet test (the assets of the Debtor are not sufficient to cover the liabilities).|
|3.||Who may apply?||Corporate Insolvency Resolution Process (“CIRP”) could be initiated by:
|I. PCP can be applied for by a Debtor only, who is facing financial difficulties, but has not become insolvent as yet.
II. Bankruptcy Procedure, could be initiated by:
|4.||Bankruptcy Court System||Insolvency related cases fall within the exclusive jurisdiction of Commercial Courts i.e. National Company Law Tribunal (“NCLT”).
|Cases related to bankruptcy are dealt with by Civil Courts in accordance with the procedures set out in UAE’s Civil Procedures Law. There are no specialized Courts in UAE.|
|5.||Procedure||An application for initiating resolution process is to be submitted before NCLT along with requisite documentation. Debtors are allowed to object to the initiation of the insolvency proceedings, if application is moved by a creditor.||An application for initiating PCP or bankruptcy proceedings may be filed before the Court along with the necessary documentation. The Court appoints an expert to prepare an initial report as to whether the conditions for commencement of the PCP are fulfilled. The said application would either be accepted or rejected by the Court on the basis of the said report.|
|6.||Court’s discretion while making a commencement decision||The discretionary powers of the Adjudicating Authority while making a commencement decision in a bankruptcy proceeding are limited to the function of ensuring that the application contains the requisite information and is supported by necessary documents.||While deciding an application for initiating Bankruptcy Procedure, Courts need to ensure that documentation is complete. PCP, however, may be declined by the Courts on the ground including but not limited to bad faith.|
|7.||Suspension of proceedings||Once an application for Insolvency Resolution is admitted, a moratorium is declared in respect of all kinds of creditors’ actions which amounts to an automatic stay on the initiation and continuation of all recovery proceedings.
|Initiation of bankruptcy procedures would result in an automatic stay on:
However, a secured creditor may apply for enforcement of its secured claim, with the permission of the Court.
|8.||Control Rights||IBC vests strong control rights upon the Financial Creditors, who exercise control over the affairs of the company through the Insolvency Resolution Professional (“IRP”). Board of Directors stand suspended, once an IRP is appointed.||UAE Bankruptcy Law creates a debtor-in-possession regime as the Debtor remains in charge of the day-to-day affairs of the company during the entire restructuring process, subject to the constant supervision of Trustee and the Judges.|
|9.||Appointment of Insolvency Professional||IRP is appointed by the Adjudicating Authority to administer the Resolution Process and take charge of the assets and the management of the company during the period.||A Trustee is appointed by the Court upon admission of the application to handle the restructuring process. A Trustee is responsible to maintain the business as a going concern and preserve the assets of the company.|
|10.||Committee of Creditors||IRP after collation of all claims against the Debtor constitutes a Committee of Creditors (“CoC”) to be composed of Financial creditors. All business-related decisions (listed under Section 28 of IBC) could be taken by IRP, only with the prior consent of the CoC.||Court appoints Committee of Creditors only after the preparation of the draft restructuring scheme for discussion purposes. However, the Court may appoint Supervisors from each category of Creditors (i.e. secured and unsecured) to supervise the proceedings. But, the Trustee is not required to obtain their consent while taking business related decisions.|
|11.||Interim Financing||IRP can raise interim finances with the prior approval of the CoC.||A Trustee with the prior permission of the Court raises additional finances which would be given precedence over the existing liabilities.|
|12.||Resolution Process||IRP prepares an Information Memorandum, on the basis of which prospective bidders are invited to submit their plans to take over the entire business of the Corporate Debtor. Such proposals are placed before the CoC by the IRP. If the CoC is of the view that the going concern value/bid value would be more than the liquidation value, then, such a resolution plan would be accepted.|| A Draft restructuring scheme is prepared by the Trustee with the assistance of the debtor, and is submitted before the Court which will appoint Committee of secured and unsecured Creditors, separately for discussing the draft restructuring scheme.
|In UAE, in a Bankruptcy Proceeding, Trustee needs to prepare a draft report as to whether the debtor’s business is capable of being restructured. If the Court arrives at a conclusion, on the basis of said report, that there is a possibility of revival of debtor’s business, it may initiate the restructuring procedures.
A draft restructuring scheme must include the proposals from prospective investors, if any, to purchase the business (partly or wholly) of the debtor.
|13.||Approval of Restructuring Plan||If the CoC approves the plan by a majority of seventy-five percent, it is submitted to NCLT for its approval. If NCLT is satisfied that the amount given to each of the creditors in discharge of its debt is not less than the sum it would have received upon liquidation, then, it would sanction the said resolution plan.||Only unsecured creditors have a right to vote. If the plan is approved by a two-third majority, it shall be sent for final approval of the Court. The Court may sanction the said plan, if, the Court is satisfied that each Creditor will receive an amount equal to or more than, the liquidation value.|
IBC in India has had quite an interesting and eventful journey throughout 2017, which included major legislative changes to the nascent code through amendments and several large Corporates undergoing the insolvency resolution process. However, in UAE, the bankruptcy law is largely untested and no major Corporate Insolvency Process has been undertaken so far.
While in UAE, the efficacy of the newly established insolvency regime is yet to be examined, Insolvency laws in India is fast evolving. Ambiguities are being clarified by the Higher Courts through their pronouncements and amendments have been made by the Parliament to further strengthen the Code. Therefore, UAE could consider incorporating certain aspects of IBC into their Bankruptcy law.
Reform in insolvency laws alone would not make much difference. There is need to introduce infrastructure related reforms through setting up of Commercial Courts manned with judges and personnel trained to handle bankruptcy cases.
Second aspect would be extending the applicability of automatic stay to secured creditors as well, in order to make the restructuring process productive. If the secured creditors are not covered under the moratorium, they can apply for invocation of their secured claim, this will lead to frustrating the entire restructuring proceedings.
These are some aspects, which if considered, may lead to strengthening of the UAE Bankruptcy Law.
Compiled by GSTstreet for #GSTManthan