Insolvency Law in India and Other Countries – A Comparative Study

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
2. Comparative Analysis of Insolvency Law Globally
3. Conclusion

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

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.