Although in everyday speech the terms “insolvency” and “bankruptcy” are frequently used interchangeably, there is a clear distinction between the two. Bankruptcy and insolvency are not interchangeable terms. The term “insolvency” refers to a person’s general incapacity to pay off their debts or to a situation in which their assets are insufficient to do so.
The term “insolvency” is only used in a narrow sense to refer to a party’s inability to pay his debts when they become due during normal business operations.
The state of insolvency is referred to as bankruptcy. Unable to pay back obligations to creditors, a person or a business has this legal position. The filing of a petition in court or before a proper authority is appointed for this purpose is the first step in the bankruptcy process.
The assets of the debtor are then assessed and allocated to paying creditors in accordance with the law. Both organisations and corporations as well as private persons can be insolvent. If insolvency is not resolved, it results in liquidation for corporations and bankruptcy for individuals.
Cross Border Insolvency
When a financially troubled debtor has assets or creditors in more than one country, the treatment of such debtor is governed by cross-border bankruptcy, often known as international insolvency. Cross-border insolvency typically focuses more on the failure of multinational corporations than it does on personal bankruptcies.
Cross-border insolvency places equal emphasis on the three areas of choice of law rules, jurisdiction rules, and judgement enforcement rules. But when it comes to insolvency, the main concern is often the acceptance of foreign insolvency professionals and their authority.
Theories of international bankruptcy
There are generally three methods for handling cross-border insolvency:
- Territorial Approach: According to which each nation applies its own domestic insolvency rules to all of the debtor’s belongings and to all of the creditors who are domiciled inside its borders. This method does not acknowledge the extraterritorial nature of bankruptcy law.
- The universalist (or universal): approach distributes all of the debtor’s assets by a single bankruptcy office holder, regardless of where the assets or claimants are situated, and any cross-border insolvencies are handled in accordance with a single global insolvency system.
- Hybrid Approach: There are numerous hybrid methods, either in principle or in reality, such as Modified universalism, wherein each nation looks to determine which state will be the most appropriate venue for the proceedings, and all other states assist and facilitate such proceedings.
Historical Background of Cross-border Insolvency
The majority of legal systems historically have evolved according to a territorial basis, and bankruptcy rules are no exception. However, there have been sporadic efforts to create cross-border cooperation in insolvency proceedings since the beginning.
In order to harmonise private international law at the signatory countries (Argentina, Bolivia, Paraguay, Peru, and Uruguay), seven treaties were signed in Montevideo in 1889. One of these accords dealt with the regulation of interstate bankruptcy. When the treaty was amended in 1930, it basically provided for a system that was more akin to territorialism than universality, allowing for several bankruptcy administrations for multinational corporations in various governments.
The Nordic Bankruptcy Convention, although not a lengthy treaty, is still in existence today and makes it easier to administer cross-border bankruptcies in the Scandinavia region. It was signed into law by Denmark, Finland, Iceland, Norway, and Sweden in 1933.
The Model International Insolvency Co-operation Act, a model law issued by the International Bar Association in the 1980s, was eventually not implemented by any government, making the endeavour fail.
Modern Day Policies
The UNCITRAL Model Law on Cross-Border Insolvency and the EC Regulation on Insolvency Proceedings 2000 are two current regimes for international insolvencies that have been put into practice on a more extensive scale than a regional one.
- The UNCITRAL Model Law: On June 30, 1997, the United Nations Commission on International Trade Law approved a model law for cross-border insolvency. Currently, 46 jurisdictions have substantially incorporated the Model Law into their domestic legislation, including several nations with sizable economies and substantial amounts of international trade, including the United States, Japan, the United Kingdom, Australia, and Canada, as well as top emerging markets like Mexico and South Africa.
- EC Regulations: The EC Regulation, as its name implies, governs relations among European Union members and aims to establish a framework for the beginning of legal procedures as well as for mutual recognition and cooperation. The EC Insolvency Rule, unusually for a European regulation, does not aim to harmonise insolvency laws among the various member states.
Insolvency Framework in India
A specially created “Bankruptcy Law Reforms Committee” (BLRC) under the Ministry of Finance prepared the Insolvency and Bankruptcy Code Bill. On December 21, 2015, the Insolvency and Bankruptcy Code was introduced in the Lok Sabha and then referred to a Joint Committee of Parliament.
The Committee submitted its recommendations, and on May 5, 2016, the Lok Sabha approved the revised Code. The Code was approved by the Rajya Sabha on May 11, 2016, and on May 28, 2016, the president gave his assent to it.
The entire country of India is covered by the Insolvency and Bankruptcy Code, 2016. However, the State of Jammu and Kashmir is not covered by Part Ill of the Code.
According to Section 1 of the Code, the Central Government may designate several dates for the start of various sections of this Code, and any reference to the commencement of this Code in a particular provision should be interpreted as a reference to that provision’s commencement.
By adopting a single statute for insolvency and bankruptcy, the Insolvency and Bankruptcy Code, 2016, streamlines the current structure. Any entity that the central government may specify is subject to the Code, including corporations, partnerships, limited liability partnerships, people, and other entities.
The 255 sections that make up the Insolvency and Bankruptcy Code, 2016, are divided into five Parts. Part Ill gives out the process for insolvency resolution and bankruptcy for individuals and partnership firms, whereas Part II deals with insolvency resolution and liquidation for corporate entities.
The Code has provisions in Parts IV and V for the regulation of insolvency professionals, agencies, and information utilities, respectively. There are eleven Schedules in the Code that change numerous laws.
Insolvency Framework in the United Kingdom
The United Kingdom’s insolvency system is governed by the Insolvency Act of 1986 and the Insolvency Rules of 1986. The Cork Review Committee Report on Insolvency Law and Practice served as a basis for the 1986 Insolvency Act’s adoption (1982).
The Bankruptcy Act of 1914, the Deeds of Arrangement Act of 1914, the Companies Act of 1948, and the portions of the Country Code Act of 1959 comprised the majority of the law pertaining to insolvency in the UK prior to the passage of the Insolvency Act of 1986. The concepts of equity and common law were added to them.
The Act of 1986 consolidated all laws pertaining to
- Company insolvency and winding up.
- Laws pertaining to individual insolvency and bankruptcy, and
- Laws pertaining to these two subject matters, such as those governing the role and qualifications of insolvency practitioners, the public administration of insolvency, the punishment and redress of malpractice and wrongdoing, and the avoidance of certain transactions at an undervalue.
The Insolvency Act, 1986, which deals with the insolvency of both people and businesses, is broken down into the three categories below.
- Group I address Corporate Insolvency
- Group II focuses on personal insolvency
- Group III handles many issues relating to both corporate and individual insolvency.
Insolvency Framework in United States of America
American Insolvency Framework in the United States of America, bankruptcy is governed by the “Bankruptcy Code,” a federal law. All bankruptcies in America are governed by the same federal statute. Title 11 of the United States Code contains the Bankruptcy Code, which was codified in 1978 by section 101 of the Bankruptcy Reform Act. The Federal Rules of Bankruptcy Procedure control the procedural parts of the bankruptcy process (Bankruptcy Rules).
- Liquidation is covered in Chapter 7. In Chapter 7 bankruptcy, a court-appointed trustee or administrator seizes non-exempt property, sells it, and then distributes the money to creditors.
- Chapter 9 is headed “Adjustment of a Municipality’s Debts.” Reorganization is an option that municipalities have in Chapter 9 bankruptcy proceedings. In Chapter 9 Bankruptcy proceedings, a municipality (which includes cities, towns, villages, counties, taxing districts, municipal utilities, and school districts) receives protection from creditors and is able to repay debt through a confirmed payment plan.
- Reorganization is covered in Chapter 11. In contrast to Chapter 7, where the company shuts down and a trustee sells all of the assets, in Chapter 11 the debtor keeps control over its business operations while simultaneously paying creditors through a court-approved restructuring plan.
- CS Kajal Govani, “Insolvency and Bankruptcy laws in various countries”, also available at Insolvency and Bankruptcy Law In Various Countries (taxguru.in)
- “Cross Border Insolvency”, also available at https://en.wikipedia.org/wiki/Cross-border_insolvency
- The restructuring and insolvency legal framework in USA”, also available at https://www.lexology.com/library/
This article has been authored by Aditi Jangid, a student at Delhi Metropolitan Education (Affiliated with GGSIPU).
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