A vast majority of the legal systems in the Commonwealth countries are founded on English common law. Hence, it is not a surprise that the Code closely mirrors the UK Insolvency Regime. The Bankruptcy Law Reforms Committee (BLRC) decided to move away from the existing "debtor in possession" regime to a "creditor in control" regime; the UK's creditor in control regime is one of the most established and recognized globally.
Although the Code is based on the UK structure, the BLRC has identified key aspects of the legislation that may not work in an Indian scenario, and therefore appropriately customized it for India. Some of the key similarities and differences between the Insolvency Law in the UK and the Code are detailed below:
1. Creditors drive the process; licensed IPs run the process: If a borrower is in default, a creditor can file an application to the court and start the insolvency process. The creditors are in control in determining the future course of action. A licensed IP will run the process.
2. Any creditor or the debtor can initiate the process: In the event of default, a creditor can initiate the insolvency process. The debtor can also initiate the process by making an application to the court. The process is broadly similar irrespective of whether the application is filled by a creditor or debtor.
3. Moratorium provided during the insolvency period: Upon commencement of the insolvency resolution process, a moratorium will be available to the corporate debtor during which period no suits can be instituted or recovery action can be initiated.
4. Clear waterfall of payments outlined during liquidation: Under both the UK and the India regime, the legislation provides a clear waterfall of payments during liquidation, giving priority of payment to secured and preferential creditors. During liquidation, the liquidator pays the liquidation costs first before making payment to any preferential/secured creditors.
5. Multiple IPAs (or equivalent) regulated by a Board: In the UK, there are multiple self-regulating bodies including ICAEW, ACCA and ICAS. Any professional who intends to become an IP needs to register with such a body and pass an exam (besides putting in minimum hours of practical training). There is a common board, which oversees the functioning of all the self-regulating bodies and brings in consistency in their functioning. In India as well, the draft regulations provide for multiple IPAs to be formed under the IBBI.
1. Creditors' involvement during the insolvency process: In the UK, the IP is an officer of the court and once the appointment and remuneration are approved by the creditors, the IP is generally not required to take any further approvals from the creditors with respect to the management of operations of the corporate debtor during the insolvency period. However, in under the Code (Section 28), there are multiple actions for which the IP needs prior approval from the creditors. There is a greater involvement of creditors in India during the insolvency process.
2. Performance security/bond to be provided by the IP: In the UK, IPs are required to provide a general and a specific bond based on the value of assets involved under the case. The bond is to cover a situation if any fraudulent act is committed by the IP. The provision for a bond was initially specified in the draft of the Code submitted to the JPC but removed in the final draft that was enacted. Further, while only an individual can be an IP in the UK, as per the draft regulations in India, individuals and partnership firms (with unlimited liability) can take IP appointments.
3. Voting rights of creditor classes: In the UK, all creditors (except secured creditors to the extent of the value of their security), including operational (trade) creditors, have voting power in the creditor committee in the ratio of the amount outstanding — particularly for the approval of a resolution plan. However, in India, only financial creditors (secured or unsecured) can vote in a creditor committee. They need to ensure, though, that a minimum of "liquidation value' is provided to the operational creditors in any resolution plan. In India, 75% of the financial creditors (in value) have to approve the resolution plan proposed during the insolvency process. In the UK, creditors with a simple majority approve the plan.
4. Deadline for the completion of the insolvency resolution process: The Code specifies that if a resolution plan is not approved by the creditors within 180 days (or as extended to 270 days) of the CIRP, the liquidation process would automatically be triggered. In the UK, no such timeline has been specified under the law.
5. Remuneration of liquidator; timeline for completion of liquidation: In the UK, remuneration for the IP in liquidations is generally decided based on discussion between the creditors and the IP, taking into account the time spent, assets realized, complexity of the case etc. If a consensus cannot be reached, the court can fix the remuneration. In India, the liquidation remuneration could be decided by the creditors in certain circumstances while in other cases, it would be decided based on the scale of realization and distribution (the court might consult the creditors or the IP while fixing the remuneration). In India, as per the draft regulations, the liquidator is required to liquidate the assets within a period of two years. Extension can be granted in exceptional cases. There is no such requirement in the UK for the liquidator.
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