This article is written by Akarsh Chaturvedi, pursuing Diploma in General Corporate Practice: Transactions, Governance and Disputes from Lawsikho. The article has been edited by Smriti Katiyar (Associate, LawSikho).
Code for Insolvency and Bankruptcy law in India (“IBC” or “Code”) and that of United Arab Emirates (UAE) are very different and distinct. UAE has two different laws; one being the Insolvency Law for Individuals (Insolvent physical persons) [Federal Decree-Law No. (19) of 2019] (“Insolvency Law”) and the other being the Bankruptcy Law [Federal Law by Decree No. (9) of 2016] (“Bankruptcy Law”) for corporate entities and individuals involved in commercial activity. Broadly the purpose of such law is the maintenance and enhancement of financial stability in a country.
Though UAE has two laws, the literal meaning of ‘Insolvency’ and of ‘Bankruptcy’ cannot be misunderstood. Insolvency is a state in which a debtor is unable to pay its debts and its liabilities are greater than its assets, whereas Bankruptcy is a process whereby a debtor tries to revive from its insolvent state. The Insolvency Law of UAE is for individuals and the Bankruptcy Law is for corporate entities and individuals involved in commercial activity.
Where the objective of Insolvency and Bankruptcy Code, 2016 is resolution of insolvent state of corporate persons, partnership firms and individuals, and balance the interest of all the stakeholders in the resolution process as per the Code. The primary purpose of both laws of UAE, i.e. Insolvency Law and the Bankruptcy Law is to protect the common interests of both the creditor and the debtor in a fair and balanced manner, which is similar and not exactly the same as IBC.
IBC lay emphasis on keeping debtors as a going concern rather than only protecting the common interest of debtors and creditors. The objective itself of IBC has been reiterated by the Supreme Court of India and different Company law tribunals in various cases. Recently, in Dinesh Gupta vs. Vikram Bajaj Liquidator M/s Best Foods Ltd., NCLAT, New Delhi shed light on the primary aim of the code, that is :
(2) Maximization of value of assets of the Corporate Debtor and thereby for the benefit of all the creditors.
Further, the court held that a Resolution Plan is not recovery, sale, auction, or liquidation plan. Also, in Prowess International Pvt. Ltd. vs. Parker Hannifin India Pvt. Ltd. – CA(AT) (Insol.) No. 89 of 2017, the appellate tribunal held that Insolvency Resolution process is not a recovery proceeding to recover the dues of the creditors.
One of the key features of both the laws of UAE is to decriminalise the financial obligations that arise from non-payment of debt by a debtor. The Insolvency Law of UAE became effective on 29th November 2019 which aims to provide protective measures and expert assistance to natural persons facing financial difficulties through a court-led process to reach a settlement with its creditors. It applies to natural persons who are not engaged in economic activity and are not a trader.
On the other hand, Part three of IBC i.e. provisions for insolvency of individuals and partnership firms got notified by the Government of India on 1st December 2019. Whereas, the other law of UAE i.e. Bankruptcy Law is applicable to companies, Individual traders, and civil companies (partnership firms). It explicitly provides for three processes i.e.
(i) To assist the debtor by means of a protective composition plan (Article 5);
(ii) Restructuring (Article 67); and (iii) liquidation (Article 67).
Key Provisions of Insolvency law of India and UAE
The Insolvency Law is applicable to natural persons who are not engaged in economic activity and are not a trader and excludes all the debtors that are subject to the Bankruptcy law.
The Bankruptcy Law applies to:
- Companies governed by Commercial Companies Law of UAE.
- Companies partially or fully owned by federal or local government.
- Traders as defined under Commercial Transaction Law of UAE.
- Companies and Establishments in Free Zones governed by Federal Law No. (8) of 2004 on Financial Free Zones.
- Civil Companies, discharging professional activities, having licenses.
It is noteworthy that the Bankruptcy Law does not apply to companies set up and carrying out its activities within the Dubai International Financial Centre and Abu Dhabi Gold Market (Financial Free Zones), as these have their internal legislation in place for Insolvency and Bankruptcy.
The Insolvency and Bankruptcy Code applies to:
- Companies incorporated under the Indian Companies Act.
- Companies governed by any special Act.
- Any Limited Liability Partnership incorporated under LLP Act, 2008.
- Any such body incorporated under any law as the Central Government may notify.
- Personal Guarantors to corporate debtors.
- Partnership firms and proprietorship firms; and
- Individuals other than personal guarantors to corporate debtors.
- Any other person incorporated with limited liability not including any Financial Service Provider.
The Applicant to initiate resolution process
One of the major differences between the law of India and of UAE is of the applicant who can initiate the resolution process. Where under IBC a corporate insolvency resolution process may be initiated by creditors as well as the debtor himself, in the resolution process under the Bankruptcy Law only the Debtor has the right to apply to Court to commence the resolution process i.e. the Protective Composition Procedure (Article 6). Also, in the resolution process under Insolvency Law only the debtor himself may submit the application to commence the resolution process i.e. Financial Settlement Proceedings (Article 3), however, applications for the proceedings of Insolvency and Liquidation, under Book 3 of Insolvency Law and for Bankruptcy (Article 67) under the Bankruptcy Law, can be submitted by the creditors as well. The protective composition procedure and financial settlement proceedings under the aforesaid laws is similar to insolvency resolution process as given under Chapter II of Part II and Chapter III of Part III of IBC respectively.
In the insolvency mechanism under IBC creditors are broadly classified into two categories which are financial creditor and operational creditor. Financial creditor can file an application for initiation of corporate insolvency resolution process under section 7 of the Code whereas operational creditor can file an application under section 9 of the Code and corporate applicant of corporate debtor can initiate the resolution process under section 10 of the Code.
The Authority to Adjudicate
In India the National Company Law Tribunal (“NCLT”) is the appropriate authority to adjudicate the matters pertaining to Insolvency and Bankruptcy of Corporate persons. NCLT of a particular place has the territorial jurisdiction where the registered office of a corporate person is situated and it is defined as the Adjudicating Authority under IBC. The Adjudicating Authority is empowered to provide sanctions – for the appointment of insolvency professionals, for any decision of the CoC, for resolution plan etc.
Pertinently, the authority to adjudicate insolvency matters of individuals and partnership firms is with the Debt Recovery Tribunal (Section 179).
Under the Insolvency Law of UAE and the Bankruptcy Law the Court having jurisdiction pursuant to the Civil Procedure Law has the jurisdiction to deal with the matters. In the cases of Insolvency Law it is the Court of first instance having the jurisdiction to adjudicate the Insolvency matters. Thus, unlike a separate adjudicating authority established for matters related to companies under IBC, the Courts in UAE having civil jurisdiction serve as the adjudicating authority in matters of insolvency and bankruptcy.
Commencement of resolution process
Under the Indian Law i.e. the Insolvency and Bankruptcy Code, 2016, its concept is based on debt and its default. Section 6 of IBC makes it evident that where any corporate debtor commits a default, a financial creditor, an operational creditor or the corporate debtor itself may initiate a corporate insolvency resolution process. The initiation date and the commencement have been defined separately under the code. Section 5 sub-section (11) defines “initiation date” for corporate insolvency resolution process – as the date on which a financial creditor, operational creditor or corporate applicant makes an application to the Adjudicating Authority. Sub-section (12) of Section 5 defines “insolvency commencement date” as the date of admission of an application by the Adjudicating Authority under section 7, 9 or section 10 of the Code for initiating corporate insolvency resolution process. Also, for insolvency and bankruptcy of Individuals and partnership firms, the threshold of default is minimum one thousand rupees. Thus, for the commencement of the resolution process for corporate entities or individuals or partnership firms there shall exist a default on the part of the corporate debtor. Having talked about the prerequisite, the final authority to admit the application for commencement of the resolution process lies with the adjudicating authority.
The apex court in Swiss Ribbons Pvt. Ltd. & Anr. vs. Union of India & Ors. – AIR (2019) SC 739, held that a ‘claim’ arises only when a debt becomes ‘due’ and ‘default’ occurs only when a ‘debt’ becomes ‘due and payable’. It is this reason why financial creditors have to prove default. Further, Swiss Ribbons was a case explaining the differentiation in triggering of insolvency resolution processes by a financial creditor and an operational creditor.
There are two kinds of proceedings under the Insolvency law for natural persons one is financial settlement proceedings which is similar to insolvency resolution proceedings under IBC and the other is Insolvency proceedings under Chapter 1 of Book 3 of the Insolvency Law of UAE which is the liquidation proceedings of the debtor. The authority of Expert (similar to insolvency professional under IBC) continues even after the Plan for settlement of financial proceedings (similar to repayment plan under IBC) gets approved by the adjudicating authority to implement the plan. The expert acts as the supervisor of the Plan for the time of its implementation (Article 21). Also, there is a scope of amendment to the Plan after the approval of the Plan by the court under Article 20 of the Insolvency Law as well as Section 116 of IBC.
Under the Bankruptcy Law as well there are two kind of processes i.e. Protective Composition Procedure provided under chapter Three and the Bankruptcy Procedure, which includes restructuring and liquidation, given under Chapter four. Pertinently, it is the court that accepts the application for commencement of Protective Composition Procedure for debtor with a prerequisite that the debtor is not in a state of Cessation of Payment for more than thirty (30) consecutive business days as a consequence of the disorder of the Debtor’s financial condition and if the Debtor is not over-indebted (Article 6, Bankruptcy Law).
While under the UAE Laws on insolvency and on bankruptcy, it is the discretion of the Court to decide on the application by the natural person under the Insolvency Law (Article 7, Insolvency Law) to initiate the settlement of financial obligations of individuals which is dissimilar when compared from insolvency and bankruptcy of individuals and partnership firms under the Indian law, where although it is the adjudicating authority to admit the application but it is the debt and its default which is prerequisite for an application to get admitted. Also, under IBC an application can be made even by a resolution professional of the debtor for a ‘fresh start’ resolution process.
Further, the minimum amount of default to initiate a corporate insolvency resolution process under IBC is rupees one crore, and for individuals and partnership firms is rupees one thousand. Whereas it is only in the process of liquidation under the Insolvency Law and in the process of Bankruptcy under the Bankruptcy Law, where the minimum amount to initiate the processes is two hundred thousand (200,000) Dirhams and one hundred thousand UAE Dirhams (AED 100,000) respectively by creditor(s).
The Authorised representative of debtor
A corporate debtor under the Insolvency and Bankruptcy Code, 2016 is represented or in correct words the management of the corporate debtor is taken over by the Interim Resolution Professional and thereafter the Resolution Professional (“RP”) once an application for corporate insolvency resolution process is admitted by the adjudicating authority. The appointed resolution professional manages the operations of such corporate debtors to keep it as a going concern (Section 20, IBC). However, the responsibilities of a resolution professional under insolvency resolution process for individuals and partnership firms is different as a debtor in consultation with RP prepare a repayment plan, the RP after the submission of repayment plan along with his report and thereafter its approval by the adjudicating authority, supervise the implementation of the repayment plan till the completion of repayment plan after which a discharge order is passed by the adjudicating authority.
The roles and responsibilities of experts assigned under the Insolvency Law are very much similar to the role of resolution professionals under insolvency resolution process of individuals and partnership firms. Here, it is the expert who prepares the resolution plan in cooperation with the debtor. Expert also acts as a supervisor for implementation of a plan for settlement of financial obligations.
Under the protective composition procedure in the Bankruptcy Law Trustee(s) is/are appointed who may either be one of the experts appointed by the court under Article 13 of the Bankruptcy Law. However, the management of the business of the debtor is carried out by the debtor itself but under the supervision of the trustee. Here the whole management of debtor’s business is not taken over by the trustee and it is the debtor who is required to carry out all the necessary acts to preserve its interest and of the creditors (Article 26). There can be more than one trustee, not exceeding three, appointed under protective composition procedure.
The Insolvency and Bankruptcy Code states a strict timeline of one hundred and eighty days, extendable further once by a period not exceeding ninety days by adjudicating authority for completion of insolvency resolution process. It is provided further in the Code that corporate insolvency resolution process be mandatorily completed within a total period of three hundred and thirty days from the insolvency commencement date. Section 101 of the Code under insolvency resolution process for individuals and partnership firms provides a period of 180 days as a period of moratorium which shall cease to have effect at the end of such period or on the date of order on the repayment plan by the adjudicating authority.
Whereas under the Bankruptcy Law there is no specific time-line in total provided for the completion of protective composition procedure. However, the total time summed-up is 260 days (approx.). Similarly, under the Insolvency Law the total time summed-up is 280 days (approx.) for financial settlement proceedings, however, there is a proposed period for execution of the plan which may not exceed 3 years from the date of the approval of financial liability settlement plan by the court.
Treatment to secured creditors
As per section 14 of the Code under corporate insolvency resolution process (CIRP), a secured creditor is forbidden to enforce its security interest against corporate debtor during the period of moratorium i.e. during the proceedings of CIRP. Rights of secured creditors are restored only after the commencement of liquidation proceedings. Further under insolvency resolution for individuals and partnership firms secured creditors have been provided an option either to participate in resolution process i.e. by participating in meeting of creditors and voting in relation to repayment plan, or to abstain from participating in the meeting of creditors. However, in the latter case concurrence of such a creditor is to be obtained where provision of the repayment plan affects the right to enforce security of such creditors.
Whereas under the Bankruptcy Law secured creditors are not forbidden to enforce its security interest by commencement of proceedings of protective composition procedure. Thus, rights of secured creditors remain capable of being enforced with the permission of the court. In the opinion of the author, such provision may have an adverse effect on the resolution process and effectiveness of the Bankruptcy Law altogether.
The law of insolvency and bankruptcy bolster the economic stability of the nation and provide secure conditions for personal loans to the satisfaction of both the debtor and the creditor, thus, a law regulating this subject is an important legislation.
Pertinently, the Insolvency and Bankruptcy Code, 2016 can be said to be similar to the Insolvency Law and the Bankruptcy Law of UAE in almost every aspect. However, some of the provisions of Insolvency Law and the Bankruptcy Law – like rights of secured creditors during insolvency resolution proceedings; authority to debtor to carry out the operations of its business; restricted right to apply to adjudicating authority only by a debtor to initiate the resolution process; are some of the major differences which altogether make the insolvency proceedings, its effect, and its efficiency different from IBC.
Students of Lawsikho courses regularly produce writing assignments and work on practical exercises as a part of their coursework and develop themselves in real-life practical skills.
LawSikho has created a telegram group for exchanging legal knowledge, referrals, and various opportunities. You can click on this link and join: