A Comparative Study of Insolvency Regimes: Bangladesh, India, and the United Kingdom

Introduction:

Insolvency regimes play a pivotal role in maintaining the stability and efficiency of financial systems, providing a legal framework for the resolution of financial distress and the protection of creditors' rights. The British insolvency regime has had a significant impact on Indian insolvency rules. Originally, the insolvency laws of the United Kingdom were heavily influenced by the ‘Creditor-in-Control system’, which has been adopted in the Indian insolvency rules. The Americans, on the other hand, have a ‘debtor-in-possession’ regime, which differs from the Indian and the traditional UK regimes.

In this article, we undertake a comparative study of the insolvency regimes of Bangladesh, India, and the United Kingdom, examining key features, similarities, differences, and the evolution of insolvency laws in these jurisdictions.

What Is Insolvency?

In simplest terms, insolvency is the inability to pay debts. Businesses and individuals alike can become insolvent, often due to issues like a reduction in monthly cash flow, increased expenses or poor cash management.

Insolvency is often temporary. For example, if a business’s customers don’t remit payments due quickly enough for the business to keep up with short-term supplier debts, the business could become insolvent. Such situations can usually be resolved by tapping into a credit card, line of credit or short-term loan. But if cash flow management issues persist, insolvency can lead to legal action and/or bankruptcy.

1. Overview of Insolvency Regimes:

Bangladesh: The Insolvency and Bankruptcy Act (IBA) of Bangladesh, enacted in (1997), represents a significant milestone in the country's legal landscape. The IBA aims to modernize the insolvency framework, promote creditor-friendly practices, and facilitate the revival of financially distressed businesses. Key features of the IBA include the Corporate Insolvency Resolution Process (CIRP), establishment of adjudicating authorities, recognition of insolvency professionals, imposition of moratorium, and approval of resolution plans. In Bangladesh, bankruptcy is governed by the Bankruptcy Act, 1997. An individual can be declared 'bankrupt' through an order of adjudication by the bankruptcy court if he commits an act of bankruptcy as described in section 9 of the said Act. The Act provides opportunities to both creditors and debtors to initiate bankruptcy proceedings. Section 2 (36) of the Bankruptcy Act of 1997 states that the individual shall include money, companies, statutory or other entities, associations and partnership transactions. As a result, the list below will refer to individuals, companies, statutory or other organizations, associations and partnerships-

• If a foreign national becomes indebted during his stay in Bangladesh and commits bankruptcy, he may be declared bankrupt according to law. Similarly, a foreigner may apply for bankruptcy against a resident of Bangladesh. However, according to Section 11 (1) of the Bankruptcy Act, in such a case the foreigner has to stay in Bangladesh for at least 1 year.
• Under the Bankruptcy Act of 1997, any prisoner can be declared bankrupt conditionally while in custody.
• If a married woman becomes indebted and the amount of such debt exceeds her property and she is unable to repay such debt, then she can also be declared bankrupt under bankruptcy law.
• If all the members of the joint Hindu family are unable to repay the loan at the same time and go bankrupt, then all the members of the joint Hindu family except the minor or legally incompetent member can be declared bankrupt.
• [Chaturbhuj Vs. Kewal Ram (1925) AIR Mad. 1249 ] According to the judgment of the case, in case two or more persons take a loan together and they are unable to repay the loan and all of them commit bankruptcy together or separately, all the joint debtors can be declared bankrupt on the basis of a single application.
• The partnership entity and the legal entity of its partner are the same. That is, there is no separate legal entity in the partnership business. As a result, the partners are personally liable for the liability of the partnership business. Therefore, since there is no separate legal entity in the partnership business, it is not possible to apply for bankruptcy directly against the partnership business, but creditors can apply for bankruptcy against one or more partners. In this case, if the court deems it appropriate, it can declare all the partners bankrupt. However, a minor partner cannot be declared bankrupt. The above decision has been made, [Shivagouda Ravji Patil Vs. Chandrakant (1965) AIR. SC 212] From the judgment of the case.
• No registered company could be declared bankrupt before the enactment of the Bankruptcy Act of 1997. But now Section 2 (36) of the Bankruptcy Act states that"person" means company, statutory or other entities, associations and partnership business. The company can also be declared bankrupt due to its individual status. Section 92 of the Bankruptcy Act states that if the person organizing the offense under this Act is a company, then the offense has been organized by the owner, director, manager, secretary or any other officer or representative of the company unless he can prove that, the crime was organized without his knowledge or he tried his best to stop the crime.
• According to the provisions of section 2 (38) of the Bankruptcy Act, the association is also considered as an individual. In view of this type of association can be declared as bankrupt after the enactment of bankruptcy law.

India: India implemented a comprehensive insolvency regime with the introduction of the Insolvency and Bankruptcy Code (IBC) in 2016. The IBC established a unified framework for the resolution of insolvency cases across individuals, partnerships, and companies. Key features of the IBC include time-bound resolution processes, establishment of the Insolvency and Bankruptcy Board of India (IBBI), recognition of the Committee of Creditors (CoC), and provisions for liquidation and restructuring. In India, the Insolvency and Bankruptcy Code, 2016 is the most significant legal restructuring framework. When the National Company Law Tribunal admits a corporate debtor to insolvency resolution, a corporate insolvency resolution procedure (CIRP) begins. The successive step of which is the appointment of an interim resolution professional (IRP) to manage the resolution procedure.(9)The corporate debtor's Board of Directors' powers are suspended and transferred to the IRP who forms the Committee of Creditors (COC). The resolution professional invites eligible individuals to submit a “resolution plan,” which is assessed by the creditors' committee and is then approved by 66% of the voting share. The resolution plan is then presented to the NCLT for final approval if it has been accepted by the committee.

United Kingdom: The United Kingdom has a well-established insolvency regime governed primarily by the Insolvency Act 1986. The UK insolvency framework emphasizes creditor protection and the maximization of asset recovery through mechanisms such as administration, liquidation, and voluntary arrangements. Additionally, the UK introduced the Corporate Insolvency and Governance Act 2020 to provide temporary relief measures and restructuring options for distressed businesses, particularly in response to the COVID-19 pandemic. The British insolvency regime has had a significant impact on Indian insolvency rules. Originally, the insolvency laws of the United Kingdom were heavily influenced by the ‘Creditor-in-Control system’, which has been adopted in the Indian insolvency rules.(3)The Americans, on the other hand, have a ‘debtor-in-possession’ regime, which differs from the Indian and the traditional UK regimes.

In the case of a default in loan or interest payments, the ‘creditor in control’ policy allows creditors, whether financial or operational, to exercise control through insolvency professionals. As a result, when insolvency procedures are initiated, managerial control of a business is taken

away from its existing promoters, and a resolution specialist is appointed in their place, to handle the company's operations during the process.

On the contrary, in the ‘debtor in possession’ policy, a person or corporation can file for Chapter 11 under the U.S. Bankruptcy Code (Title 11) bankruptcy protection, but will still own the property against which creditors have a legal claim through a lien or other security interest. Typically, it allows for a transitional stage in which the debtor tries to restore value from assets after insolvency. It is consistent with a corporation's going concern and is often used for corporate restructuring rather than liquidation.

The United Kingdom has recently passed the Corporate Insolvency and Governance Act, 2020, which clearly demonstrates a transition to the ‘debtor in possession scheme’ for it incorporates a range of “debtor friendly” policies to English restructuring and insolvency law in response to the Covid-19 crisis and the strain it places on industries.

As a result, in light of the evolving and transitional international bankruptcy system, it is important to examine the domestic laws and analyze how they fit into the global structure.

2. Comparative Analysis:

• Legal Framework: While all three jurisdictions have enacted legislation to govern insolvency proceedings, there are significant differences in the legal frameworks. Bangladesh and India have introduced modern insolvency laws relatively recently, whereas the United Kingdom has a longstanding insolvency regime with a robust legal framework.
• Resolution Processes: The approaches to insolvency resolution differ among the jurisdictions. Bangladesh and India emphasize time-bound resolution processes, with specific provisions for the appointment of insolvency professionals, adjudication by specialized tribunals, and approval of resolution plans. In contrast, the United Kingdom focuses on maximizing asset recovery through mechanisms such as administration, liquidation, and voluntary arrangements.
• Creditor Rights: All three jurisdictions prioritize creditor rights in insolvency proceedings. Bangladesh and India have established mechanisms such as the Committee of Creditors (CoC) to represent creditors' interests and approve resolution plans. The United Kingdom emphasizes creditor protection through robust legal mechanisms for asset recovery and distribution.
• Regulatory Oversight: Regulatory oversight of insolvency proceedings varies among the jurisdictions. Bangladesh and India have established specialized regulatory bodies, such as the Insolvency and Bankruptcy Board of Bangladesh (IBB) and the Insolvency and Bankruptcy Board of India (IBBI), to regulate insolvency professionals and oversee the implementation of insolvency laws. The United Kingdom relies on the oversight of courts and government agencies to ensure compliance with insolvency regulations.
• In many aspects, the Indian insolvency system is similar to that of the United Kingdom. Both creditors and debtors have the ability to initiate bankruptcy procedures in both States. Furthermore, both Indian and UK laws set a deadline for the conclusion of proceedings, albeit this deadline differs. Both nations have self-regulatory agencies, the Insolvency and Bankruptcy Board of India (IBBI) in India and ICAEW, ACCA, and others in the UK, to ensure that the procedure runs smoothly.

Another important resemblance between the two nations under the previous English regime was the ‘creditor in control scheme’. However, due to the spread of Coronavirus, the UK has adopted the Corporate Insolvency and Governance Act 2020, which includes a system similar to the ‘debtor in possession’ system used in the USA, as well as several other substantial revisions to the UK's erstwhile insolvency legislation. The new Corporate Insolvency and Governance Act 2020 came into effect on June 26th, 2020, with the highlight being that it favors debtors in typically creditor-friendly bankruptcy legislation. In the UK Insolvency Law, the CIGA created a new standalone moratorium procedure that keeps the directors in charge while they devise a strategy to save the corporation as a going concern. The UK's emphasis on business rescue mechanisms, such as administration and CVAs, can inspire India to strengthen its restructuring provisions and promote the revival of financially distressed companies.

A major reform introduced in the English Insolvency regime is that the directors can seek a standalone moratorium for an initial term of 20 business days under the standalone moratorium. The directors remain in charge at this time, but a professional insolvency practitioner is appointed as "monitor," who is responsible for overseeing the company's operations. The moratorium's purpose is to safeguard the corporation from adverse creditor action for a limited time while the directors seek to reorganize and save the company.

The rules for a “restructuring plan,” are the second CIGA reform. In the UK, like in India, a plan of arrangement is only effective if each class of creditors and members (shareholders) agree to it. Under the CIGA, a court can sanction a restructuring plan that

is enforceable on dissenting classes of creditors or members ("cross-class cram down"), as long as it is equitable to such creditors. Similar cross-class cram down rules also exists in India, where operational creditors and shareholders are bound by a resolution plan agreed upon by a two-thirds majority of financial creditors. The Supreme Court of India too has upheld such cross-class cram down as long as operational creditors are treated fairly and equally.

3. Evolution of Insolvency Laws:

• Bangladesh: The enactment of the Insolvency and Bankruptcy Act in Bangladesh represents a significant step towards modernizing the country's insolvency framework. The IBA reflects a commitment to promoting creditor rights, enhancing transparency, and facilitating the efficient resolution of insolvency cases.
• India: India's Insolvency and Bankruptcy Code represents a paradigm shift in the country's approach to insolvency resolution. The introduction of the IBC has streamlined insolvency processes, improved creditor recovery rates, and enhanced investor confidence in the Indian market.
• United Kingdom: The United Kingdom has continuously refined its insolvency regime to adapt to changing economic conditions and market dynamics. The introduction of the Corporate Insolvency and Governance Act 2020 demonstrates the UK government's commitment to supporting businesses during times of crisis while maintaining a robust framework for insolvency resolution.

Conclusion:

In conclusion, the comparative study of insolvency regimes in Bangladesh, India, and the United Kingdom highlights the diverse approaches to resolving financial distress and protecting creditor rights. While each jurisdiction has its unique features and challenges, there are valuable lessons to be learned from examining the evolution and implementation of insolvency laws across different legal, economic, and institutional contexts. Continued efforts to enhance the effectiveness and efficiency of insolvency frameworks will be essential for promoting financial stability, investor confidence, and economic growth in these jurisdictions and beyond.