NAME: PRASANNA KUMAR

COURSE NAME: DIPLOMA ON INSOLVENCY & BANKRUPTCY CODE.

TOPIC: COMPARITIVE ANALYSIS OF INSOLVENCY AND BANKRUPTCY

LAWS IN INDIA, US & GERMANY.

INTRODUCTION
Insolvency means incapability to debts. It applies both to living as well as corporate persons i.e failure of
business organisation as well as individual person bankruptcy. Insolvency or indebtedness implies
insufficiency to repay of the debts of the person when his claim is due. It is a state of having more
obligations than the resources to pay off them that is in simple words if a person has more liability to pay
off than his assets then this situation of his is known as insolvency. Corporate insolvencies happen
because the companies become extremely indebted. Insolvency is classified into two types Cash flow
insolvency and Balance sheet insolvency. The difference between the two is that the cash flow
insolvency means non ability to meet up to the commercial transaction arising out of day to day
transactions of business with the third party and balance sheet insolvency means where the liabilities of
the company is more than its assets. The main problem is not long term feasibility of business but a short
term delay in the cash flow into the market. Sometimes insolvency and bankruptcy are used
interchangeably. However, legally both the term have different meaning. Insolvency is when a person
who has borrowed money is unable to repay of his debts. This process can be resolved by the way of
changing the resolution plan of repayment or writing off a part. This is a temporary situation where the
money can be recoverable this Is attained voluntarily. Now Bankruptcy is the process which follows the
insolvency process that is it is a legal proceedings invoking an individual or a company or a partnership
firm that is unable to repay of its debts in this process petition is filed by the debtor so that the court can
declare him as insolvent. If this does not happen then the creditor can file for the bankruptcy against the
debtor in the court. The court then declares the person as insolvent and initiates for the liquidation
process of the company and then the remaining assets are then used to repay of the debts of the
company or the person or the partnership firm. Bankruptcy allows the individuals and the business that
cannot repay their financial obligation to be immune from repaying. Insolvency has been in presence
since antiquated occasions. It also protects persons who have become overburden by their debts.
The regulations and procedures for filing bankruptcy are governed by law of national and common law
principles. Although insolvency or bankruptcy seems very bad for individual or corporate but there is a
possible benefit to both parties in bankruptcy. A creditor wants to recover his unpaid debts from the
debtor who is not able to repay the creditor the whole amount in a way of a speedy process. From the
debtors point the bankruptcy process allows the resolution of debts.

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The following are the objectives of the bankruptcy law.
1. An equal distribution of debtors assets among the creditors who are of the equal rank or have
equal claim.
2. A process which allows the debtor to be free from all his debts through a resolution plan and
this also allows him to revive his business.
This procedure is punitive in nature and hence this promotes the entrepreneurship that is by the way
that it helps the owners to revive the business by changing the existing management of the company
which defaulted in paying the financial dues of the company and hence resulting the company to
enter into the insolvency stage. However, allowing the owners to carry on the business with more
efficient management as this would ensure that there is a going concern as well and there is also flow
of cash into the market hence the main aim behind enacting these laws is to provide equal rights to
the debtors and creditors and so that the this does not give undue advantage to the creditors and
biased against the debtors.

INSOLVENCY AND BANKRUPTCY LAWS IN THE UNITED STATES

The first bankruptcy law in the USA came into force in 1800. The law was then repealed in 1802 and
was then followed by the act in 1841. The law was then repealed in 1843 and was followed by the act
of 1867, which was then amended in 1874 and was then later repealed in 1878. The Nelson Act
became the first modern bankruptcy act in the country. The next modern law regarding the
bankruptcy was in 1978 by the bankruptcy reform. The Bankruptcy Abuse Prevention and Consumer
Protection Act (2005) is the most recent amendment to the 1978 law.
In USA the bankruptcy code is divided into 6 chapters. The US bankruptcy code are allowed to file a
petition under the Bankruptcy code chapters 7,9,11,12,13 and 15 for the companies and individuals
seeking relief.
Chapter 7: Liquidation
“This chapter covers the process of liquidation and involves the appointment of the trustee by the
bankruptcy court to collect the assets of the debtor. The trustee is tasked with selling the assets and
distributing the proceeds to the creditors in the order of preference. Businesses and individuals can
file for bankruptcy in the United States. An amendment was made to the bankruptcy law in 2005
with the passing of “the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of
2005”.1
This amendment limited the consumer debtors from filing in general. This amendment would protect
certain companies like the credit card companies from loses from the bankrupt customers.”
Chapter 9: Reorganisation of Municipalities
“Municipalities refer to public agency of the state they help in the restructuring of their amount
outstanding. It is authorised to be borrower by state law, organisation or a government officer to
give such authorisation. Before this the only remedy for troubled municipalities was for the creditors
to take an action through court order to force the municipality to raise taxes. The 2008 financial crisis
resulted in many municipal bankruptcies.”
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Chapter 11,12,13 : Reorganisation
“These sections deals with the reorganisation of the assets. Usually the insolvency court allows to
keep the account holder a few benefits and then use them to pay the money and the obligations
owed to the creditors. Here the chapter 11 is for business that is whether it is a sole proprietorship or
partnership or a company and even for individuals. Chapter 12 is only related to famil,farmers and
fisherman.”
Chapter 15: Cross-Border Insolvency
“This chapter allows co-operation between American courts, foreign courts and other authorities in
the cross border insolvency.”

INSOLVENCY AND BANKRUPTCY LAWS IN INDIA

The insolvency and bankruptcy code which came up in 2016 aims at combining the existing laws
which were In India for the Insolvency and Bankruptcy . The main idea was that there should be
equal rights for the debtors and creditors and other motive was the revival of the business. The code
also aimed at improving the entrepreneurship by removing the existing management and also aimed
at speedy resolving of the problem. The code gives the debtors a change for revival of their business
by coming up with a resolution plan or to enter into liquidation process and winding up of the
company.
The Code repeals the “Presidency Towns Insolvency Act, 1909”, and "Provincial Insolvency Act,
1920”, as well as amends 11 laws, including: “Indian Partnership Act 1932”, “The Companies Act
2013”, “Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest
Act 2002”, “Limited Liability Partnership Act, 2008”, “Sick Industrial Companies (Special Provisions)
Repeal Act 2003”. To avoid any further litigation in bankruptcy proceedings, the Code will have
superseding effect over all other laws. Code has formulated IBBI (Insolvency & Bankruptcy Board of
India) which regulates the working of Insolvency Professionals, Information Utilities. It helps in
governing the insolvency and bankruptcy of the individuals, partnership firms and the corporates by
following the process or the rules laid down in the code.
Insolvency Resolution Process: In this process the financial creditor assess that whether
the corporate debtor is in a position to revive its business and continue the same. Here the
creditors have to decide whether the business is worthy or not to come up with a revival plan
or solutions for restructuring of the business so that the loses could be avoided. In this an
application can be sent to the National Company Law Tribunal(NCLT) for starting the
resolution process. The operational creditor has to give a notice of 10 days before sending an
application to the NCLT. This is a time bound process that is the code has prescribed a period
of 180 days and 90 days extention. During this period the NCLT will hear the proposals for the
revival of the business. During this period the company or the corporate debtor enters into
the Moratrium period that is no legal proceeding can be Initiated against the corporate
debtor during this phase. And the NCLT appoint the Insolvency Professional(IP) who takes
over the existing management of the company and also looks after the assets of the company

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 until the IRP process has been completed. NCLT makes a public notice for the initiation of the
process and then calls for the claims of the creditors.
Liquidation : This stage starts when the insolvency resolution process fails here the assets of
the corporate debtor are distributed in order to recover the dues of the creditors. There
needs to be a unanimous decision made by the creditors to see whether the insolvency
resolution process has been failed and then the assets of the company are sold off in order to
meet the claims of the creditors. The liquidation process can be initiated under 3 scenarios
which are failiure to submit the resolution plan to the NCLT within the time period, non-
compliance with any of the provision given under the code by the corporate debtor or by the
vote of majority that is 75% votes the committee od creditors have decided to initiate the
liquidation process during this process also there is moratrium period wherein no legal
proceeding can be initiated against the corporate debtor except the liquidation proceedings 2.
The resolution professional appointed by the NCLT will act as the liquidator.
Fast track Resolution Process: This process needs to be completed in 90 days and with an
extention of 45 days. This is mainly used by the start-up companies.
Insolvency Resolution Process for Individuals and Partnerships: if the default is
above 1000 INR and Upto 1 lakh INR then only this provision of the code applies. In this the
adjudicating authority is Debt Recoveries Tribunal (DRT) here the application may be either
filed by debtor or creditor if the debtor is partner of the partnership firm then unless he has a
majority of all the partners he may not file for the IRP. Whereas a creditor may make an
application by himself or by a majority for the initiation of the process. They can either file for
the process by themselves or through resolution proffesionals. The stages under these are:
1. Appointment of resolution professional
2. Admission/rejection of application
3. Repayment plan
4. Meeting of the creditors
5. Approval/rejection of the repayment plan
6. Implementation of the repayment plan

INSOLVENCY AND BANKRUPTCY LAWS IN GERMANY

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 Germany introduced its bankruptcy act in the year 1877. It allowed its industries to opt for
bankruptcy allowing it to be one of the leading industrial nations back then. After a long
period and discussion after 20 year Germany amended its relevant acts due to industrial
distress and this was again updated in 2012,2014 and 2017.

The objectives of the German code is to satisfy the needs of the creditor by liquidation of the
insolvent person’s assets and distribution of the amount collected in the manner laid down
the the code which is popularly known as “Liquidation Proceedings”. Another way is to
suitably reach the insolvency plan to restructure the business or insolvent entity. 3

In Germany courts themselves cannot initiate insolvency proceedings but can act only on
the basis of action initiated by the debtor or creditors. The grounds on which the insolvency
proceedings can be filed are:

1. Liquidity
2. Over- indebtedness
3. Imminent illiquidity

Any entity or creditor can file for an application under the first 2 cases but only an entity
can file for the process under the third one. Once the application is being made then the
competent court appoints the preliminary administrator who takes over the assets of the
the entity and also supervises the management of the entity once the application has been
filed. preliminary administrator is called as weak administrator when the court does not impose
any conditions on transfer of assets on the entity, and the duties of the administrator is
determined by the court.

In case, the court imposes restrictions on the management of the entity like non- selling of
assets, the temporary administrator to be called as “strong administrator” has a full right to step
into the shoes of the management, take possession of the assets, continue the business of the
entity and sell the goods of the entity and collect the claims against others. Basically, continue
the entity as a going concern. It is obvious that the administrator works under the supervision of
the court and reports regularly.

The court then appoints the committee of creditor(COC) if following 2 out of 3 conditions are
satisfied by the debtor.

 A balance sheet total of at least 4,840,000 Euro (after a deduction of negative equity).
 A revenue of at least 9,680,000 Euro.
 Working with a minimum of 50 employees.

The members of the COC include creditors with a right to separate satisfaction, insolvency
creditors having the maximum claim and the small sum creditors. The committee shall also
include the representative of the debtors employees. All the meetings of the creditors is viewed
or headed by the insolvency court.
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https://taxguru.in/corporate-law/german-insolvency-law-latest-reforms.html

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The insolvency plan can be submitted to the court only by the debtor. The plan consist of 2 parts
declaratory part and the conclusion part and the rehabilitation plan is given in the declaratory
part but the impact of rehabilitation on the rights of creditors is in the conclusion part. The most
significant part is to divide the creditors into groups and then the plan first needs to be
approved by the COC and once it’s is approved by them with a majority of 75% votes then is
sent to the court for its approval once the court approves the plan then the plan comes into
action and the process is initiated.

CONCLUSION

The US Bankruptcy code and The Insolvency and Bankruptcy Code of India has many similarities
like both the codes have separate laws governing the proceeding for individuals and the
corporates. But there is nothing related to the municipalities in the India code. The US already
had these kinds of law in the past but India relied on Companies act, SICA,SARFAESI for
implementing the insolvency and bankruptcy proceeding but now it has a separate code that is
the Insolvency & Bankruptcy Code. Overall this particular code is very clear and helpful for both
debtors and creditors and is helping India to be a strong nation when it comes to
industrialisation and growth.

on the other hand Germany ranked high consistently in the world for ease of doing business It
also ranks among one of the top countries in industrialisation which is possible because of its
overall policy on establishment, nourishing, and manpower. As early as 1877 it had an idea that
bankruptcy proceedings would be an important part of its industrial growth this made the
country one of the most advanced and developed countries in the current times of
industrialisation.

BIBLIOGRAPHY

 https://www.justiz.nrw.de/WebPortal_en/projects/ieei/documents/public_papers/germ
an_insolvency.pdf
 https://www.iaeme.com/MasterAdmin/uploadfolder/JOM_06_02_028-
2/JOM_06_02_028-2.pdf
 https://taxguru.in/corporate-law/german-insolvency-law-latest-reforms.html
 https://www.justiz.nrw.de/WebPortal_en/projects/ieei/documents/public_papers/germ
an_insolvency.pdf

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