C I L & C I: Orporate Nsolvency AW

CORPORATE INSOLVENCY LAW
&
CORPORATE RESCUE IN INDIA
An Economic Analysis
PARAM PANDYA
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Corporate Insolvency Law & Corporate Rescue in India: An Economic Analysis
CONTENTS
Introduction ..................................................................................................................................... 3
Historical Background ................................................................................................................ 4
Corporate Insolvency Law: From the Prism of Law & Economics............................................ 7
Objectives of Corporate Insolvency Law ............................................................................... 8
Frontiers of Corporate Insolvency Law ................................................................................ 10
Coordination Problems ......................................................................................................... 10
Ex-ante efficiency ................................................................................................................. 11
Ex-Post efficiency ................................................................................................................. 12
Conclusion ............................................................................................................................ 13
Corporate Rescue: From the Prism of Law & Economics ........................................................ 14
The Bankruptcy of bankruptcy laws in India - A Law and Economic Scrutiny .......................... 16
Winding Up of Companies ....................................................................................................... 17
Meaning ................................................................................................................................ 17
Modes of Winding up ........................................................................................................... 18
Compulsory Winding up ....................................................................................................... 18
Process of Winding up .......................................................................................................... 21
Voluntary Winding up .......................................................................................................... 22
Changes in Winding up procedure under the 2013 Act ........................................................ 25
Draft Rules, Companies Act, 2013 ....................................................................................... 26
Critical Analysis.................................................................................................................... 27
Civil Remedies for Debt Recovery ........................................................................................... 28
Summary suits ....................................................................................................................... 28
Critical analysis ..................................................................................................................... 29
Conclusion ............................................................................................................................ 29
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Corporate Rescue in India ......................................................................................................... 30
Sick Industrial Companies .................................................................................................... 30
Process of Application to BIFR ............................................................................................ 32
Practical issues of enforcement of SICA .............................................................................. 33
Determination of Sickness under the 2013 Act .................................................................... 33
Corporate Debt Restructuring in India .................................................................................. 37
Legal validity of CDR ........................................................................................................... 39
CDR System.......................................................................................................................... 40
Conclusion ............................................................................................................................ 43
Committee Recommendations .................................................................................................. 44
Best Practices in Corporate Insolvency Law & rescue - A comparative overview ...................... 46
Recommendations & Conclusion ................................................................................................. 51
Bibliography & References........................................................................................................... 54
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INTRODUCTION
A corporation, alike a human entity takes birth. Though it is a creation of a statute, it posses
separate personality and perpetual existence.1 With the Industrial Revolution, capital intensive
industries developed which required more capital to run. Also, the advancement in technology
has redefined business processes. Hence, the wealth maximization by corporations for their
shareholders has grown to wealth maximization for all stakeholders which includes creditors,
employees and society in general. The greatest lessons that Financial Crisis in 2008 taught the
world was how a few key corporations and their failure could lead the world economy. 2 Given
these parameters, corporations in the present context have an imperative role to play.
However, alike a human body, corporations also suffer from 'ill health' or to put it in a corporate
parlance, 'financial distress' due to myriad reasons. In such circumstances, contrary to many
contractarian theorists who propound that a corporation is a combination of contracts fail
because during distress, the other party is incentivized to breach and hence the law has to step in.
The proprietary rights theorists step in to hold that insolvency law needs to regulate the conduct
of the parties so as to protect the rights of the creditors.3
Also, just like a doctor makes all attempts to revive the ailing health of a patient, so does various
formal and informal systemic measures in order to revive the ailing financial condition of a
corporation. Rephrasing it in a industry fashion, such attempts are termed as corporate rescue.
1 Indrajit Dube, Indian Corporate Insolvency Law: Efficiency and efficacy from a Cross Border Perspective,
Electronic copy available at: http://ssrn.com/abstract=1141931.
2
J C Coffee, ‘What went wrong? An initial inquiry into the causes of the 2008 financial crisis’ (2009) 9(1)
JOURNAL OF CORPORATE LAW STUDIES 1. See Also, Ileana Ashrafzadeh - Nișulescu & Marușa Beca, The
Corporate Insolvency’s Evolution in the EU and India in the Period 2007-2012, 3 JOURNAL OF KNOWLEDGE
MANAGEMENT, ECONOMICS AND INFORMATION TECHNOLOGY 6, (2013), pp. 1.
3 John Armour and Michael J. Whincop, The Proprietary Foundations of Corporate Law, 27 OXFORD JOURNAL
OF LEGAL STUDIES 3, (2007), pp. 429-465.
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However, it needs to be determined whether these attempts tent to be efficient or not. The legal
framework to determine corporate insolvency and its economic analysis reveals three major
problems - coordination, ex-ante efficiency and ex-post efficiency.4 A right balance of incentives
and disincentives for ensuring a creditor-debtor friendly insolvency law should be the aim.
However, imbalance in these incentives tend to render these laws inefficient. Also, impetus to
corporate rescue mechanisms supplement the structure of corporate insolvency law and hence a
structured hassle free mechanism should be implemented. The present chapter shall begin with
an historical analysis of the term 'bankruptcy' 5 and later proceed to highlight the economic
rationale behind bankruptcy laws. In the process, we shall discover the rudiments for an ideal
framework of laws governing bankruptcy.
HISTORICAL BACKGROUND
In very primitive society there are no laws preventing fraud of debtors or regulating the
distribution of a debtor's- estate among his several creditors, for the reason that, generally
speaking, debtors and creditors are unknown in the early stages of social evolution.6 Historical
narratives of the bankruptcy law is rather scattered and developing a chain of historical evolution
is not promising. However, most historians discuss the treatment of debtors in various
civilizations to judge the evolution of bankruptcy laws.
4 J. Franks, Nyborg, K. and Torous, W, A comparison of US, UK and German insolvency codes, 25 FINANCIAL
MANAGEMENT 3, (1996) pp. 86-101.
5 The term 'insolvency' will be used interchangeably with the term 'bankruptcy' in this paper and the focus of the
discussion will be on corporate insolvency unless the context requires otherwise. 'Insolvency proceedings' is used as
the generic expression to cover the various types of proceedings that may be initiated when a debtor is unable to pay
its debts.
6
LE Levinthal, The Early History of Bankruptcy Law, 66 UNIVERSITY OF PENNSYLVANIA LAW REVIEW
5/6, (1918), pp. 228.
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In Ancient Greece, the treatment to debtors who had failed to pay their debts had to lose their
freedom to the creditor and the creditor had control over all his property and the debtor became a
slave. Though there were several states that protected against bodily harm of debt-slaves and a
maximum period of five years, but this did not mean to regulate the oppressive conduct over the
debtors and certainly not for the slaves of the debtor. 7 In Ancient India, Manu - the law giver
provides that the creditor can by any means recover the property that was loaned by him to the
debtor. 8 Even the practice of sitting on 'a dharna' or fasting was also prevalent during those
days. In Rome, the old proverb, "He who cannot pay with his purse pays with his skin," was
literally applied. Upon three calls for payment and after providing sixty days to pay the same, the
creditor upon non-payment could arrest the debtor and make him his slave, kill him or sell him to
foreigners.9
The word ‘bankruptcy’ originates from the Italian word ‘banca rotta’, an old expression that
indicated that the bench of a trader was broken when he was not able to pay his creditors. This
being the most acceptable version of the origin of bankruptcy, has been widely accepted across
Italy & France.10
England saw the first enactment on bankruptcy coming in 1542 under the reign of Henry VII. At
that time, a bankrupt individual was considered a criminal and, as such, subject to criminal
punishment ranging from incarceration in debtors' prison all the way to the extreme sentence of
death. He passed a law repealing his predecessors' penchant for mutilating offenders and instead
7
A Brief History of Bankruptcy, available at http://www.bankruptcydata.com/Ch11History.htm, (April 14, 2015).
8
Manu VIII, 48 ff. By whatever means a creditor may be able to obtain possession of his property, even by those
means may he force the debtor and make him pay. By moral suasion, a suit at law, by artful management, or by the
customary proceeding"
9
Cf. Russian law, Prawda ruskaja, xxiii; Post, "Ethnologischen Jurisprudeng," p. 576.
10
Heather Whipps, The History of Bankruptcy: Dungeons, Slavery and Executions, available at
http://www.livescience.com/3629-history-bankruptcy-dungeons-slavery-executions.html (April 14, 2015).
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sent them off to special debtor's prisons, which soon filled to capacity. It was Queen Elizabeth I
in 1570 who came up with an elaborated bankruptcy law in England which served as the basis
for many colonies to have transplant in their respective legal system.
United States, after its independence included the power to enact 'uniform laws on the subject of
bankruptcies' in the Article I of the legislative branch. 11It was in 1800 that United States came
out with its first bankruptcy law reform which was virtually a copy of the English law to the
Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCA), 2005, it has now
emerged as one of the most advanced bankruptcy law system in the world. 12
India, alike most other laws, also owes its bankruptcy laws to the British. Before the British
came, there was no indigenous law.13 It was with Government of India Act, 1800 and later by
various enactments that followed, we created the Indian Insolvency law regime. However, it took
us more than seven decades to realize the need for a comprehensive bankruptcy code.
This being the historical evidence of the evolution of bankruptcy laws needs to be read with the
rationale of having a bankruptcy law in the first place. Secondly, since most historical laws
relating to bankruptcy were focused on individual debtors, corporate insolvency law framework
demands an analysis as to the reasons of its evolution. This evolution shall be from the prism of
law and economic analysis.
11
US CONSTI. Art. I,  8. cl. 4.
12
Charles Jordan Tabb, History of the Bankruptcy Laws of United States, 3 AM BANKR. INST. LAW REVIEW 5,
1995 pp. 5.
13
MULLA LAW ON INSOLVENCY LAW IN INDIA (1958), pp. 1-2.
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CORPORATE INSOLVENCY LAW: FROM THE PRISM OF LAW & ECONOMICS
Traditionally, bankruptcy laws were a subject matter of study for lawyers. However, since the
past three decades we see, various economists have written over the same. Behind the
technicalities of the legal regulation of bankruptcy lies a clear economic rationality. Economists
analyze bankruptcy law as the legal instrument to achieve the best possible outcome, which
implies a minimization of social costs.14 While the law takes care of the equality and fairness
part of it while law and economic analysis harps on determining the efficiency of bankruptcy
procedures.
Of course, in an ideal world, there would be no need for the state to set up its own bankruptcy
procedure: individuals could do it by themselves via a contract. That is, a debtor who borrows
from a creditor could specify as part of the debt contract how his assets will be divided between
various creditors (and the debtor himself) in the event of a default or insolvency, who will
supervise the division process, etc.15 According to many Contractarian theorists, the theory of the
firm analyses corporate law as 'merely' a set of standard form contracts. 16 This has undermined
the true value of corporate law and hence 'property rights' theorists cite one example to be the
insolvency law and its function.When there is conflict of interests among creditors and other
stakeholders, insolvency law steps in to effect a collective transformation of creditors' rights. 17 It
is also argued that the cost of entering into contractual arrangements to protect the assets of
14
Francisco Cabrillo & Ben W.F. Depoorter, 7800 BANKRUPTCY PROCEEDINGS, pp. 261.
15
Aghion, Philippe, Hart, Oliver D. and Moore, John The Economics of Bankruptcy Reform, 8 JOURNAL OF
LAW, ECONOMICS, AND ORGANIZATION, (1992), pp. 529.
16
R.H. Coase, 'THE NATURE OF THE FIRM' (1937) 4 Economica 386.
17
John Armour & Michael J. Whincop, The Proprietary Foundations of Corporate Law, 27 OXFORD JOURNAL
OF LEGAL STUDIES 3, (Autumn, 2007), pp. 429-465.
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bankrupt company against mismanagement every time there is a change in the asset - liability
position in the balance-sheet of a company is very high.18
Also, with the increase in the span of business activities, corporations have expanded from a
'shareholder' driven to a 'stakeholder' driven model and hence has to balance out interests of
shareholders, creditors, employees and the society at large. This has further negated the
possibility of having contractual arrangements especially at the time of financial distress for each
class has their separate and contradictory interest. Therefore, it may be considered efficient to
have standard procedures regulating the possible outcomes of a firm’s default which corporate
insolvency law seeks to provide for .19
Objectives of Corporate Insolvency Law
An economy is made up of vast number of firms which are engaged in economic activity of
diverse nature. Each firm as per the nature of its business makes efforts to strive on and compete
with other players in the industry. They use marketing strategies or product innovations to gain
competitive advantage. An efficient market place will drive out those players who are not able to
meet industry standards are automatically driven out. The survival of the fittest - is the law that
prevails in the market domain and those who can compete successfully only survive. 20 The
purpose of insolvency law is not to save all companies from failure. The role of insolvency law is
not to take up the place of the market's selective functions but to give troubled companies the
opportunity to turn their affairs around where it is probable that this will produce overall benefits
18
Francisco Cabrillo & Ben W.F. Depoorter, 7800 BANKRUPTCY PROCEEDINGS, pp. 262.
19
Aghion, Philippe, Hart, Oliver D. and Moore, John The Economics of Bankruptcy Reform, 8 JOURNAL OF
LAW, ECONOMICS, AND ORGANIZATION, (1992), pp. 523-546.
20
M. White, The Corporate Bankruptcy Decision, 3 Journal of Economic Perspectives, (1983), 129.
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or, where this is not probable, to end life of the company efficiently, expertly, accountably and
fairly.21
Corporate insolvency Law has three broad objectives: to maximize the return to the creditors; to
establish a fair and equitable system for the ranking of claims and the distribution of assets
among creditors, involving a limited redistribution of rights; and to provide a mechanism by
which the causes of failure can be identified and those guilty of mismanagement brought to book
and where appropriate, deprived of the right to be involved in the management of other
companies.22
Bankruptcy Law needs to satisfy divergent interests like - Managers and employees want to keep
their jobs, shareholders want a high stock price, creditors want full repayment of debts, etc.
Different stakeholders have different powers, and they often bargain with each other in an
attempt to agree on how to resolve the firm’s distress. It needs to find a fine balance among
these. Most importantly it needs to prevent coordination problems among creditors. It also needs
to promote efficiency in the relationship between a debtor and creditor in the ex-ante sense,
when the debtor is solvent and in the ex-post sense, when the debtor is already insolvent.23
21
Vanessa Finch, Corporate Failure, CORPORATE INSOLVENCY LAW, (2009), pp. 144.
22
Roy Goode, The Foundations of Corporate Insolvency Law in PRINCIPLES OF CORPORATE INSOLVENCY
LAW, (2011), pp. 58.
23
Matej Marinc & Razvan Vlahu, General Issues in Bankruptcy Law in THE ECONOMICS OF BANK
BANKRUPTCY LAW, (2012), pp. 5
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Frontiers of Corporate Insolvency Law
The prime focus of corporate insolvency law framework is to consider on three major frontiers:
 Coordination Problems
 Ex-ante efficiency
 Ex-post efficiency
Coordination Problems
The need for coordination in bankruptcy law is most evident when corporations borrow from
multiple creditors. Without bankruptcy regime in place, coordination would prematurely trigger
bankruptcy. 24 By a mere perception of distress of corporation, each shareholder might
individually to be on the safe side, sue the corporation in its race to collect their debts. Also,
secured creditors could cash in their collaterals. The short-term creditors could decide not to
provide loans. In this way a chaos among the bunch of creditors could cause great harm to a
corporation which is worth more than a going concern.
A way to mitigate the problem, as the bankruptcy law addresses is to impose a legal stay in
which debt repayment in bankruptcy is frozen. Creditors with equal debt contracts are given
equal standing in bankruptcy. Earlier collection of debt no longer puts them front of other
creditors, though this a partial solution for the problem as a creditor can by leapfrogging
renegotiate their debt arrangement and gain priority.
The meeting of creditors, in most bankruptcy legislation a prerequisite before adopting any final
decision concerning the bankrupt firm, may be a good example of the various efficiency aspects
in bankruptcy procedure. From a law and economics perspective this compulsory meeting can be
24
T. H Jackson, THE LOGIC AND LIMITS OF BANKRUPTCY LAW, 1986.
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understood as a useful means to reduce transaction costs in collective action. Negotiations
between various creditors are often difficult and expensive.
Although an agreement is certainly not guaranteed in this meeting, procedure costs may be
substantially reduced. In more general terms, bankruptcy law can be defined as a set of rules that
institutionalizes collective action in debt collection. When collecting their credits out of a
bankruptcy procedure creditors play a non-cooperative game, in which each individual
maximizing strategy produces an inefficient outcome. Social costs will increase when each
creditor tries to get the highest possible percentage of his credit. These individual strategies
cannot raise the value of the debtor’s estate. On the contrary, they reduce the net value of the
assets to be distributed among the creditors. Though there seems to be conflict in the nature of
bankruptcy law to mitigate coordination problem, a potential solution should be sought wherein
the secured creditors are denied the right to vote in an bankruptcy proceedings and their share
subtracted or an administrator be appointed to appropriate the assets.
Ex-ante efficiency
The aim of bankruptcy laws in the ex-ante sense (before the debtor is insolvent) is to elicit
optimal incentives to debtors and creditors before bankruptcy. It should ensure that creditors
could effectively control debtor's behaviour, debtors must be allowed to take risk and gain
returns over capital by supplying sufficient efforts and to affect optimal timing for bankruptcy.
An efficient debt contract entitles the creditor for the remaining funds of the debtor for loan
repayment. Hence, an effective bankruptcy framework should be creditor-friendly by providing
high pay offs to the creditors which serves as an disincentive for managers to refrain from
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expropriating free cash flow or concealing the true returns of the firm.25 Proper incentives to
creditors lowers the cost of and access to debt financing which is vital for the growth of the
industry.26
Ex-Post efficiency
Ex-post sense means that the debtor has already gone insolvent. It is at this juncture that the ex-
post sense of bankruptcy law that is brought in question. Here, a debtor friendly bankruptcy law
is advisable which shall ensure welfare-increasing asset reallocations, keep the cost of
bankruptcy which encompasses the cost of administrative procedures and lost reputation to be
low and ensure adequate incentives for the parties. Also, since bankruptcy causes exit of a player
in the market, the cost of bankruptcy should be as low as to allow easy exit to boost high
competition. The cost of bankruptcy differs from country to country but the direct costs majorly
include the cost of lawyers, restructuring advisors and accountants. The indirect costs which are
difficult to determine may include opportunity costs like that of loss of employees, loss of
reputation, loss of suppliers etc. The cost of bankruptcy depends on the kind of procedures used
for bankruptcy. There exists three basic procedures around the world too address insolvency;
foreclosure by senior creditor, liquidation and reorganization.27In the ex-post sense, a debtor-
friendly bankruptcy law induces prompt initiation of bankruptcy procedures and debtors have
fewer incentives to conceal any information. Also, debtors are incentivized to take risks during
bankruptcy. The existing manager can also be capable of endeavouring a successful restructuring
of the company.
25
D. Gale & M Hellwig, Incentive -compatible debt contracts: The one-period problem, THE REVIEW OF
ECONOMIC STUDIES, 52, (1985), 647 - 663; M C Jensen, Agency Costs of free cash flow, corporate finance and
takeovers, 76 THE AMERICAN ECONOMIC REVIEW 2, (1986), 323 - 329.
26
S D Longopher & CT Carlstrom, Absolute priority rule violations in bankruptcy laws, FEDERAL RESERVE
BANK OF CLEVELAND, ECONOMIC REVIEW 31, 21 - 30.
27
S. Djankov, O Hart & A Shleifer, Debt enforcement around the world, 116 JOURNAL OF POLITICAL
ECONOMY 6, (2008), 1105 - 1149.
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Objectives of Corporate Bankruptcy Law
• Race to colllect debts

• Holdout problem
Mitigate • Facilitate renegotiation of debt
Coordination • Optimal trigger for bankruptcy - Debtors & Creditors
Problems
• Creditor friendly bankrutcy law (honouring absolute priority rule) -

prevents strategic defaults, ensures optimal efforts, optimal debtor
Ex-ante risktaking and control over creditors.
Efficiency
• Debtor friendly bankruptcy law (deviation from absolute priority rule) -

improves the timing of bankruptcy and ensures and efficaous
Ex-post bankruptcy proceedings.
Efficiency
Conclusion
Bankruptcy is a creditor's remedy as well as debtor's right.28 This one line very well summarizes
that a nation's legal system should have a bankruptcy law framework that is creditor-friendly in
the ex-ante sense and debtor friendly in the ex-post sense.
28
Richard A Posner, Corporations, Secured & Unsecured Financing, Bankruptcy, ECONOMIC ANALYSIS OF
LAW, (2011), 544.
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CORPORATE RESCUE: FROM THE PRISM OF LAW & ECONOMICS
Corporate Rescue is going beyond the traditional responses to corporate distress. It takes on
board both formal and informal strategies to drive the company out of financial ill health.
Corporate rescue is seen as a ' major intervention necessary to avert eventual failure of the
company'.29 For a lot of companies going through corporate rescue, the provision of additional
funding allows them to continue operation.30
The reasons that work behind having a corporate rescue though as many economists argue goes
against the fundamental dictates of market forces. Forcing investors to keep their assets locked
up in what is at best a marginal enterprise may prevent the same investors from making more
productive use of the assets in a more efficient enterprise. It also may reduce their incentive to
invest these assets in the first place.31 However, going beyond an economic - creditor wealth
maximization approach to a more 'social' one, leaves scope for rescue based on the diverse
objectives it serves like the preservation of business which is worth more as a going concern; the
protection of jobs for the work force, the avoidance of harm to suppliers or customers or state tax
collectors or the prevention of damage to the general economy or the confidence of a business
sector.32Despite the fact that success of this mechanism is barely understood in proper statistical
terms more so because of the time factor involved in the said process, it is needed for any
economy. There are various forms of rescue33 - the company might be reorganized (managerial
reforms are implemented) or restructured (where closure of business might be involved),
29
A Bechler, CORPORATE RESCUE, (1997), p.12.
30
L J Abbot, S Parker & G F Peters, The Effect of Post-bankruptcy Financing on Going Concern Reporting 21
AICPA,(2000).
31
D G Baird & T H Jackson, Corporate Reorganizations and the Treatment of Diverse Ownership Interests: A
comment of adequate protection of secured creditors in bankruptcy, 51 U Chi L Rev 97, (1984), pp. 102.
32
B G Carruthers & T C Halliday, RESCUING BUSINESS: THE MAKING OF THE CORPORATE
INSOLVENCY LAW IN ENGLAND AND THE UNITED STATES, (1998), pp. 69 - 71.
33
Brown, CORPORATE RESCUE: INSOLVENCY LAW IN PRACTICE, (1996) pp.6-8.
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refinanced (where new capital is injected or debts are rescheduled) or downsized (where
operations are cut back, labour reduced or activities rationalized) or are subjected to sell-offs or
taken over. Corporate rescue actually help in maintaining a fine balance between debtor-
friendliness and creditor-friendliness and provide enough incentive for a company in distress to
aim for being back in business.
Having seen the theoretical perspectives, we see how Indian Corporate Insolvency Laws have
evolved across time and question its efficiency based on these parameters.
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THE BANKRUPTCY OF BANKRUPTCY LAWS IN INDIA - A LAW AND ECONOMIC
SCRUTINY
Bankruptcy law reform, that brings about legal certainty and speed, has been identified
as a key priority for improving the ease of doing business. SICA (Sick Industrial
Companies Act) and BIFR (Bureau for Industrial and Financial Reconstruction) have
failed in achieving these objectives. We will bring a comprehensive Bankruptcy Code in
fiscal 2015-16, that will meet global standards and provide necessary judicial capacity.
- Shri Arun Jaitely, Finance Minister, Government of India.
The title of the chapter is itself self-explanatory of the dismayed state of affairs as to the
bankruptcy law regime is concerned. Also, the quote from the Finance Minister's Budget Speech
of 2015 shows a ray of hope as to a revamp of the sad situation on the legal front and the
government's lethargic attitude towards forcing bankruptcy reforms. India's pathetic ranking of
142 in the World Bank's Ease of Doing Business Report coupled with the new government's pro-
industry agenda has triggered this proposed change. The average time taken for insolvency
proceedings in India is about 4.3 years, while it is only 1.7 years in high-income OECD
countries. The recovery rate (cents on the dollar) is 71.9 in high-income OECD countries as
opposed to 25.7 in India. 34
In the initial half of the present chapter we shall focus primarily on an analysis of the present
framework of bankruptcy laws in India. As it is well known that India does not have an umbrella
legislation governing all forms of insolvency unlike various developed nations which do have a
34
Doing Business Report, World Bank, 2015.
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uniform central bankruptcy code and procedures governing all entities are listed in the said piece
of legislation. India has fragmented legal statutes like Winding up of companies is governed
under the Companies Act, 1956 & presently the Companies Act, 2013, the corporate rescue
provisions are dealt with in the Sick Industrial Companies Act, 1985 and the Corporate Debt
Restructuring is resorted by the consortium of financial lenders. An economic analysis coupled
with statistics reveal the urgent need for reform. In conclusion, the various committee reports
that have suggested various changes and the evolution of bankruptcy law in India shall be the
final leg of the study.
WINDING UP OF COMPANIES
Meaning
Winding up or liquidation refers to the process by which the management of a company’s affairs
is taken out of its Director’s hands, its assets are realized by a liquidator and it’s debts and
liabilities discharged out of the proceeds of realization and any surplus of assets remaining is
returned to its members or shareholders.35
At the end of the winding up the company will cease to have any assets or liabilities and will
therefore be simply a formal step for it to be dissolved, that is, for its personality as a corporation
is brought to an end.
Winding up in India is carried under the Companies Act, 1956 (“1956 Act”) until the notification
of the relevant sections under the Companies Act, 2013 (“2013 Act”) & the Rules (presently the
“Draft Rules”) as prescribed by the Ministry of Corporate Affairs, Government of India. The
2013 Act is supposed to be the complete overhaul of Company Law in India and is aimed at
35
PENNINGTON’S COMPANY LAW, 5th Edition, Pg. 839.
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fastening the effective enforcement of corporate law by the establishment of the National
Company Law Tribunal (“NCLT”) & National Company Law Appellate Tribunal (“NCLAT”).
Modes of Winding up
In India as per the prevalent corporate law and practice there are three types of winding up:
 Compulsory winding up - By order of the Companies Court (“High Court”);
 Voluntary winding up – By the company itself vide an appropriate resolution;
 Winding up under Court’s supervision36
Presently, the High Court of the relevant jurisdiction is the competent court to handle matters
pertaining to winding up and reconstruction37, subject to the formation of the NCLT & NCLAT
under the 2013 Act.
Compulsory Winding up
Compulsory Winding up is a modicum of winding up which is resorted to after obtaining an
order of the High Court based on statutory grounds provided under Section 433 of the 1956 Act:
Section 433 reads as under:
a) if the company has, by special resolution, resolved that the company be wound up by the
Tribunal (presently High Court);
b) if default is made in delivering the statutory report to the Registrar or in holding the
statutory meeting;
c) if the company does not commence its business within a year from its incorporation, or
suspends its business for a whole year;
36
This procedure is nonexistent after the Companies (Second Amendment) Act, 2002.
37
Section 10, Companies Act, 1956 read with the Section 2(11), Companies Act, 1956.
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d) if the number of members is reduced, in the case of a public company, below seven, and
in the case of a private company, below two;
e) if the company is unable to pay its debts;
f) if the Tribunal is of opinion that it is just and equitable that the company should be
wound up;
g) if the company has made a default in filing with the Registrar its balance sheet and profit
and loss account or annual return for any five consecutive financial years;
h) if the company has acted against the interests of the sovereignty and integrity of India, the
security of the State, friendly relations with foreign States, public order, decency or
morality;
i) if the Tribunal is of the opinion that the company should be wound up under the
circumstances specified in section 424G.

Note: The clauses (g), (h) & (i) have been added by the Companies (Second Amendment) Act,
2002
Section 439 of 1956 Act enlists which persons are allowed to file the winding up petition. The
company itself, any creditor/s including any contingent or prospective creditor/s, any
contributory, Registrar of Companies & in a case falling under section 243, by any person
authorized by the Central Government in that behalf or in a case falling under section 433 (h), by
the Central Government or a State Government.
Section 439 (2) provides that a secured creditor, the holder of any debentures (including
debenture stock), whether or not any trustee or trustees have been appointed in respect of such
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and other like debentures, and the trustee for the holders of debentures, shall be deemed to be
creditors within the meaning of Section 434(b)(1).
The term holder of ‘any debenture’ shall as per section 2 (12) of the 1956 Act mean a holder of
‘debenture stock, bonds and any other securities of a company, whether constituting a charge on
the assets of the company or not’. Thus, a Bond Holder against which the issuer company has
pledged its assets is eligible to file as a secured creditor and also as a holder of debenture for
winding up under section 433 of the 1956 Act.
Section 434 acts as an explanation as to the section 433(e) with regard to the inability to pay debt
as a ground for winding up. It explains that a company shall be deemed to be unable to pay the
debts if:
a) A creditor for more than Rs. 1,00,000/- has served a demand under his hand requiring
payment of the said debt to the registered office of the company and the company has for
21 days thereafter neglected to make payment to the reasonable satisfaction of the
creditor.
b) Execution or other process issued on a judgment or order in favour of the creditor of the
company is returned unsatisfied in whole or in part; or
c) It is proved to the satisfaction of the court that the company is unable to pay its debts,
taking into account its contingent and prospective liabilities.
The judicial interpretation of the terms ‘debt’ and ‘inability to pay debt’ is important to be
ascertained.
The term ‘debt’ is a sum of money which is now payable or will become payable in the future by
reason of a present obligation. Debt is determined or definite sum of money payable and must be
Page 20 of 57

undisputed.38 A bona fide dispute as the debt is a substantial defense as to the operation of this
section.39
The courts have unanimously held that since winding up is equated to “corporate death” the
court has to be extra cautious in awarding winding up and must look at the overall financial
health of the company40 for determining its inability to pay the debts.
However, courts have also held that winding up is not a tool for recovery of the debt which the
creditor needs to borne in mind as recovery of debt is a civil remedy awarded by civil courts. 41
Process of Winding up
• To be presented to the High Court.

Petition • Prima facie caseto be made out.
• The High Court shall decide as to the validity of the grounds under which the said application is made & if
it is just and equitable to proceed with winding up.
Hearing
• The High Court at any time of the hearing may decide (Section 433):
• to dismiss it, with or without costs;
• adjourn the hearing conditionally or unconditionally;
Order • make any interim order/s as it deems fit;
• pass an order for winding up or any other order as it deems fit.
• Notice to the company being wound up.

• If the High Court orders for Winding up, it shall appoint an Provisional /Official Liqidator (Section 444).
Official • Filing of Statement of Affairs.
Liquidator • Disposal of all assets and claims.
• The High Court will order for dissolution when the affairs of the company are completely wound up
Dissolutio • the Official Liquidator is unable to carry the winding up due to paucity of funds
n
38
Sundhiya Nath v. Bihar National Insurance Co. AIR 1941 Pat. 603
39
Madhusudan Gordhandas & Co. v. Madhu Wollen Industries Pvt. Ltd. [1972] 42 Comp. Cas. 125
40
Advance Television Network ltd. v. registrar of Companies [2011] 12 taxman.com 420
41
Haryana Telecom Ltd. v. Sterlite Industries (India) Ltd. AIR 1999 SC 2354
Page 21 of 57

 The disposal of assets shall include the debt of secured creditors and it falls second in
terms of priority of clearance however the payment shall depend on the total assets and
the method of disbursement thereof. (Section 529A & 530)
 An appeal shall lie from the High Court’s Order to the High Court itself and further to the
Supreme Court of India. (Section 483)
Voluntary Winding up
Voluntary winding up is a mode of winding up provided in Section 484 of the 1956 Act and is
resorted by Members or Creditors without interference of the Court. However they can apply to
the Court for orders or directions whenever necessary.
a) when the period, if any, fixed for the duration of the company by the articles has expired,
or the event, if any, has occurred, on the occurrence of which the articles provide that the
company is to be dissolved, and the company in general meeting passes a resolution
requiring the company to be wound up voluntarily;
b) if the company passes a special resolution that the company be wound up voluntarily.
In case of members’ voluntary winding up, the board of directors has also to make a declaration
to the effect that either the company has no debts or the company is solvent in terms of
provisions of section 488 of the 1956 Act. When the board of directors provides a declaration as
to the insolvency of company, the process of creditors winding up would be initiated.
Once voluntary winding up commences, the company is required to appoint one or more
Liquidators and fix his/their remuneration in a general meeting of the shareholders. On the
appointment of the Liquidator, all the powers of the board of directors come to an end except
where the company or the Liquidator sanctions them to continue. Once appointed, the Liquidator
Page 22 of 57

takes necessary steps to liquidate the company and dispose of its business or property by sale or
any other arrangement approved by a special resolution of the company. The property is
disbursed as to the proportion of the total assets. Primacy is given to creditors in disbursement
after which the residue if any is distributed among the Members.
Distribution of the companies in liquidation by their mode of winding up
(Sourced: 55th Annual Report of the Ministry of Corporate Affairs on the Working and
Administration of Companies Act,1956 for the year ending 31.3.2011)
Page 23 of 57

Page 24 of 57

Changes in Winding up procedure under the 2013 Act
The 2013 Act has proposed a set of changes in the current law and practice of corporate law in
India. The key points as to winding up can be highlighted as below:
 The formation of National Company Law Tribunal which shall have the jurisdiction in
place of the High Court and shall entertain winding up petitions. The NCLT is not a new
creation of the 2013 Act, but a product of the Companies (Second Amendment) Act,
2002 which was subjected to a lot of debate and litigation in Union of India v. R.

Note: The said Companies act, 2013 (“2013 Act”) has come into force as regards to certain notified sections,
however those pertaining to winding up, creation of NCLT & NCLAT and the Draft Rules are still not in force and
the Ministry of Corporate Affairs, Government of India shall vide a notification enforce the same from the date so
prescribed since there is a pending litigation by the Madras Bar Association against the non-compliance by the
Government of India while framing the NCLT & NCLAT.
Page 25 of 57

Gandhi42. There are still very many issues as to inclusion of non judicial members into
the Tribunal, their competence etc. that need to be adequately answered.
 The appeal shall lie from National Company Law Tribunal to National Company Law
Appellate Tribunal and then to the Supreme Court of India thereby barring the High
Court’s original as well as appellate jurisdiction as to company law matters.
 Also a leave of NCLT shall be required for the admission of the winding up petition if it
pertains to inability to pay a contingent or a prospective debt.
 Certain criteria for winding-up by NCLT is deleted under the 2013 Act like minimum
number of members falling below prescribed limit, non-commencement of business for 1
year etc.
 Additional grounds are provided in the 2013 Act. Hence winding up can be ordered if
NCLT is of the opinion that:
– affairs of the company have been conducted in a fraudulent manner;
– company was formed for fraudulent and unlawful purpose;
– the persons concerned in the formation or management of its affairs have been guilty of
fraud, misfeasance or misconduct in connection therewith.
Draft Rules, Companies Act, 2013
The said Rules provide for various forms that are to be filled when a winding up petition is made
under the 2013 Act. It also provides for various specifications as to the winding up order and the
various other essential procedural requirements to be complied with. These Draft Rules are put
for comments from the general public and shall be enforced as on the date prescribed vide the
notification by the Ministry of Corporate Affairs, Government of India.
42
2010 (5) SCALE 514
Page 26 of 57

Critical Analysis
As it is rightfully evident from the statistics available that the cases that have been disposed off
are increasing however its progress is very gradual partly because of the huge burden on cases in
the High Courts. The NCLT is supposed to solve this problem, however, it is also caught up in
legal battles. This certainly in ex-ante sense does not provide for a creditor-friendly framework
and since the cost of bankruptcy procedure due to legal costs and delay are high neither provides
any ex-post benefit to debtors. Though the Companies Act, 2013 is set to change the scene but it
will be time who can tell the efficacy of the system in absence of an overarching bankruptcy law.
Page 27 of 57

CIVIL REMEDIES FOR DEBT RECOVERY
The Code for Civil Procedure, 1908 (“CPC”) provides for filling of ordinary suits or summary
suits under Section 9, Order 1 and Order 37 respectively. The ordinary suit is similar to any civil
suit under the CPC and follows generic principles as laid down in Order 1 of CPC. Summary
suits are a special remedy for certain cause of actions as prescribed in the Order 37 of CPC
wherein one of the reasons for filling the same is for the recovery of debts.
Summary suits
Summary suits are generally resorted to by parties to resort to speedy adjudication. The Order 37
Rule 1 of CPC determines the application of summary procedure in two frameworks viz. the
courts which can try such cases and the subject matter of the said suit. The Order 37, Rule 1 (1)
provides that a suit for summary procedure can only be filled in the High Court, City Civil
Courts, Small Causes Court and other courts. The High Court vide a notification is empowered to
further restrict, enlarge or vary, the categories of suits to be brought under the operation of this
order as it deems proper.
Secondly, the subject matters where summary procedure is applicable are covered under the Rule
1 (2) of Order 37:-
a) wherein suits upon bills of exchange, hundies and promissory notes;
b) suits in which the plaintiff seeks to recover a debt or liquidated demand in money
payable by the defendant,
i. with or without interest arising out of a written contract; of an enactment;
ii. where the sum sought to be recovered is a fix sum of money or in nature of a debt
other than a penalty;
Page 28 of 57

iii. or on a guarantee, where the claim against the principal is in respect of a debt or
liquidated demand only; or
iv. a suit for recovery of receivables instituted by an assignee of a receivable.
In such cases the defendant cannot defend his suit until he files for an appearance and the plaint
shall be deemed to have been admitted if he fails to do so which would entitle the plaintiff to
obtain an ex parte decree as to costs & interests. This right is subject to the rules framed by the
respective High Court in this regard. The court also has the power to cancel the decree passed
and also to grant leave for appearance by the defendant in case of non appearance.
Critical analysis
Despite the fact that this methodology is meant for a speedy recourse for lenders/creditors to
recover the debt due to them, the general attitude of the court has made it to be equivalent to the
ordinary civil proceedings. There are long delays and execution also is a problem. Also the
appeal mechanism leads to a huge delay. Moreover the relief awarded is neither quick nor
adequate. Hence, it is most seldom resorted by creditors and the other modes provided by various
other insolvency laws are undeniably more effective than resorting to remedy under the CPC.
Conclusion
Neither the civil remedies provide adequately for ensuring the recovery of debts nor does the
bankruptcy law in terms of winding up provide for efficient distribution of assets. Hence, India
has not emerged as a hub for investment as compared to various other nations who offer ease in
business.
Page 29 of 57

CORPORATE RESCUE IN INDIA
The condition of corporate rescue is further on a lower side as far as efficiency is concerned. The
current corporate rescue framework is encompassed by two mechanisms - Sick Industrial
Companies Act, 1985 which has virtually failed as it is unable to provide the right kind of
protection to debtors and has often been misused by them as well.
While the Corporate Debt Restructuring has not gained impetus partly because Indian financial
sector is not willing to take risk and also because of the lack of success of this mechanism too
identify and convert corporate failures into success.
Sick Industrial Companies
A perusal of the statement of objects and reasons encapsulated in Sick Industrial Companies
(Special Provisions) Act, 1985 (“SICA”) clearly indicates that the intention of the Legislature is
to overcome the ill-effects of industrial sickness.
The SICA was enacted with a view to: 43
 securing the timely detection of sick and potentially sick companies owning industrial
undertakings;
 the speedy determination by a body of experts of the preventive, ameliorative, remedial
and other measures which are required to be taken with respect to such companies and
 the expeditious enforcement of the measures so determined and for matters connected
therewith or incidental thereto.
43
Statement of Objects & Reasons, Sick Industrial Companies (Special Provisions) Act, 1985
Page 30 of 57

The Board of experts which is named as the Board for Industrial and Financial Reconstruction
(“BIFR”) was set up in January, 1987 and functional with effect from 15th May 1987. The
Appellate Authority for Industrial and Financial Reconstruction (“AAIRFR”) was constituted in
April 1987.
SICA applies to companies both in public and private sectors owning industrial undertakings:44
(a) pertaining to industries specified in the First Schedule to the Industries (Development and
Regulation) Act, 1951, (“IDR Act”) except the industries relating to ships and other vessels
drawn by power and;
(b) not being “small scale industrial undertakings or ancillary industrial undertakings” as defined
in Section 3(j) of the IDR Act.
(c) The criteria to determine sickness in an industrial company are (i) the accumulated losses of
the company to be equal to or more than its net worth i.e. its paid up capital plus its free reserves
(ii) the company should have completed five years after incorporation under the Companies Act,
1956 (iii) it should have 50 or more workers on any day of the 12 months preceding the end of
the financial year with reference to which sickness is claimed. (iv) It should have a factory
license.
44
Section 3(1)(o) along with provisions of sections 3 (1) (e), 3(1) (f), 3 (1)(n) & section 23
Page 31 of 57

The process for making a reference and the entire series of consequences in the SICA is
presented in below in a diagrammatic format.
Process of Application to BIFR
• Board of Directors to pass a resolution to make a Reference to BIFR on the fulfillment of the
grounds stated in section 3 after the date of finalization of fully audited accounts.
•
Reference to If the Board of Directors have sufficent reasons to belive as to the sickness of the company
BIFR (Section then within sixty days from such date that it forms the opinion.
15)
• The BIFR is empowered to make an iquiry to determine the sickness of the company or
appoint a special director.
• Once satisfied the BIFR will look into the avenues of increasing the net worth of the
Powers of company with respect to accumalated losses or it is of the opinion that it is expedient in
BIFR public interest to adopt all or any of the measures provided in Section 18 of the SICA, it can
appoint an Operating Agency ("OA") to formulate a scheme for revival of the company.
Section 17 (2)
& (3)
• OA has to prepare a scheme within 90 days of the order by the BIFR.
• BIFR can make modifications as required to the draft scheme and send it back to the
company & the OA.
Scheme by • In order to invite any suggestiosn or objections the BIPR is required to get such a draft
OA scheme in brief being published in daily newspapers as considered necessary by the BIFR.
Section 18 • Seek consent of all those entities who have extended any financial support to the company.
• As a protective measure, after the acceptance of the Reference under section 22, no fresh
Bar on legal proceedings against the company can be made. All pending proceedings shall be suspended
proceedings by the virtue of this provision.
Section 22
• If the BIFR deems fit to hold that the revival of the said company is not possible and that it is
just and equitable to wind up the said company, it may make a reference to the relevant High
Court competent to proceed with the Winding up petition.
Winding up
• The aggrived party can file for an appeal with AAIFR and if aggrived with the order of the
Appeal AAIFR can file for an appeal to the Supreme Court of India.
Section 25
Page 32 of 57

Practical issues of enforcement of SICA
The most vital question pertains to the observation that SICA has been misused against the
creditors as acceptance of a reference automatically operates as a stay on all pending and fresh
proceedings against the company by resorting to manipulation of accounts to show erosion of net
worth. Moreover, procedural delays and lack of timely commencement of proceedings for a
proof of erosion of net worth is too late for restoration of the said company under SICA are other
issues that make it a less effective mechanism.
Determination of Sickness under the 2013 Act
The key takeaways are highlighted as under:
 Chapter 19 of the 2013 Act provides for the provisions governing sickness of companies.
It effectuates the repeal of the SICA and brings it in the realm of the company law. These
sections are not yet in force and are subject to the notification by the Ministry of
Corporate Affairs, Government of India.
 The foremost of it being that the NCLT shall be the appropriate forum to adjudicate on
the matter of sickness of a company in place of BIFR and NCLAT shall act as the
appellate body in place of the AAIFR.
 The 2013 Act removes the qualification of a company being an “industrial” unit and
extents it to any company.
 It also moves from “erosion of net worth” as a ground to “inability to pay the debt” as a
reference point of sickness. That is to say that if the company fails to make a payment
within 30 days after the receipt of demand from the secured creditors representing 50% or
more in value of the outstanding debt, the secured creditor can himself move to the
Tribunal for declaring the company as a sick company.
Page 33 of 57

 The 2013 Act also requires of an appointment of an interim administrator or a company
administrator from the databank maintained by the Government of India.
 This interim or company administrator shall propose a draft scheme of revival. Thus the
interim/company administrator shall assume the role of an OA as was under the SICA.
 The scheme could also include a scheme of a takeover by a solvent company and if the
NCLT is of the opinion that no efforts of rehabilitation or revival would be successful the
NCLT may itself order for winding up.
Thus, on one hand when undue delays would be avoided due to the proposed structure of NCLT,
the extension of the application from an industrial undertaking to all companies and reducing the
scale from erosion of net worth to that of inability to pay debts would make the companies more
subject to the threat of litigation. Also, NCLT’s effectiveness to solve the matter remains
questionable with the influx of a floodgate of litigation that it is destined to handle in the new
company law regime.
In the midst of these changes in the legal framework, it will be only time that will test the
practical implications of the new law and the effectiveness of the new structure/s that emerge out
of the new law.
Page 34 of 57

Please see below for the compilation of statistics in terms of the effectiveness of Board for
Industrial and Financial Reconstruction (BIFR):
Year Total cases registered Cases disposed off during the year
during the year Cases under Cases revived Winding up Dismissed
revival recommended
1987 311 0 0 0 8
1988 298 0 1 12 29
1989 202 0 1 31 77
1990 151 1 3 42 45
1991 155 1 5 47 27
1992 177 3 7 30 43
1993 152 3 13 63 59
1994 193 2 38 77 48
1995 115 6 25 61 29
1996 97 7 92 83 25
1997 233 2 34 81 21
1998 370 5 21 49 36
1999 413 5 11 61 72
2000 429 14 37 143 157
2001 463 20 47 109 120
2002 559 30 33 106 214
2003 430 17 40 98 195
2004 399 11 29 51 68
2005 180 55 69 19 179
Page 35 of 57

2006 118 120 83 18 290
2007 78 174 76 16 202
2008 57 194 59 11 129
2009 64 725 77 19 123
TOTAL 5644 1396 801 1227 2196
Note:
1. The above figures are as of 31.12.2009 sourced from the “Country Report on Insolvency
Laws in India” by the Indian Institute of Corporate Affairs, New Delhi.
2. Figures of Companies revived after the successful implementation of scheme as well as
those where Net Worth become positive at the inquiry stage itself have been clubbed
together.
3. Above figures are according to Calendar year.
Data for Total cases registered with BIFR after the year 2009:
Year Total cases registered
2010 72
2011 73
2012 80
2013 92 (as on 27.12.2013)
2014 91(as on 31.12.2014)
2015 28 (as on 17.02.2015)
Page 36 of 57

Critical Analysis
The problem lies in the clear interface of SARAESI Act and SICA. The present scenario in India
is completely chaotic, wherein SARFAESI Act is constantly being made powerful at the cost of
social considerations. Use of SARFAESI Act is fairly acceptable in case of security interests on
non-core assets, but where the assets in question are the core assets of the borrower, enforcement
of security interests cannot be given a free play under "might is right" principle. Hence, India
urgently needs to write insolvency and creditors' rights laws that talk to each other, and not talk
45
at each other. Though the Companies Act, 2013 has helped, however this matter of
interpretation shall take time.
Corporate Debt Restructuring in India
Being sensitized by the experiences of various comparable jurisdictions like UK, Korea,
Thailand, Malaysia etc and the plight of the both lenders and borrowers in the Indian scenario,
RBI in 23 August, 2001 provided for an institutional framework for Corporate Debt
Restructuring (“CDR”) creating an entire CDR system consisting of three different bodies -
CDR Standing Forum, CDR Empowered Group & CDR Cell. Subsequently based on the
recommendations made by the Working Group (Chairman: Shri Vepa Kamesam, Deputy
Governor, RBI. The group was constituted pursuant to the announcement made by the Finance
Minister in the Union Budget 2002-2003) to make the operations of the CDR mechanism more
efficient, and consultations with the Government, the guidelines on Corporate Debt
Restructuring system were revised in terms of RBI circular dated February 5, 2003.
45
Vinod Kothari & Soumya Bagaria, Resolution versus creditor rights: India strongly needs to tame SARFAESI Act,
XLIII CHATERED SECRETARY I, (2013), pp. 18.
Page 37 of 57

The CDR Mechanism is a voluntary non-statutory system based on Debtor-Creditor Agreement
(“DCA”) and Inter-Creditor Agreement (“’ICA”) and the principle of approvals by super-
majority of 75% creditors (by value) which makes it binding on the remaining 25% to fall in line
with the majority decision. The mechanism covers:
 Only multiple banking accounts, syndication/consortium accounts, where all banks and
institutions together have an outstanding aggregate exposure of Rs.100 million and
above;
 All categories of assets in the books of member-creditors classified in terms of RBI's
prudential asset classification standards;
 Cases filed in Debt Recovery Tribunals/Bureau of Industrial and Financial
Reconstruction/and other suit-filed cases eligible for restructuring under CDR;
 Two categories are covered under the CDR – Category I consists of standard and sub
standard assets and Category II of doubtful assets.
 No case where the borrower has committed fraud, misfeasance or such economic
offences shall be entertained in CDR mechanism.
The recent trend as per the report of the RBI reveals a 37% hike in 2013 (Rs 2.29 lakh crores) in
the restructured loan amount in India as compared to the last fiscal year 2012 (Rs. 1.505 lakh
crores).46
46
RBI Report on 'Trends and progress of banking in 2012-13’
Page 38 of 57

Legal validity of CDR
The Debtor-Creditor Agreement and the Inter-Creditor Agreement provide the legal sanction to
the CDR mechanism. All banks /financial institutions in the CDR System are required to enter
into the legally binding ICA with necessary enforcement and penal provisions.
Similarly, debtors are required to execute the DCA, either at the time of reference to CDR Cell
or at the time of original loan documentation (for future cases). The DCA has a legally binding
‘stand still’ agreement binding for 90/180 days during which both the parties agree to not file any
litigation on the said subject matter. ‘Stand Still’ is necessary for enabling the CDR System to
undertake the necessary debt restructuring exercise without any outside intervention, judicial or
otherwise and acts as an immunity against all civil actions but not criminal. Besides, the
borrower needs to undertake that during the ‘stand still’ period the documents will stand
extended for the purpose of limitation and that he would not approach any other authority for any
relief and the directors of the company will not resign from the Board of Directors during the
‘stand still’ period.
Page 39 of 57

CDR System
• It is the top tier of the CDR mechanism which is the policy making body.
• It comprises of Chief Executives ("CE") of All-India Financial institutions and scheduled
CDR banks excludes regional rural banks, cooperatives and Non Banking Finance Companies
Standing ("NBFC").
Forum • The forum meets once in six months.
• It is the second and the most crucial tier of the CDR framework for it is the executory wing.
It comprises of the Executive Director level Members from the IDBI, ICICI & SBI.
• Various other banks/financial institutions who have proximity in transactions with the
CDR company also act as members. They vote on the said issue at hand to arrive at decisions as to
Empowere
d Group approving the draft revival plan, shaping up the Final plan and it can suggest/approve
modifications.
• The third tier mandated to assist the Standing Forum and Empowered Group is the CDR
Cell and also determines the prima facie validity of the revival applications that it recieves.
• It shall srutinize the draft and final revival plan which is subject to the approval of the CDR
CDR Cell
Empowered Group and after approval order for the issuance of Letter of Approval ("LOA").
• For effective implementation of the CDR scheme an effective monitoring system has been
put in place:-
• i) Monitoring Institution (referring institution); (ii) Monitoring Committee; and (iii)
external agencies of repute to complement monitoring efforts and also to carry out
concurrent audit, special audit/valuation etc.
Monitoring • The Monitoring Institution is required to monitor all aspects of implementation of the
Mechanism package and furnish a consolidated report on the status of sanction and implementation of
the approved package to CDR Cell every month, in the prescribed format. However this is
completely a recomendatory body which merely aids the approved revival packages.
Page 40 of 57

Performance of CDR since its inception till as on 30.12.2014:
Sr. No Overall Status No. of Aggregate Cases Amount of Debt (in
(in nos.) Rs. crores)
1. Total references received by CDR Cell 647 452940
2. Cases rejected before admission or 122 65925
approval
3. Cases under consideration of CDR EG 5 6130
4. Total Cases Approved 520 380885
5. Cases Withdrawn on account of failure 155 50104
6. Cases exited successfully 77 58682
7. Live cases in CDR 288 272099
CDR as an instrument has been used by the banks as well as the borrowers for more than a
decade now. The CDR mechanism has been devised as an institutional mechanism to support the
large, viable accounts, judiciously and to preserve the values of large exposures of banks.
The CDR mechanism has come under the scanner and for ensuring that its misuse be avoided
and early detection of NPAs is made possible the RBI has come up with a discussion paper titled
‘Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery of
Lenders: Framework for Revitalizing Distressed Assets in the economy’ 47 which is the first step
towards creating a lender/creditor friendly environment so that the rise in NPAs is reduced and
the money cycle continues.
47
Available at http://www.rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30206
Page 41 of 57

The key points include:-
 Fastening up of the CDR process by ensuring the early formation of a lender’s
committee, incentives to lenders for acting collectively and quickly;
 Bringing in greater transparency by an independent evaluation of large CDRs and fair
sharing of losses between promoters and creditors;
 Ensuring steps to provide for a liberal treatment for asset sales.
The Reserve Bank of India released the Framework for Revitalising Distressed Assets in the
Economy in January, 2014. The Framework outlines a corrective action plan that will incentivize
early identification of problem cases, timely restructuring of accounts which are considered to be
viable, and taking prompt steps by banks for recovery or sale of unviable accounts. The main
features of the Framework are48:
i. Early formation of a lenders’ committee with timelines to agree to a plan for resolution.
ii. Incentives for lenders to agree collectively and quickly to a plan: better regulatory
treatment of stressed assets if a resolution plan is underway, accelerated provisioning if
no agreement can be reached.
iii. Improvement in current restructuring process: Independent evaluation of large value
restructurings mandated, with a focus on viable plans and a fair sharing of losses (and
future possible upside) between promoters and creditors.
iv. More expensive future borrowing for borrowers who do not co-operate with lenders in
resolution.
v. More liberal regulatory treatment provided for asset sales:
48
RBI Press Release dated January 30, 2014 - https://rbi.org.in/scripts/BS_PressReleaseDisplay.aspx?prid=30519.
Page 42 of 57

a. Lenders can spread loss on sale over two years provided loss is fully disclosed.
b. Take-out financing/refinancing possible over a longer period and will not be
construed as restructuring.
c. Leveraged buyouts will be allowed for specialized entities for acquisition of
‘stressed companies’.
d. Steps to enable better functioning of Asset Reconstruction Companies mooted.
Sector-specific Companies/Private equity firms encouraged to play active role in stressed assets
market.
Critical Analysis
The CDR mechanism though in its sense aided the process of revival however, there have been
instances of more failures than success.49 There have been various cases where companies have
failed causing huge loss to the financing banks.50 Thus, a new mechanism under the same or in a
new form an structure is awaited to effectively address the issue of revival of companies in the
Indian framework.
Conclusion
It is aptly clear as to the inadequacy bankruptcy laws in India with particular reference to rescue
mechanism however, there have been certain improvements triggered mostly by the various
expert committee reports. The very recent report of the Bankruptcy Law Reform Commission in
February, 2015 is quintessential as regards that it shall shape the contours of a Bankruptcy code
in India.
49
Anand Adhikari, Backup Fails The Test, Business Today, July 20, 2014.
50
Corporate debt recast: More failure than success, Business Standard, December 11, 2014.
Page 43 of 57

COMMITTEE RECOMMENDATIONS
Shri T Tiwari Committee (1981)
The Reserve Bank of India was concerned with rise of sick industry particularly during
industrial stagnation in 1980. This committee was appointed under the chairmanship of Shri T
Tiwari to propose a solution to the menace sick industrial units and the requisite protection to be
provided for them in order to revive them.
The recommendations were considered as late as in 1985 when the Sick Industrial Industries Act,
1985 was passed. This Act has been misused by promoters to evade debt recovery and its revival
mechanism - BIFR has proved to be faulty. Later, SICA was repealed in 2002 however, the
provisions still remained in force due to variety of reasons. Presently, provisions for Sick
Industrial Units have been made a part of the Companies Act, 2013.
Justice V.B. Balakrishna Eradi Committee (1999)
The Eradi Committee is a legendary committee in itself for it recommended various major
reforms as far as the company law in India is concerned. Apart from the smoothening up of the
liquidation procedure and other reforms, the proposal of National Company Law Tribunal
(NCLT) has changed the face of company law. However due to the constitution of the said
Tribunal and challenge first by Mr. R Gandhi and then presently by the Madras Bar Association,
the reform is still not a reality despite having implemented it in the form of legislation long back.
This is the biggest headache for corporate law framework in India as this vital reform has still
not seen the light of the day.
Page 44 of 57

N L Mitra Committee (2001)
N L Mitra Committee again set up by the Reserve Bank of India, in the Report of the Advisory
Group on Bankruptcy Laws for the first time proposed a comprehensive bankruptcy law code for
India. It studied various existing bankruptcy laws in various nations like US, UK and suggested
the framing of one for India. However, lack of legislative intent has lead the report being
shelved for many years. However, in the present wake of political landscape, this report shall
surely serve as the basis for the drafting of the bankruptcy code in India.
J J Irani Committee (2005)
The J J Irani Committee was established by the Ministry of Corporate Affairs, Government of
India to prose changes to the company law framework It made big ticket proposals to amend the
exiting procedure for liquidation and winding up, increasing shareholder and remedies for
creditors etc. It also remained unnoticed until the Satyam Scam in 2009 when the government
woke to frame the new Companies Bill, 2009. It was in 2013 that these recommendations saw a
concrete legal structure in the form of the Companies Act, 2013.
The Bankruptcy Law Reform Committee (2014)
The Bankruptcy Law Reform Committee was set up under the Chairmanship of Mr. T K
Vishwanathan, Former Secretary General, Lok Sabha in August, 2014 under the aegis of the
Ministry of Finance, Government of India. It has submitted its Interim Report in February, 2015
which has recommended major changes in ensuring that the mechanism of corporate rescue and
corporate insolvency provide efficient outcomes both in the ex-ante and ex-post sense. These
recommendations if at all are put into practice, it will significantly salvage the failing corporate
insolvency regime in India until a new bankruptcy code is put in its place.
Page 45 of 57

BEST PRACTICES IN CORPORATE INSOLVENCY LAW & RESCUE - A
COMPARATIVE OVERVIEW
Global Convergence in terms of corporate law and governance is the mantra in the present day
globalized and industrialized society. Especially in the domain of law and that too corporate law
we have various advanced countries to look up to. Firstly, a glance at the essentials of
UNICITRAL Model Law on Insolvency would tell us the requirements of an ideal framework.
Secondly, studying the best practices The three major jurisdictions that posses the most advanced
form of corporate insolvency framework are the United States, United Kingdom and Germany. A
glance at these and its comparison with India would also help us to arrive at vital issues that
could have a 'legal transplant'.
The UNCITRAL Model Law on Insolvency (2004) and the World Bank (2011) framework
provides for various indicators for an efficient insolvency procedures. 51 it ranges from the
integration of a nation's broader legal system to be creditor friendly ex-ante and debtor friendly
ex-post.
Provide for smooth and speedy liquidation procedure, free from delay and as less expensive so as
to reduce costs. Also the major point which requires preponderance from the Indian standpoint is
to ensure that the insolvency systems are circumvented and misused. Providing the corporate
rescue mechanisms which ensure success and providing priority to creditors in case of
liquidation also for those who provide finance to a sick unit during a revival process. Another
point for providing an investor friendly process, cross-border insolvency mechanism must be
also efficacious.
51
Source: Doing Business Report, World Bank, 2015.
Page 46 of 57

Page 47 of 57

As far as United States is concerned the Bankruptcy Law is a matter of the Federal Government's
legislative prerogative.52 It is the Bankruptcy Code, 1978 which is in practice in United States
and acts the umbrella legislation regulating insolvency for all - corporate and other persons
including individual unlike India where all laws are scattered and lack sync. The Chapter 7 &
Chapter 11 form the crux of the US Bankruptcy Code, the former deals with Liquidation and the
later deals with reorganization. Considered as a pro-debtor law, it provides immediate protection
to the promoter from the creditors and secondly, it does not force seizure of normal functioning
of the unit till a decision is made.53Chapter 11 application automatically provides for automatic
stay on other proceedings. Also, it provides for the absolute priority rule which is also available
in the Indian law. Critics call it a pro-debtor law which has afforded more leniency towards a
bankrupt company and has enhanced the cost of credit in USA.54
In the colonial master's land - UK, they have the Insolvency Act, 1986 which in a legendary
move has added the legal remedy of receivership or administration. This is the second best
remedy after liquidation and can only be resorted when there is a floating charge i.e a charge
over the movable property or work in progress. However, receiver unlike the official liquidator
has full power and control of the firm and does not need to reach back to the court for every
single move. This mechanism is to fill the gap for such kind of creditors which was brought in
the 1986 Act. The UK mechanism does not have an automatic stay alike the US system however
it being low in cost then the US counterpart.
52
Bankruptcy in the United States is permitted by the United States Constitution (Article 1, Section 8, Clause 4)
which authorizes Congress to enact "uniform Laws on the subject of Bankruptcies throughout the United States.
53
Anil Bhardwaj, Towards Establishing Modern Insolvency and Bankruptcy Codes for Small Enterprises in India,
Federation of Indian Micro and Small & Medium Enterprises (FISME), Issue I , January, 2009, pp. 21.
54
CA. Rajkumar S. Adukia, A STUDY ON INSOLVENCY LAWS IN INDIA INCLUDING CORPORATE
INSOLVENCY, available at http://www.mbcindia.com/Image/18%20.pdf.
Page 48 of 57

The new German code which is put in force in 1999 is aimed reduction of the incidence of
inefficient liquidations by curtailing the rights of secured creditors and by the elimination of
preferred creditors. The fact that control rights are in the hands of all creditors rather than the
debtor firm makes it closer to the UK's administration rather than to Chapter 11. In Germany
alike UK, there are two proceedings - liquidation and the other being receivership. In Germany
too, a creditor's committee approves the plan and resorts to receivership where they govern the
firm, however it has significant court-intervention.55
A study ranked bankruptcy laws in different countries, compared them according to their legal
origins, and concluded that countries with a French civil law tradition are relatively pro-debtor,
whereas countries with a British common law tradition are relatively pro creditor. 56 If this
explanation is correct, then developing countries with bankruptcy laws modelled on Britain have
a distinct advantage over those modelled on France or civil law countries.57
55
Uhlenbruck, 1975, "Zur Krise des Insolvenzrechts," Neue Juristische Wochenschrift, 897.
56
C. Wihlborg, S. Gangopadhyay, Infrastructure Requirements in the Area of Bankruptcy Law, Wharton School
Center for Financial Institutions, University of Pennsylvania, Center for Financial Institutions Working Papers No.
01-09 (2001) p.50.
57
Robert D. Cooter & Hans Bernd-Schäfer, SOLOMON'S KNOT: HOW LAW CAN END THE POVERTY OF
NATIONS? Princeton University Press, December 2011, pp. 15.
Page 49 of 57

Difference between: US, UK & Germany Corporate Insolvency regimes58
58
Julian R. Franks, Kjell G. Nyborg and Walter N. Torous, A Comparison of US, UK, and German Insolvency
Codes, 25 FINANCIAL MANAGEMENT 3, Special Issue: European Corporate Finance, (Autumn, 1996), pp. 86-
101.
Page 50 of 57

RECOMMENDATIONS & CONCLUSION
There are no second thoughts that an economic analysis aptly reveals the glaring failure of the present
bankruptcy law framework in India which has also been agreed by various authors and expert committees
on the said matter. It is also imperative that a Bankruptcy Code for India is the need of the hour.
Therefore, it is necessary that there be a highly efficient corporate insolvency regime that
 separates feasible companies from the unviable ones, and
 reorganizes the feasible companies with minimum loss of value and in minimum cost and time.
A well-designed insolvency system must address the following policy objectives59:
 the protection of creditor interests by maximizing returns to creditors;
 the promotion of economic growth through efficient reallocation of resources;
 the development of credit markets;
 the protection of other stakeholders such as employees and shareholders; and
 enhancement of investor confidence.
India, at this juncture needs to revamp its policies and bring in a fair amount of transparency and
accountability. Delay needs to be removed and speedy disposal brought in place. Though delay is
a resultant of many factors like delay tactics by parties, court-permissions, confused priority
system, moratoriums, hold-out by certain creditors, failure of proper institutional mechanisms etc
which needs to be eliminated by a strong and robust legal enforcement. Ex-ante efficiency
requires that a creditor friendly legal environment is created where he is assured of his return and
the credit market flourishes for the betterment of the economy. Since the priority system is out of
shape and the out-of-court rescue modes simply unavailable, then new bankruptcy law should
address these issues.
59
Interim Report, Bankruptcy Law Reform Committee, February 2015.
Page 51 of 57

The rescue proceedings must be allowed to be filled by secured creditors with determination of a
time period within which if an undisputed debt is not discharged. This will ensure that creditors
have the incentive to ensure that the company is prevented from any further losses. Also in the
similar fashion, debtor company should also be allowed to file for revival or rescue as under
Section 253 of the Companies Act, 2013 so as to provide an ex-post incentive for a debtor
company if it is unable to pay debts whose threshold can be prescribed. Also, to avoid the flood
gates of litigation, penalty on vexatious or frivolous petitions be imposed which should serve as
an effective deterrent from misuse which remains the demerit of SICA.
The advent of NCLT and NCLAT are preeminent for the success of the present system. The
problem with these are that they are already into a what seems like to be a long-drawn litigation
battle. It has already taken roughly one and half decade after its enactment however its real
colours are yet to be seen in practice. The Government should certainly amend the Companies
Act, 2013 to see to it that it does not violate the Supreme Court Judgement in Union of India v.
R. Gandhi.
The BLRC has very explicitly laid down reasons for providing moratorium under Section 253 for
avoiding misuse of the same, which is certainly welcome move. Also, Section 260 as regards to
powers of Administrator and many amends need to be made so as to make sure that misuse is not
done neither are they be reduced to be puppets in the hands of court for it shall cause more delay.
The another important reform that is being proposed is the super-priority for those who creditors
who agree to finance the rescue procedures, amends to Section 261 is proposed to accommodate
the same. This will certainly allow rescue more realistic. Schemes of arrangement can also
facilitate the use of hybrid-rescue mechanisms like ‘pre-packaged rescues’. Pre-packaged rescue
Page 52 of 57

is a practice evolved in the UK and the US by which the debtor company and its creditors
conclude an agreement for the sale of the company’s business prior to the initiation of formal
insolvency proceedings.
These are a few twilight zones which have received focus however, all said and done, a relook is
certainly required to address this alarming issue lest we as a nation shall lose out on investment
opportunities which for a developing nation like India is the least affordable option. Law needs
to rise up to the dynamism of the market.
Page 53 of 57

BIBLIOGRAPHY & REFERENCES
Books
 Cooter, Robert D. & Hans Bernd-Schäfer, Solomon's Knot: How Law Can End The
Poverty Of Nations? Princeton University Press, (2011).
 Finch, Vanessa, Corporate Insolvency Law, Cambridge University Press, (2009).
 Goode, Roy, Principles of Corporate Insolvency Law, Sweet & Maxwell, (2011).
 Institute of Company Secretaries of India, Corporate restructuring and insolvency, ICSI
Publication, (2009).
 Jackson, T. H, The Logic and Limits of Bankruptcy Law, Cambridge, (1986).
 Posner, Richard A, Economic Analysis of Law, Wolters Kluwer (2011).
 Romano, Roberta, Foundations of Corporate Law, Lexis Nexis, (2010).
Statutes
 Companies Act, 1956 (India)
 Sick Industrial Companies Act, 1985 (India)
 SARFAESI Act, 2002 (India)
 Companies Act, 2013 (India)
 US Constitution (USA)
 Bankruptcy Code, 1978 (USA)
 Insolvency Act, 1986 (UK)
 German Bankruptcy Code, 1999 (Germany)
Page 54 of 57

Articles
 Abbot, L J, S Parker & G F Peters, The Effect of Post-bankruptcy Financing on Going
Concern Reporting, 21 AICPA (2000).
 Aghion, Philippe, Hart, Oliver D. and Moore, John The Economics of Bankruptcy
Reform, 8 Journal Of Law, Economics, And Organization, (1992).
 Armour, John and Michael J. Whincop, The Proprietary Foundations of Corporate Law,
27 Oxford Journal of Legal Studies 3, (Autumn, 2007).
 Baird, D G & T H Jackson, Corporate Reorganizations and the Treatment of Diverse
Ownership Interests: A comment of adequate protection of secured creditors in
bankruptcy, 51 U Chi L Rev 97, (1984).
 Bhardwaj, Anil, Towards Establishing Modern Insolvency and Bankruptcy Codes for
Small Enterprises in India, Federation of Indian Micro and Small & Medium Enterprises
(FISME), Issue I (2009).
 Coffee, J C, ‘What went wrong? An initial inquiry into the causes of the 2008 financial
crisis’ 9 Journal Of Corporate Law Studies 1, (2009).
 Djankov, S., O Hart & A Shleifer, Debt enforcement around the world, 116 Journal of
Political Economy 6, (2008).
 Dube, Indrajit, Indian Corporate Insolvency Law: Efficiency and efficacy from a Cross
Border Perspective, Electronic copy available at: http://ssrn.com/abstract=1141931.
 Franks, J., Nyborg, K. and Torous, W, A comparison of US, UK and German insolvency
codes, 25 Financial Management 3, (1996).
Page 55 of 57

 Franks, Julian R., Kjell G. Nyborg and Walter N. Torous, A Comparison of US, UK, and
German Insolvency Codes, 25 Financial Management 3, Special Issue: European
Corporate Finance, (1996).
 Gale D. & M Hellwig, Incentive -compatible debt contracts: The one-period problem,
The Review of Economic Studies, 52, (1985).
 Ileana Ashrafzadeh - Nișulescu & Marușa Beca, The Corporate Insolvency’s Evolution in
the EU and India in the Period 2007-2012, 3 Journal of Knowledge Management,
Economics and Information Technology 6, (December, 2013).
 Jensen, M C, Agency Costs of free cash flow, corporate finance and takeovers, 76 The
American Economic Review 2, (1986).
 Jordan Tabb, Charles, History of the Bankruptcy Laws of United States, 3 Am Bankr.
Inst. Law Review 5, 1995.
 Kothari, Vinod & Soumya Bagaria, Resolution versus creditor rights: India strongly
needs to tame SARFAESI Act, XLIII Chartered Secretary I, (2013).
 Levinthal, LE, The Early History of Bankruptcy Law, 66 University of Pennsylvania
Law Review 5/6, (April, 1918).
 R.H. Coase, The Nature of The Firm, 4 Economica (1937).
 White, M. The Corporate Bankruptcy Decision, 3 Journal of Economic Perspectives,
(1983).
Reports
 Shri T Tiwari Committee Report (1981).
 Justice Eradi High Level Committee on Law relating to Insolvency of Companies
(1999).
Page 56 of 57

 N L Mitra Committee Report on Bankruptcy (2001).
 Dr. J.J Irani Committee Report (2005).
 Interim Report of The Bankruptcy Law Reform Committee (2015).
 RBI Report on 'Trends and progress of banking in 2012-13’ (2012-13).
 Doing Business Report, World Bank (2015).
Internet Documents
 A Brief History of Bankruptcy, available at
http://www.bankruptcydata.com/Ch11History.htm, (April 14, 2015).
 Rajkumar S. Adukia, CA, A Study on Insolvency Laws in India Including Corporate
Insolvency, available at http://www.mbcindia.com/Image/18%20.pdf. (April 17, 2015).
 Whipps, Heather, The History of Bankruptcy: Dungeons, Slavery and Executions,
available at http://www.livescience.com/3629-history-bankruptcy-dungeons-slavery-
executions.html (April 14, 2015).
 Wihlborg, C., S. Gangopadhyay, Infrastructure Requirements in the Area of Bankruptcy
Law, Wharton School Center for Financial Institutions, University of Pennsylvania,
Center for Financial Institutions Working Papers No. 01-09 (2001) (April 16, 2015).
Newspaper Articles
 Anand Adhikari, Backup Fails The Test, Business Today, July 20, 2014.
 Corporate debt recast: More failure than success, Business Standard, December 11, 2014.
Page 57 of 57

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CORPORATE INSOLVENCY LAW

Historical Background ................................................................................................................ 4

Corporate Insolvency Law: From the Prism of Law & Economics............................................ 7

Objectives of Corporate Insolvency Law ............................................................................... 8

Frontiers of Corporate Insolvency Law ................................................................................ 10

Coordination Problems ......................................................................................................... 10

Ex-ante efficiency ................................................................................................................. 11

Ex-Post efficiency ................................................................................................................. 12

Corporate Rescue: From the Prism of Law & Economics ........................................................ 14

Winding Up of Companies ....................................................................................................... 17

Modes of Winding up ........................................................................................................... 18

Compulsory Winding up ....................................................................................................... 18

Process of Winding up .......................................................................................................... 21

Voluntary Winding up .......................................................................................................... 22

Changes in Winding up procedure under the 2013 Act ........................................................ 25

Draft Rules, Companies Act, 2013 ....................................................................................... 26

Civil Remedies for Debt Recovery ........................................................................................... 28

Summary suits ....................................................................................................................... 28

Critical analysis ..................................................................................................................... 29

Corporate Rescue in India ......................................................................................................... 30

Sick Industrial Companies .................................................................................................... 30

Process of Application to BIFR ............................................................................................ 32

Practical issues of enforcement of SICA .............................................................................. 33

Determination of Sickness under the 2013 Act .................................................................... 33

Corporate Debt Restructuring in India .................................................................................. 37

Legal validity of CDR ........................................................................................................... 39

Committee Recommendations .................................................................................................. 44

Recommendations & Conclusion ................................................................................................. 51

Bibliography & References........................................................................................................... 54

Electronic copy available at: https://ssrn.com/abstract=2970582

contractarian theorists who propound that a corporation is a combination of contracts fail

of the parties so as to protect the rights of the creditors.3

Electronic copy available at: https://ssrn.com/abstract=2970582

framework of laws governing bankruptcy.

civilizations to judge the evolution of bankruptcy laws.

Electronic copy available at: https://ssrn.com/abstract=2970582

Italy & France.10

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for many colonies to have transplant in their respective legal system.

law and economic analysis.

Electronic copy available at: https://ssrn.com/abstract=2970582

CORPORATE INSOLVENCY LAW: FROM THE PRISM OF LAW & ECONOMICS

stakeholders, insolvency law steps in to effect a collective transformation of creditors' rights. 17 It

Electronic copy available at: https://ssrn.com/abstract=2970582

position in the balance-sheet of a company is very high.18

insolvency law seeks to provide for .19

Objectives of Corporate Insolvency Law

Electronic copy available at: https://ssrn.com/abstract=2970582

among creditors, involving a limited redistribution of rights; and to provide a mechanism by

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Frontiers of Corporate Insolvency Law

bankruptcy. 24 By a mere perception of distress of corporation, each shareholder might

corporation which is worth more than a going concern.

renegotiate their debt arrangement and gain priority.

Electronic copy available at: https://ssrn.com/abstract=2970582

understood as a useful means to reduce transaction costs in collective action. Negotiations

between various creditors are often difficult and expensive.

bankruptcy procedure creditors play a non-cooperative game, in which each individual

subtracted or an administrator be appointed to appropriate the assets.

repayment. Hence, an effective bankruptcy framework should be creditor-friendly by providing

Electronic copy available at: https://ssrn.com/abstract=2970582

Electronic copy available at: https://ssrn.com/abstract=2970582