Banking Law

A research thesis on International Bankruptcy Laws

International Bankruptcy Laws

 

By

Saumya Parmarthi

Symbiosis Law School, NOIDA

 

 

LIST OF ABBREVIATION

 

 

UNIDROIT International Institute for the Unification of Private Law
UNCITRAL United Nations Commission on International Trade Law
OAS Organization of American States
UNCCISG United Nations Convention on Contracts for the International Sale of Goods
US United States
 

 

 

 

RESEARCH METHODOLOGY

 

The thesis shall follow a theoretical research methodology. The primary research question is to comprehend the significance of bankruptcy laws internationally & nation-wise too.

 

 

OBJECTIVE OF STUDY

 

  1. To understand the concept of Bankruptcy laws
  2. To comprehend the laws of insolvency on international basis.

SCOPE OF THE PROJECT

 

The scope of the project shall be based on the geographical boundaries.

INTRODUCTION

 

Bankruptcy is a legal proceeding involving a person or business that is unable to repay outstanding debts.[1]

It allows individuals, couples, and businesses that cannot meet their financial obligations to be excused from repaying some or all of their debt. It has been in existence since ancient times. Generally, there are two types of bankruptcy.

  • Liquidation bankruptcy: debtors must surrender their property, which is sold, and the proceeds distributed to creditors. In return, all debts are permanently discharged.
  • Reorganization bankruptcy: debtors are allowed to keep their property. But the debtors must agree to an installment plan to repay creditors a portion of the amount they owe.

INDIA

Who can file

By definition, a bankrupt or an insolvent person is the one who is unable to pay his debts. However, an insolvency petition can only be filed if his liabilities exceed his assets, making it impossible for him to pay the debt. Hence, this option is not open to all the people who are in debt.

If a petition is filed on flimsy grounds or insolvent person is unable to prove that he cannot pay the debt, the petition will be dismissed. Besides, insolvent person can file for bankruptcy if he has been arrested as per a court order or the property has been attached. The insolvent person is eligible to file for insolvency even if he has  not been arrested or the property has not been attached, but the debt amount should exceed 500.

Procedure for filing

In India, there are two Acts that govern insolvency:

  • The Presidency Towns Insolvency Act, 1909 (PTIA), and
  • Provincial Insolvency Act, 1920 (PIA).

The PTIA is applicable in Mumbai, Chennai and Kolkata, while the rest of the country comes under PIA. Except for some minor procedural differences, the law concerning insolvency is the same under both the Acts.

A petition for insolvency can be filed in a particular court only if you have resided in that place or have conducted business for a year. Bankruptcy is filed in an individual capacity without including the spouse.

This document should have a statement that you are unable to pay your debts, the place where you reside or conduct the business, details of the court order if you have been arrested, details of pecuniary claims against you, as well as the list and addresses of creditors.

After the suit has been filed, the court shall fix a date for hearing. Here, you will be required to produce books of accounts, an inventory of your properties and the list of creditors. The court will examine your conduct, dealings and properties in the presence of the creditors. This gives the latter an opportunity to examine if you have made a full disclosure of your real estate holdings.

If you have filed for insolvency in Mumbai, Chennai or Kolkata, the examination will take place only after you have been declared insolvent, while in all other areas, the examination takes place at the time of hearing. Once you are declared insolvent and the public examination concludes, you can file an application of discharge, which requests the removal of the status of ‘insolvency’.

Declaration of bankruptcy

The biggest advantage of filing for insolvency is that the creditors will stop chasing. Instead, they will be directed to the court in which the insolvency petition is being processed.

While the matter is in the court, creditors cannot file separate suits against the Bankrupt person without prior permission of the court. However, if someone has a secured credit against collateral, the lender need not take the court’s permission to acquire the mortgaged asset. In all other cases, the creditors will have to follow the court’s directives.

On being declared insolvent, the court will appoint an officer, known as official assignee or receiver, who will take charge of the bankrupt’s property, which will be divided among creditors to pay the debts. He will not be associated with his property once the official receiver takes charge.

It can be difficult since the court does not consider your accommodation or other expenses that you may need to take care of. However, if he does not have any property with which debts can be settled, there is very little creditors can do about it. “If you deliberately transfer property before filing an insolvency petition, the transaction can viewed as fraudulent and the court can reverse it”.[2]

The flip side of being declared bankrupt is that the person’s credit score will be adversely impacted. Typically, he will remain on the Cibil list for up to 10 years. This does not mean that creditor cannot avail of loans since he can improve the creditor credit score gradually and apply for smaller loans like those for car.[3]

 

INTERNATIONAL LAWS

 

International Efforts to Harmonize Commercial Law: History

The United States’ first major step toward international harmonization in the post-World War II era occurred in the 1960s. Following progress on the unification of certain aspects of air transportation and maritime law in the 1950s, the United States in 1964 joined two international organizations which seek to harmonize or unify private law – the Hague Conference on Private International Law,[4] and the UNIDROIT.[5] The UNCITRAL[6] was formed shortly thereafter in 1967, and the OAS began planning for resumption of its Inter-American Specialized Conferences on Private International Law (CIDIPs), the first of which took place in 1975.[7]

International lending institutions started to address international insolvency problems as they become subject to increased pressure to underwrite multinational trade and corporate activity. Private commercial lenders are also realizing the extent of their exposure because of lack of predictability as to how security interests’ laws unwind internationally in the complex maze of debt in a failed business. The economic dislocation caused by interrupted trade patterns, and the loss of going concern value which might have been recoverable, have begun to be recognized as serious problems in an age of multinational corporate operations. The discernible movement in some states toward supporting reorganization as well as liquidation may be providing more common ground. One may also speculate that prior achievements in harmonizing commercial laws may add to a willingness to again seek the grail.

Different Approaches to Cross-Border Insolvency

There are three principal approaches to cross-border insolvency situations-

  • the universalist approach,
  • the unity approach, and
  • the territoriality approach

This list is a broad generalization, and in practice each approach contains a variety of subsets. In addition, ad hoc coordination between courts and administrators in cases shows signs of becoming an independent methodology.

Under the Universalist approach, one central forum resolves the financial difficulties of an enterprise, or at least coordinates actions in other jurisdictions in aid of its centralized approach. The Universalist approach requires that all or at least the principal “assets and debts of [a distressed] enterprise… be administered through one central proceeding in the ‘home’ country, and [that] courts in all other countries … act ancillary to and in aid of the home country.

The second approach to cross-border insolvency situations is often termed the “unity” approach.” This approach has as its objective the development of a common insolvency regime, which can result in a single administrator of a cross-border proceeding, or a principal administrator which coordinates the actions of other forums.

Under territorial approach, each state asserts the sovereignty of its domestic law, at least with regard to property or parties within its jurisdiction, thus foreclosing or significantly limiting prospects of cooperation with respect to foreign insolvency proceedings

LAWS OF OTHER COUNTRIES

 

United States

 The three main chapters of the Bankruptcy Code –

Chapter 7 bankruptcies are by far the most common. These are liquidation bankruptcies in which the debtors must turn over all “non-exempt” property to a supervising officer known as the bankruptcy trustee. Property is exempt if it falls within specific categories of assets that debtors are allowed to keep, such as a certain amount of clothing, household items, tools for work, and in some instances, vehicles and the family home.[8]

Chapter 11 allows businesses to obtain protection from their creditors while they put together a repayment plan. Liabilities can be reduced and restructured to give the business another chance at achieving profitability. 

Chapter 13 bankruptcies offer a number of benefits besides allowing debtors to keep their property. For example, certain types of secured debt, like a car loan, can be restructured by reducing principal to the market value of the collateral, and lowering payments by extending the repayment period to 60 months. Other obligations, like mortgages, student loans, and tax liabilities can be modified as well. Creditors are given no choice in the matter.

In the United States, the rules and procedures for filing bankruptcy are governed by federal law. States are prohibited from legislating in this area of the law.

United Kingdom [9]

The United Kingdom has not developed one single bankruptcy code for all of the provinces that constitute this territory. Therefore, England and Wales maintain different bankruptcy laws from Scotland, which has, in turn, developed different legislation than Northern Ireland.

This variation of laws across the United Kingdom often causes some confusion. In general, though, UK bankruptcy law is very similar to the bankruptcy laws in Canada and the United States. However, in the United Kingdom, bankruptcy is reserved for individuals who are experiencing financial troubles and is not utilized for failing corporations.

In many cases, bankruptcy in the UK is petitioned for directly by creditors. It is possible for individuals to choose to petition a court for bankruptcy. However, in order to avoid the liquidation of their assets, many debtors will choose to forge an Individual Voluntary Arrangement. This will allow a petitioner to reorganize his/her finances and repay a portion of his/her debts.

Australia 

With the passage of the Bankruptcy Act, the Australian government established a bankruptcy system in order to discharge individuals’ debts if they are insolvent and unable to pay their bills. The process of filing for bankruptcy is fairly parallel to the procedure in the United Kingdom. A bankruptcy case may be initiated in one of two ways: either individuals will voluntarily file for bankruptcy due to their inability to adequately address their debt, or a creditor will file a bankruptcy petition to place a debtor in bankruptcy.

Like in the United States, Australian legislation outlines debts that are exempt from a debtor’s bankruptcy estate and debts that are not dischargeable. Despite these fundamental similarities between bankruptcy in Australia and the process in the United Kingdom and the United States, there are many important differences that should be researched and acknowledged.

 

China 

China maintains a very different bankruptcy system than most countries with market-based economies. Countries such as Canada and the United Kingdom recognize the need to offer individuals a method of relieving their debt so that they may once again manage their finances successfully.

In order to address their own numbers of insolvent individuals who were unable to pay their debts, many countries developed a personal bankruptcy system. China has yet to do so. Therefore, individuals who are experiencing a financial crisis in China have no method of relieve themselves of the debt they have accrued.

It is only recently that China developed effective legislation regulating business bankruptcy. EBL, or the Enterprise Bankruptcy Law, was established in order to provide increased protection to both corporations and lenders. This new legislation includes and effectively creates a reorganization provision, allowing failing corporations to restructure their businesses.

CONCLUSION

As in many specialized fields, insolvency law has been built on particular traditions and is a strong competitor in maintaining its boundaries against incursion by other areas of law. Progress toward harmonization has been more difficult-at least in the past-than many other areas of law. As noted earlier, although federalized in the United States Constitution, the first comprehensive Bankruptcy Code in the United States took about 100 years to achieve, and was not substantially modernized, at least with respect to cross-border matters. Progress in other states legal systems has been similarly difficult.

Attempting to achieve limited but key procedural targets such as access and recognition, and foregoing the temptation to deal with so called substantive issues, provides a platform from which to achieve real progress. To harmonies on such limited basis got feasible at the time and is worth the required resources, as well as the support of governments that have enacted or facilitated such measures. As a governmental approach, the multilateral effort at the United Nations was a positive step, with its apparent and necessary reliance on practical economic results and the needs of the insolvency bar. Of course, the strength of the territorial impulse and pressures for protective legislation that can arise in any state cannot be underestimated throughout this quest.

BIBLIOGRAPHY

 

 Sites Referred:

Journals:

  • Burman H. S. (1996) Harmonization of International Bankruptcy Law: A United States Perspective, Fordham Law Review (Volume 64, Issue 6, Article 4)
  • UNCITRAL Legislative Guide on Insolvency Law (2004)
  • Economic Laws Practice

Endnotes

[1] http://www.investopedia.com/

[2] Economic Laws Practice

[3] http://articles.economictimes.indiatimes.com/

[4] Done Mar. 15, 1940, 15 U.S.T. 2494 (entered into force for the United States Mar. 13, 1964).

[5] Done Mar. 15, 1940, 15 U.S.T. 2494 (entered into force for the United States Mar. 13, 1964).

[6] G.A. Res. 2205, U.N. GAOR, 21st Sess., Supp. No. 16, at 99, U.N. Doc. A/ 6316 (1966).

[7] Peter H. Pfund, Overview of the Codification Process, 15 Brook. J. Int’l L. 7, 7 & n.1 (1989).

[8] http://www.hg.org/

[9] http://bankruptcy.laws.com/

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