Corporate Insolvency Law in South Asia

Corporate Insolvency Law in South Asia

Sikha Bansal (Vinod Kothari and Company, India)
DOI: 10.4018/978-1-5225-5541-4.ch003

Abstract

The chapter, while making a background study of the principles underlying corporate insolvency laws and corporate insolvency laws prevalent in non-Asian economies (i.e., United States, United Kingdom, Australia, and South Africa), tracks the history of corporate insolvency law in select South-Asian and South-East Asian countries (i.e., Bangladesh, Bhutan, India, Malaysia, Nepal, Pakistan, Sri Lanka, and Thailand). The chapter seeks to acquaint the readers with the efforts which led to the various reforms in these jurisdictions.
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Philosophy And Objective Of Corporate Insolvency Laws

Insolvency laws are more a part of our social system than the legal system. If an individual living in a society, despite being honest, unfortunately gets into the tangles of debt, insolvency laws seek to protect him from being strangled and provide an opportunity of fresh start. Similar idea applies to corporate entities as well – though these may not be natural persons, yet these constitute an integral part of society serving economic functions and catalysing economic development. Corporate entities carrying on business functions are vulnerable to risk of failure, which is obvious. A risk management system, therefore is quintessential to ensure that in case of a corporate failure, such systems would suggest “the best possible outcome” for the entity. The need becomes more acute where the corporate entity is a large player and any failure thereof may create negative ripples across the industry/market. It must be noted that insolvency laws cannot stop failures – the objective is to resolve failures in the best possible manner.

Sir R.M. Goode (1997) in Principles of Corporate Insolvency Law, discusses the philosophy, foundations, and objectives of the corporate insolvency law. Goode emphasises that it is not the function of a regulation to eliminate risk. The risk of business failure is an essential concomitant of entrepreneurial activity. Risk can only be eliminated by not doing business at all. What has to be controlled is systemic risk, the risk of collapse of an entire market through the domino effect of failure of a major player, particularly a large bank. This may necessitate government intervention through the provision of support finance or through nationalisation. Measures both in public law and private law domain are to be used to reduce systemic risk – in public law, by increased capital requirements for banks and tighter regulation; and in private law, by immunising contracts for netting, close-outs, and the like from the ordinary effects of insolvency laws. But systemic risk aside, the role of regulation is not to prevent corporate failure, but to ensure that when it occurs, rules of insolvency come into play which will produce the best possible outcome for those with an economic stake in the enterprise.

In his work, Goode (1997) points out the following overriding objectives of corporate insolvency laws:

  • 1.

    To maximise the returns to creditors;

  • 2.

    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

  • 3.

    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.

The World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes (2016) emphasise that commercial insolvency systems should aspire to:

(i) integrate with a country’s broader legal and commercial systems; (ii) maximize the value of a firm’s assets and recoveries by creditors; (iii) provide for the efficient liquidation of both nonviable businesses and businesses whose liquidation is likely to produce a greater return to creditors and reorganization of viable businesses; (iv) strike a careful balance between liquidation and reorganization, allowing for easy conversion of proceedings from one proceeding to another; (v) provide for equitable treatment of similarly situated creditors, including similarly situated foreign and domestic creditors; (vi) provide for timely, efficient, and impartial resolution of insolvencies; (vii) prevent the improper use of the insolvency system; (viii) prevent the premature dismemberment of a debtor’s assets by individual creditors seeking quick judgments; (ix) provide a transparent procedure that contains, and consistently applies, clear risk allocation rules and incentives for gathering and dispensing information; (x) recognize existing creditor rights and respect the priority of claims with a predictable and established process; and (xi) establish a framework for cross-border insolvencies, with recognition of foreign proceedings.

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Global Principles Of Insolvency Resolution

For insolvency being a global issue, the multilateral agencies over the world have developed guidance and principles to serve as references. Major ones are briefly discussed as follows:

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