A STUDY OF CORPORATE INSOLVENCY LAW IN INDIA

Kristin van Zwieten John Collier Fellow in Law, Trinity Hall, Cambridge

Outline
A framework for inquiry
Introducing Indian corporate insolvency law: the formal rescue and

liquidation procedures Designing a study: avenues for potential research; methodological challenges
Results of research on Indias liquidation procedure
The law on the books: a UK transplant The law in practice: evidence of the failure of liquidation law in India Explaining the operation of the law in practice: new evidence of the role of

the courts in influencing the operation of liquidation law Reflecting on the implications of the Indian case:
The design of the UK liquidation procedure Common law adjudication and the challenges of economic transition

The role of the regulator, practitioners, and the academy

A framework for inquiry: introducing the subject

Indian corporate insolvency law: two formal (collective) procedures
(1) Liquidation under the Companies Act 1956 A UK transplant, with few differences on the books (2) Corporate rescue under the Sick Industrial Companies Act 1985 Available only to one class of debtor: industrial (manufacturing) firms For non-industrial companies: only formal route to reorganisation is the scheme of arrangement (also a UK transplant)

The laws failure

India ranks 128 (of 183) in the resolving insolvency WB Doing Business ranking Consistent record of extraordinary delays and poor returns to creditors:

India has the dubious distinction of being among the countries where it takes the longest time to go through bankruptcy in the world (10 years on average). Consequently, recovery rates are also very low (Chakrabarti et al, 2007)
Why failure matters: impact on availability and cost of finance Reform promised since 1990s but has to date faltered; now reportedly imminent

A framework for inquiry: designing a study

Potential avenues for research:
Why does Indian corporate insolvency law function as it does? (explaining delay) What impact has the laws functionality had on creditor/debtor behaviour? How should Indian insolvency law function?

My project
Focuses on the primary empirical question: explaining the laws functionality Virtues under-explored in the existing literature; immediate reform implications Pitfalls multiple variables at play, not all equally susceptible to analysis Managing the methodological challenges:

Long-range study (1956 to present day), traversing both key economic periods Multi-method approach (systematic case law review, archival research,

qualitative fieldwork and quantitative data collection), grounded in the literature

The best [empirical] research uses a variety of methods to provide a more nuanced understanding of law, legal institutions and legal processes than can be provided by any one methodology alone due to the complex nature of the social world in which they operate (Nelson)

Acknowledging the limitations of research output

Results: research on Indias liquidation procedure (I)

Introducing Indian liquidation law on the books: formal similarities with UK A colonial transplant (1866, modelled on English Act of 1862)

[Mr Peacock] thought that it was very desirable that the law should be nearly alike as the circumstanceswould permit; so that persons forming themselves into partnerships on the principle of limited liability in England, and desirous of carrying on either the whole or a portion of their business in India, might know that the Law in both countries was substantially the same, and that they would incur no greater risk in India (1856)
After independence: Companies Act 1956 enacted Colonial transplant trend continues, with one key exception (the liquidator) Between 1956 and today: Relatively few changes in either liquidation regime (UK: wrongful trading; undervalue

transactions; abolition of Crown preference; prescribed part); India (preferential debts)

Result: core framework from colonial period remains intact, with strong similarities

between the two jurisdictions persisting

Area of most significant difference: allocation of responsibility for administration of

compulsory liquidation

Results: research on Indias liquidation procedure (II)

Introducing Indian liquidation law in practice: striking differences with the UK
Consensus that the procedure is a failure: it is virtually impossible to liquidate and

wind up an unviable firm (Goswami Committee, 1993) Consistent anecdotal reports of delay and associated loss in value/returns: the process of liquidation is costly, inordinately lengthy, and results in almost complete erosion of asset value (Irani Committee, 2005) Evidence of delay:
In the process of winding up: anecdotal reports of 10 year average (Schroff, 2006)

As at 31.12.1999, 15% of compulsory liquidations had been pending for 25+ years, and a further 18% for 15-25 years 1993 analysis of firms in liquidation in 14 High Courts: 186 cases (10%) at 30-40 years, further 44 cases (2%) at 40-50 years Between presentation of petition and order in compulsory liquidation: further delays
Consequences of delay:
ex post asset wastage; asset siphoning ex ante recourse to liquidation (liquidation as a disciplinary device); cost of credit

Results: research on Indias liquidation procedure (III)

Company registrations and liquidations over time
80000 70000

60000 Number of companies

50000

40000

30000

20000

10000

0 1957 1967 1977 1987 1997 2007 companies limited by shares registered companies wound-up

In 1958, 961 companies limited by shares registered, 469 wound up In 2008, 54,343 companies limited by shares registered, 376 wound up

Results: research on Indias liquidation procedure (IV)

Break-down by procedure
Year No. registered 54,020 51,708 65,359 64,582 67,570 303,239 No. CLs No. CVLs No. MVLs No. subject to super. 0 0 50 0 0 50

2005-2006 2006-2007 2007-2008 2008-2009 2009-2010 Total

380 247 236 135 140 1,138

0 2 4 0 4 10

84 75 86 61 81 387

Comparison with UK: pre-crisis year 2006-2007

2006-2007 England and Wales India No. registered 308,800 51,708 No. CLs 5,165 247 No. CVLs 7,342 2

Overall: Indian liquidation procedure as defunct, not merely dysfunctional

Results: research on Indias liquidation procedure (V)

Explaining the demise of Indias liquidation procedure: existing research
Little in-depth scholarship on this question Existing literature does offer some explanations for delays in compulsory

liquidation: 1. Administrative/regulatory capacity: under-resourced liquidators, overburdened courts, un-cooperative managers 2. Judicial preference/practice: attempts to rescue after winding-up order made (interim payment orders), and also before any order is made
It is normally observed that there is a substantial time lag between the date of presentation of the petition for winding up and the date of winding up order. It was pointed out [to the committee] that courts usually allow time to the company to pay off the creditors and ensure that the instalments fixed for the purpose are finally paid and this results in delay in disposal of such petitions (Eradi Committee, 2002)
The reform agenda hypothesis (1)

Results: research on Indias liquidation procedure (VI)

Explaining the demise of Indias liquidation procedure: new research
Original analysis of all petitions to wind-up company by creditor, 1956-today Hand-collected dataset of approx. 450 judgments, reviewed and catalogued Results:

New evidence of striking judicial innovations in liquidation practice of the

High Courts, which altered laws functionality Overwhelming theme: emergence of revival imperative in judicial treatment of creditor petitions
An order of winding up declaring company insolvent amounts to killing a juristic person. Therefore in all cases of inability to pay debt, the Court does not order winding up. The norm is to infuse new life into a company whose life is ebbing out and avoid euthanasia. A company is not mere association of people to increase net worth of their capital. It has economic, human and public concerns not only to members but also to the society at large including work force toiling to increase wealth. These and other aspects have necessitated Indian Courts to evolve tests to be applied while considering creditor's petition for winding up (Walnut Packaging Private Limited v Sirpur Paper Mills, 2008, Rao J)

Results: research on Indias liquidation procedure (VII)

Four innovations: Procedure increased complexity in initial stage of admitting petition
Mandatory additional pre-hearing stage for disposal of all petitions,

whether or not contested

Procedure the pay-to-exit innovation
At both admission and hearing stage, multiple opportunities for respondent

to escape liquidation by payment or part-payment of petitioners debt

Substantive treatment of disputed debts and of solvency
Robust approach to characterising the petitioners debt as disputed Cautious approach to characterising the respondent as insolvent

A catch-all discretion: the court as revival trustee

Conclusion: reflecting on the results

Lesson-learning: The design of the UK liquidation procedure: The central role of the adjudicator (the statute as an incomplete code) Liquidation as a disciplinary device (the laws non-collective functions) The effect of the availability of alternatives to liquidation Case-management; practice and procedure Common law adjudication: precedent lock-in effects, and the challenges

of economic transition Dialogue between judges, the regulator, practitioners and academics
Data collection and reporting Robust, comprehensive and critical secondary literature

Questions?