Comparative Company Law

Requirement

Write on '' All developed legal systems provide mechanisms designed to protect creditors from the risks generate'' Use OSCOLA reference.

Solution

Creditors Protection Laws

“The creditor’s rights” is the field of law which deals with the legal means as well as procedures to collect debt and judgments.
The creditor protection refers to the statues of laws that help to protect both the creditors as well as borrowers as far as payment details are concerned. In other words, these laws have been drafted for the purpose of protecting creditors. As the corporate world is replete with the activities of defaults on the part of creditors and such activities require a stringent set of laws so that the debtors would retain the control of basic and fundamental possessions in order to maintain and carry a basic standard of living, even in the situation of losing the lawsuit. However, the creditors have no right to seize all the debtor’s property(Mansi, Maxwell, & Wald, n.d.). So, when the creditor protection is used to describe laws, procedures as well as regulations that are intended to protect debtors from the action of creditors then the term refers to the prohibitions which keep the creditor from acquiring the financial assets of the debtors. But it doesn’t mean that the creditor or government for that matter would be going to provide a leeway to the debtors. In the case of insurance creditor protection if the borrower dies or becomes totally disabled and therefor no table to pay the borrowed amount, then the outstanding debt is paid by the insurance company only to make sure that creditor does not lose money.

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In view of this, there are certain laws that protect the income and the assets from debt collectors, which is sometimes known as being “collection proof” or “judgment proof”. 
It is also very important for the businesses to take control of their debtors in order to ensure that they do not end up in difficulties. The slowing economy could be a trouble for any business, therefore the businesses need to set up credit controls, manage debtors and identifying the problem customers(Armour, 2000). Whereas, Insolvency is the legal term describing the situation of a debtor who is unable to pay his, her, or its debts. There are two primary types of insolvency: cash flow and balance sheet.

1.    UK Insolvency Laws

The UK Insolvency Act 1986 had adopted the meaning of insolvency as “unable to pay debts”. This situation arises when a person or company:
a)    Has failed to comply with a statutory demand over a debt of 750 pounds.
b)    Was unable to satisfy the enforcement of a judgment debt.
c)    The court fully concedes that the company has failed to pay its debts because the worth of its assets have fallen the value of its contingent and prospective liabilities.

Insolvency Procedures 

The legislation of UK provides the following types of procedures for insolvency:

  • Liquidation: It consists of three types of liquidation – compulsory liquidation, where the company has to wind up by the order of the order because of the petition by a creditors and the second is voluntary liquidation, wherein the owner/s or members of the company resolve to wind it up.

  • Administrative Receivership: as per the law, it commences on account of the holder of a floating charge on all the assets that the company has. The duties of the administrative receiver are to maximize the return to the floating charge holder rather than the creditors as a whole(Mokal, 2005).

  • Administration: it was first inducted under the Enterprise Act 2002with an aim of promoting a culture of rescue in UK. It may be appointed by the court and become enforceable.

  • Company Voluntary Arrangement (“CVA”): it refers to a scheme of arrangement or agreement between debtors and creditors. This procedure is intended either to avoid or provide alternate types of insolvency procedures. It begins with the making of the proposals by the directors to the company and its creditors, in which the restructuring of the debts may be discussed(Company Law, 2006).   

UK Debtor Control procedures are listed in the following points:

  • Setting up of credit controls: it includes encouraging the customers to make payments. It helps using references and reports in order to check credit ratings for new customers who place large orders, also identifying customers having bad credit records in the past. Finally, it would be easier at the outset to set the terms of the trade and stick to them.

  • Managing Debtors: it includes dealing directly with the decision makers of the customers and monitoring their collections, reviewing credit ratings regularly on the backdrop of changed buying habits, keeping eyes on the customer’s expansions and requests for extended credit.

  • Identifying problem customers: it is crucial to understand the warning signs about the difficulties that he customers or debtors are experiencing as well as getting commitment from them for the amount to be paid against the account. Finally, discussing policy and credit limits upfront with the customers(Franks, Nyborg, &Torous, 1996).

2.    USA Insolvency/Bankruptcy Laws

The article 1, Section 1 and Clause 4 of the United States Constitution confers the authority to the Congress to establish the uniform laws that concern the insolvency or bankruptcy. Since 1800, US Congress has enacted numerous bankruptcy laws. In view of this, the Title 11 of the code of the United States is also known as the United States Bankruptcy or Insolvency Code. Therefore, the US Bankruptcy Code is the statue of the federal law that protects creditors and debtors the same.
The US bankruptcy code requires that almost all the assets of a debtor would be administered as well as distributed in a proper and orderly manner for the benefit of the creditors.

The domestic adoption of the US model law on the cross border insolvency being promulgated by the UNCITRAL replaces section 304 of the bankruptcy code. According to it, US interpretation must be in accordance with the interpretation being promulgated by the other countries which have adopted it in order to promote uniform and legal regime for the insolvency cases(Bliss & Kaufman, n.d.). So, there are five effective mechanisms to deal with the insolvency cases which involve debtors, assets, claimants and other interested parties that might involve more than one country. These specified objectives in the statutes are:

  • 1.    Promoting the cooperation between the Courts of United States and the courts of interested parties and other competent authorities belonging to the foreign countries which are involved in the cross-border insolvency cases.

  • 2.    It is intended in establishing a greater legal certainty for trade and investment.

  • 3.    Providing a regime of fair and efficient ad cross-border insolvencies with an aim of protecting the interests of all the creditors as well as other interested entities

  • 4.    It protects as well as maximizes the value of the debtor’s assets , and

  • 5.    Facilitation of the rescue of financially troubled businesses so that the protection of investment and preservation of the employment are maintained.

In United States, in general, there are two types of bankruptcies:

  • 1.    Liquidation:the most number of the bankruptcy casesthat are filed in the United States are of liquidations. It allows a trustee to be automatically appointed by the Bankruptcy Court to be responsible for the collection of the non-exempt assets of the debtor. He, then converts those assets to cash and then distributing it to the creditors and the shareholders in accordance with the distribution scheme laid down in the Bankruptcy Code. The process of the liquidation has five stages: 1) Commencement of the case, 2) Securing debtors assets, 3) liquidating the non-exempt assets of the debtor, 4) distributions to the creditors, and 5) honest discharge of bankruptcy code.

  • 2.    Reorganizations: the United States Bankruptcy Code addresses the reorganization by particular types of debtors. In such cases of reorganization, creditors look to the future income of the debtors in order to satisfy their claims. And in most of the cases the retention of the control of the possessions is with the debtors. The commencement of the case requires the filing of the bankruptcy petition voluntary or involuntary. The operation of debtor’s business in terms of successful reorganization of a commercial enterprise requires that the debtor continues with the operation of the management of the debtor’s business dealings. In view of this, the plan of reorganization exists against the debtor and establishes in a manner in which claims would be paid or satisfied. Finally, the reorganization talks about the acceptance of the plan and confirmation of the plan as well.

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3.    Insolvency Laws in India: 

Whenever any individual, corporation or other organization for that matter becomes unable to meet its financial obligations of paying debts which are due. Insolvency happens because of poor cash management, increase in the cash expanses or decrease in the cash flow. It is quite possible that in terms of cash flow, a business could be insolvent, yet looking completely in the balance sheet. For example illiquid assets help to maintain the solvency of the balance sheets but not the cash flows. This can also happen the other way around with negative net assets and positive cash flow.

The Constitution of Indiagives the provision of Bankruptcy and Insolvency under the (Article 246 – Seventh Schedule to the Constitution). The process of winding up of companies, in India, is regulated by the Companies Act under the supervision of the Court. However, in view of employment, there are restrictions on the closure of any industrial undertaking. As a result of which, according to such policies, there is freedom to undertake any industrial activity, but there is no freedom to exit. According to the Indian laws, the restrictions on the process of deregulation and liberalization on undertaking industrial activity has been withdrawn and relaxed(Deakin, Demetriades, & Gregory, n.d.). This process is needed to take a step further in order to recognize that so long as a company is acting in the interest of the shareholders, it needed to have the necessary freedom to manage its affairs, merge, amalgamate, restructure and recognize the plans in the best interests of the stakeholders.
Insolvency Laws for Individuals and Corporates in India

a)    Pre-Insolvency Workouts
Pre-insolvency Work-out Schemes include: 

  • Companies Act, 1956 (Sections 391 to 396)

  • The Sick Industrial Companies (Special Provisions) Act, 1985 

  • Corporate Debt Restructuring Scheme 

  • Asset Reconstruction under Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI) 

  • RBI Guidelines on Special Mention Accounts.

b)    Insolvency of individuals and unincorporated entities
In this, the individuals and the partnership firms are effectively dealt in the situations of their going insolvent. Consequently, there is the declaration of the insolvency and the incapacity to contract. This provision is governed by Provincial Insolvency Act, 1920 and Presidency Towns Insolvency Act, 1909.

c)    Corporate Insolvency
This provision is applicable in case of corporates going insolvent. Consequently, the winding up of the company under the Companies Act, 1956 takes place.
d)    Insolvency of incorporated associations and other incorporated bodies
This deals with insolvency of bodies like co-operative societies and body corporates incorporated under certain legislations.

Insolvency Process in India

•    The processes of Insolvency or Liquidation, in India, essentially cover each and every aspect of recovery, revival, reconstruction as well as winding up. This is the holistic process and should be seen accordingly.
•    It is noted that there is a coherent lack of Separate Unified Insolvency Code that covers all the above mentioned aspects. This makes the process more complicated, time consuming as well as ineffective(Umashankar, n.d.).
•    The legal and procedural framework of the present scenario that relates to the corporate insolvency other than several special provisions such as debt recovery laws as laid out by the major legislations are:

  • i.    Companies Act 1956 

  • ii.    Sick Industrial Companies (Special Provisions) Act, 1985 [SICA]

  • iii.    Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI) Act, 2002 also known as the Securitization Act 

  • iv.    Recovery of Debts due to Banks and Financial Institutions Act, 1993 (RDB Act)  

4.    Insolvency Law, Policy and Procedures in France 

The insolvency law of France provides six restructuring as well as pre-insolvency proceedings, which can be classified into two sub-groups: two court assisted (the Mandat ad hoc and conciliation proceedings) and four court-controlled proceedings (judicial reorganisation, judicial liquidation, sauvegarde and accelerated financial sauvegarde proceedings (AFS)). The court-assisted proceedings are both informal as well as amicable proceedings where no creditor can be forced into a restructuring agreement and the management is still taking care of the business. The contractual law govern the negotiations and proceedings implying that the consent of each and every stakeholder (such as debtor) is involved in the restructuring process(Kayser, 1998). So, the debtor can decide whether to enter into these kinds of non-compulsory proceedings and which are conducted under the supervision of court-appointed practitioner in order to assist the debtor reach an agreement with its creditors in particular by the process of rescheduling indebtness.

Now, the four court-controlled proceedings are fully public and share some of the following similar features: 

  • a)    All of the pre-filing claims, except a few ones, are automatically stayed

  • b)    All of the creditors, expect for the employees must file proof of their claim within the time duration of the two months after the publishing of the opening judgment. This period can be extended to four months for the creditors that are located outside France.

  • c)    The debts that arise after the commencement of proceedings begins, will come under the priority as compared to the debts incurred well before their commencements.

  • d)    In the case of judicial reorganization as well as judicial liquidation proceedings, certain types of transactions could also be set aside by the court if in case they were entered into the debtor a hardening period before a judgment opening a judicial reorganization or a judicial liquidation. This period runs from the date on which the company is deemed insolvent; such date is fixed by the court and may predate the judgment commencing the relevant insolvency proceedings by up to 18 months.

5.    German Insolvency Laws

The insolvency laws that are prevalent in Germany are governed by a systematic set of Insolvency Code which was enforced with effect from January 1, 1999 and has, however, been amended from time to time. The latest amendment in the act was Further Facilitation of the Restructuring of the Company that was applicable from March 2012. In Germany, there is only one fundamental Insolvency procedure which is effectively applicable to both individuals and companies. These proceedings can be initiated against any person any natural or legal circumstances, unless the defendant is organized under public law. Historically, the objective of the proceedings has only been the non-discriminatory satisfaction for the creditors. So, in order to achieve it, there is a laid down framework for the liquidation of the insolvent’s debtor’s assets with the help of a court appointed practitioner.

Insolvency Stages

The stages are largely divided into Preliminary and Final Insolvency Proceedings and both of them are being supervised by the Insolvency Court. These proceedings are initiated only in the situations when the financial crisis of the company prompts the management to file for Insolvency with the competent court in order to avoid any personal criminal or financial liability. Other than the management itself, the filings for insolvency on the part of Creditors are possible as well as usual. After the initiation, the Insolvency Courtreacts by appointing a preliminary creditors’ committee as well as a preliminary Insolvency Administrator who is responsible to secure the assets of the debtor and starts preparing the grounds for Insolvency.

Grounds for Filing for Insolvency

The final proceedings are opened when the findings and observations of the court allows it to conclude a) the debtor is illiquid meaning unable to pay its debts, and b) the debtor is over-indebted. In view of this, the question arises whether a positive business continuation forecast can be made. Pursuant to the case law, illiquidity does not exist in the event of certain limited temporary liquidity gaps. 

6.    Insolvency Laws in Brazil

There are various types of securities over the assets in Brazil. In most of the cases, the traditional type of security is mortgage in terms of the real property, while Pledge is used in the case of movable assets. In both of the securities, the debtor acquires the relevant asset in order to secure the underlying obligation. Even in case, the transfer of ownership of the asset to the creditor doesn’t take place perfectly, the priority is still created over the respective asset that can be opposed against the unsecured creditors. In the event of the default on the part of the debtor, the creditor is given an entitlement in order to file a foreclosure proceeding against the debtor seeking the collection of the secure debt. Apart from Mortgage and Pledge, the debtor is also under the obligation of transferring the fiduciary ownership over the asset to the creditor in order to secure a debt. Moreover, the creditor is often exempted from the effects of bankruptcy, extra-judicial or judicial reorganization. In the case of judicial reorganization proceeding, the subject to some limitations is entitled to repossess the asset in the situation when the debtor is submitted to an insolvency proceeding.
In Brazil, there are no specific tests for the insolvency, such as financial benchmarks. However, creditors can make requests about the bankruptcy liquidation of a company which is a defaulter on a liquid obligation. For example, if a company exceeds 40 minimum wages and is formalized through a protested instrument that would allow a creditor filing for an enforcement proceeding against the company. Which is why, companies resort to the reorganization proceedings or a voluntary liquidation in the case of inability on their part to pay relevant obligations as they are due.

A company, in Brazil, may be placed into a bankruptcy liquidation proceeding in the following cases:

  • a)    If it defaults on a certain obligation materialized under the instrument of protested enforcement.

  • b)    Under an enforcement proceeding that is filed against the debtor, if he does not pay, deposit or offer assets for attachment that is sufficient to cover the amount of the debtor.

  • c)    If it performs any of the so-called bankruptcy acts, such as premature liquidation of assets, fraudulent payments as well as transfer of assets to the third party.

Therefore, the main cause of insolvency of a company in Brazil is not the negative proportion of the debts versus assets, rather its inability to pay the debts as they become due

References

  • Armour, J. (2000). Share Capital and Creditor Protection: Efficient Rules for a Modern Company Law.Modern Law Review, 63(3), 355-378. http://dx.doi.org/10.1111/1468-2230.00268

  • Bliss, R. & Kaufman, G. U.S. Corporate and Bank Insolvency Regimes: An Economic Comparison and Evaluation. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.878355

  • Company Law. (2006).

  • Deakin, S., Demetriades, P., & Gregory, J. Creditor Protection and Banking System Development in India. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.1208866

  • Franks, J., Nyborg, K., &Torous, W. (1996). A Comparison of US, UK, and German Insolvency Codes.Financial Management, 25(3), 86. http://dx.doi.org/10.2307/3665810

  • Kayser, N. (1998). A study of the European convention on insolvency proceedings. Int. Insolv. Rev.,7(2), 95-140. http://dx.doi.org/10.1002/iir.3940070204

  • Mansi, S., Maxwell, W., & Wald, J. Creditor Protection Laws and the Cost of Debt. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.892808

  • Mokal, R. (2005). Corporate insolvency law. Oxford: Oxford University Press.

  • Umashankar, S. Evolution of Environmental Policy and Law in India. SSRN Electronic Journal. http://dx.doi.org/10.2139/ssrn.2508852

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