Comparative Analysis of Insolvency Laws of India and Hong Kong

Amar Singh
Gujarat National Law University

Introduction:

Insolvency is a concurrent subject under the Indian Constitution thus enabling both state and centre to make laws governing the field. However, there are only central laws on insolvency in India till date. In India, till 1985 there was only The Companies Act 1956 to deal with insolvency while personal bankruptcy was dealt with by The Presidency Towns Insolvency Act, 1909 and The Provisional Insolvency Act, 1920. However, these were insufficient since they failed to account for insolvency cost and need for professional liquidators. In the 1980’s the ensuing problem reached its peak and SICA, 1985 was enacted. This for first time allowed restructuring however section 22 of the act which allowed a bar on proceedings was misused excessively. Consequently, Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (“RDDBI”) came into being allowing banks to file for a Certificate of Recovery before specially constituted DRTs. However, these too lacked adequate powers and were overburdened. Next came The Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act (SARFAESI), 2002 for faster recovery without court intervention however it was limited to secured assets and there was a parallel jurisdiction between SARFAESI AND RDDBI. Justic Srikrishna initiated the attempt to constitute comprehensive insolvency law reform in 2011 and in 2014, Ministry of Finance instituted the Bankruptcy Legislative Reforms Committee, headed by T. K. Viswanathan whose committee submitted the report in 2015 which finally ended up as the IBC.

Definition Of Insolvency and Bankruptcy:

“Insolvency is insufficiency (of an individual or a corporate) to discharge all enforceable debts“. Bankruptcy, on the other hand, is a legal process for resolving insolvency. It is a legal declaration of an individual or a corporate, averring its inability to pay a debt that is due as of today, triggering a resolution process in accordance with the jurisdiction’s regulatory framework.

Legal Position in India:

Applicable legislation in India is the Insolvency and Bankruptcy Code, 2016 (IBC). It was passed on 5^th May 2016 by the lower house and on 11^th May 2016 by the upper house of the parliament, receiving the presidential assent on 28^th May 2016. Small investor’s interests are protected by it as it explores corporate resolution and rescue.

Main Features of IBC:

• Resolution of Insolvency: It gives separate processes for resolution of insolvency of individuals, companies and partnership firms. Either debtor or creditor may initiate the process for which maximum time limit is 180 days (further extendable by 90 days) for companies. For companies and start-ups of assets less than 1 crore, it has to be completed within 90 days of initiation (along with 45 days of extension). The 2019 amendment has raised the limit to 330 days including the legal formalities.
• Regulatory body: Insolvency Bankruptcy Board of India has been established to regulate proceedings and entities registered under it with 10 members representing the finance and law ministries and the RBI.
• Role of Professionals: Licensed insolvency professionals will manage the process and control debtor’s assets.
• Adjudicating Body: Companies and LLP matters are dealt with by NCLT while individuals and partnerships are dealt with by the DRTs.

Procedure:

Corporate Insolvency Resolution Process (CIRP):

• An interim Resolution Professional (RP) is nominated by the Financial Creditors and appointed by the tribunal.
• In case of Application by operational creditor—either it can nominate the name of the resolution professional or the court will ask IBBI to nominate one. CoC formed post admission of insolvency petition can continue with the interim RP or appoint a new one. If the Committee of Creditors (CoC) comes up with a resolution plan, it is sent to NCLT for approval and implementation and if not the assets are liquidated. When company goes in liquidation, RP becomes the liquidator.
• There are 2 ways of liquidation:
  • Voluntary liquidation under code or;
  • Liquidation pursuant to resolution petition under Code.
• Winding up by Tribunal— In this case the official liquidator linked to the court, hearing the matter will be the liquidator and he can act for more than one group of companies under the jurisdiction of the court.
• Voluntary winding up— Liquidator is appointed by the shareholders’ resolution. He must be qualified as an Insolvency Resolution Professional.
• Notice to Creditors— In any of above cases, public notice must be sent for invitation of claims from all creditors of the company after issuance of an order admitting the petition.

Personal Insolvency in India:

Part III of the Insolvency and Bankruptcy Code of India relates to insolvency and bankruptcy of individuals and partnership firms but the same is yet to be notified. Once it is notified, it will repeal century old Presidency Town Insolvency Act, 1909 and the Provincial Insolvency Act, 1920.

Legal Position in Hong Kong:

Applicable legislations in Hong Kong are: Companies (Winding Up and Miscellaneous Provisions) Ordinance (Cap 32) (“CWUMPO”), the Companies (Winding Up) Rules (Cap 32H), Companies Ordinance (Cap. 622), The Rules of the High Court (Cap. 4A), Conveyancing & Property Ordinance (Cap. 219).

Main aim of the Hong Kong insolvency laws is to realize, collect and distribute assets among creditors as per the statutory scheme.

3.1 Procedure:

• Corporate insolvency matters are dealt by Court of First Instance of the High Court of the HKSAR
• There are 3 ways to wind up the company—
  • Voluntary Liquidation
  • Compulsory Liquidation
  • Provisional Liquidation
• The two types of voluntary liquidation are as follows:
  • Members’ voluntary liquidation (MVL) (solvent companies).
  • Creditors’ voluntary liquidation (CVL) (insolvent companies).
• Section 228A of Companies (Winding Up and Miscellaneous Provisions) Ordinance provides a special procedure by which directors of the company can put the company under creditors’ voluntary liquidation.
• Outline of MVL procedure: Convening a board of meeting, dispatch of notice of EGM, filing of certificate of solvency with Companies Registry, approval of resolution and submission to registry within 15 days. Notice of appointment of liquidator within 21 days of appointment. Final general meeting for filing of documents and on expiry of 3 months from filing of final account statement company is dissolved.
• Outline of CVL procedure: Convening of board meeting, EGM, creditor’s meeting, dispatch of notice of EGM and creditors’ meeting, publishing notice of creditor’s meeting in HKSAR government gazette, 1 Chinese and 1 English newspaper, after meeting final general meeting for filing documents and on expiration of 3 months of filing of final account statement company is dissolved.
• Section 228A—Special Procedure—convening of meeting to pass resolution that company cant continue business due to liabilities, execution of winding up statement, meeting of member and creditor, appointment of provisional liquidator and execution of statement of affairs, filing of winding up statement and notice of appointment of liquidator with ROC,  publish notice of same with government gazette and notice of meeting in one Chinese and one English newspaper, hold creditor and member meeting within 28 days of statement delivery and file returns for final meeting and accounts with ROC.
• Compulsory Liquidation – Petition on grounds mentioned in section 177 of Companies (Winding Up and Miscellaneous Provisions) Ordinance. Company deemed unable to pay if fails payment of HK$ 10,000 or more for 3 weeks, court hearing with order for wind up, appointment of provisional liquidator, submission of statement of affair, director’s powers cease and stay of actions against company. Creditor and members meeting on a 21-day notice within 4 months of order to windup, appointment of liquidator, collection of assets and distribution in statutory order. After wind up liquidator applies for order for dissolution and after OR registers certificate of release, company is dissolved within 2 years from registration date.
• Provisional Liquidation – Court can at anytime after winding up petition for company is presented and before order is made appoint provisional liquidator to preserve its assets during this interval. He/she may be OR or any competent person whose powers can be restricted by court and once appointed no action can be commenced against company without leave of court.

Personal Insolvency:

Under Hong Kong law, the term insolvency is used for companies, and bankruptcy is used for individuals. Personal bankruptcy is regulated by the Bankruptcy Ordinance (Cap 6) and the Bankruptcy Rules (Cap 6A).

Key Differences:

• Goal is different in India—at least theoretically—the aim is resolution while in HK it is winding up.
• Both have different provisions for personal and corporate insolvency.
• While in India, we have dedicated adjudicatory bodies like NCLT/NCLAT, in Hong Kong it is the court of first instance i.e. High Court of HKSAR which has jurisdiction over these matters.
• India has two types of liquidation processes voluntary and pursuant to petition while in Hong Kong there are 3 types: voluntary, compulsory and provisional.
• Regulatory Body: IBBI It is a unique regulator: regulating profession and processes. While The role of the Official Receiver’s Office in Hong Kong is in personal and corporate insolvencies to ensure that the insolvency service it provides in Hong Kong is of a high quality, on a par with international standards and that the legislation is commensurate with the objective of keeping Hong Kong to the forefront as a major international financial centre.
• Time limit: In India it is 330 days and in Hong Kong it is 3 years.

Conclusion:

While on the one hand there is a fundamental difference between the main purpose of the Insolvency Laws in India and Hong Kong, on the other there are similarities like a regulatory body in both countries. India should judge the relevance and efficiency of different provisions of Hong Kong and consider if adopting them would be beneficial.

Interestingly, while in India the prime aim of Insolvency laws is resolution, still majority of cases are going into liquidation and in Hong Kong, the law is based on winding up itself. Therefore, practically they are similar though theoretically different.