1. A STUDY OF CORPORATE INSOLVENCY LAW IN INDIA
Kristin van Zwieten
John Collier Fellow in Law, Trinity Hall, Cambridge

2. 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 India’s 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

3. 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 law’s failure
India ranks 128 (of 183) in the ‘resolving insolvency’ WB Doing Business ranking
Consistent record of extraordinary delays and poor returns to creditors:
Why failure matters: impact on availability and cost of finance
Reform promised since 1990s but has to date faltered; now reportedly imminent
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)

4. 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 law’s functionality had on creditor/debtor behaviour?
How should Indian insolvency law function?
My project
Focuses on the primary empirical question: explaining the law’s 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
Acknowledging the limitations of research output
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)

5. Results: research on India’s liquidation procedure (I)
Introducing Indian liquidation law ‘on the books’: formal similarities with UK
A colonial transplant (1866, modelled on English Act of 1862)
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
[Mr Peacock] thought that it was very desirable that… the law… should be nearly alike as the circumstances…would 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)

6. Results: research on India’s 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 , 15% of compulsory liquidations had been pending for 25+ years, and a further 18% for years
1993 analysis of firms in liquidation in 14 High Courts: 186 cases (10%) at years, further 44 cases (2%) at 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

7. Results: research on India’s liquidation procedure (III)
In 1958, 961 companies limited by shares registered, 469 wound up In 2008, 54,343 companies limited by shares registered, 376 wound up

8. Results: research on India’s liquidation procedure (IV)
Break-down by procedure
Comparison with UK: pre-crisis year
Overall: Indian liquidation procedure as defunct, not merely dysfunctional
Year
No. registered
No. CLs
No. CVLs
No. MVLs
No. subject to super.
54,020
380 84
51,708
247 2 75
65,359
236 4 86 50
64,582
135 61
67,570
140 81
Total
303,239
1,138 10
387
No. registered
No. CLs
No. CVLs
England and Wales
308,800
5,165
7,342
India
51,708
247 2

9. Results: research on India’s liquidation procedure (V)
Explaining the demise of India’s liquidation procedure: existing research
Little in-depth scholarship on this question
Existing literature does offer some explanations for delays in compulsory liquidation:
Administrative/regulatory capacity: under-resourced liquidators, over-burdened courts, un-cooperative managers
Judicial preference/practice: attempts to rescue after winding-up order made (interim payment orders), and also before any order is made
The reform agenda – hypothesis (1)
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)

10. Results: research on India’s liquidation procedure (VI)
Explaining the demise of India’s 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 law’s 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)

11. Results: research on India’s 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 petitioner’s debt
Substantive treatment of disputed debts and of solvency
Robust approach to characterising the petitioner’s debt as ‘disputed’
Cautious approach to characterising the respondent as ‘insolvent’
A catch-all ‘discretion’: the court as revival trustee

12. 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 law’s 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

13. Questions?