GUJARAT NATIONAL LAW UNIVERSITY

MANAGERIAL ECONOMICS
Internal Continuous Evaluation
Semester II (2018– 2023 Batch)

TITLE: FINANCIAL CREDITORS: RIGHTS, LIABILITIESCLAIMS IN

AND
INSOLVENCY AND BANKRUPTCY CODE, 2016. A COMPARATIVE LAW
AND ECONOMICS ANALYSIS .

Name: Naman Devpura, (18A073)

Sakshya Jain, (18B102)
Email: namandevpura17@gmail.com,
jainsakshya@gmail.com
Contact: +91 898 959 9225,
+91 759 707 0410
Submitted to: Dr. Hitesh Thakkar
INDEX
RESEARCH FOCUS 3

ABSTRACT 3

RESEARCH QUESTIONS 4

METHODOLOGY 5

INTRODUCTION 7

1. HISTORICAL BACKGROUND 7

LEGAL AND FACTUAL TERMINOLOGY 8

1. DEFINING FINANCIAL CREDITORS 9

CORPORATE INSOLVENCY RESOLUTION PROCESS 11

1. SECTION 7, INSOLVENCY AND BANKRUPTCY CODE, 2016 11
2. APPLICATION IN NATIONAL COMPANY LAW TRIBUNAL 12
3. STAGES OF CORPORATE INSOLVENCY RESOLUTION PROCESS 12

ECONOMIC ANALYSIS OF INSOLVENCY LAW 14

INSOLVENCY LAW IN UNITED STATES OF AMERICA 16

INSOLVENCY LAW IN EUROPEAN UNION 18

1. AUSTRIA 19
2. FRANCE 19
3. CYPRUS 19

REFERENCES 21

CONCLUSION 22

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RESEARCH FOCUS
Analysing the policy framework and laws governing the Financial Creditors under the
Insolvency and Bankruptcy Code, 2016 in India with comparative analysis of policy framework
and laws in United States of America and European Union along with the application of Law
and Economics Analysis and its tools.

ABSTRACT
This study examines the scope and power along with the major rights, liabilities and claims of
Financial Creditors as governed by the Insolvency and Bankruptcy Code, 2016 and as per legal
mechanism established in India. The major laws relating to the study area all around the world
as established by United States of America and European Union are studied carefully for a
scope of legal transplantation and for effective means to understand their varied outcomes in
economies. The study also examines these better pool of laws both in India and outside through
a Law and Economics analysis by using various tools such as Prisoner’s Dilemma, Ex Post
Costs, Ex Ante Costs etc. This further narrows down the scope and efficiency of the law and
the ways through which it can be further amended and developed catering to the modern day
requirements and reducing the company-creditor distress. The study thus concludes with way
forward and proposed solutions in the same field of study to move towards an efficie nt
implementation and profitable venture for both the creditor and the company.

Keywords: European Union, Ex Post Costs, Ex Ante Costs, Financial Creditors, Game Theory,
Insolvency and Bankruptcy Code, 2016, Law and Economics analysis, Legal Mechanis m,
Legal transplantation, Prisoner’s Dilemma, United States of America.

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RESEARCH QUESTIONS
1. What are the key rights, liabilities and claims of Financial Creditors and how can these
be understood and analysed to attain a medial point between the Financial creditors and
Companies?

2. What is the position of Financial Creditors in the insolvency and bankruptcy policies
and laws in United States and European Union?

3. How can the laws governing Financial Creditors be analysed with the tools of Law and
Economics analysis such as Game Theory, Prisoner’s Dilemma, Ex Post Costs, Ex Ante
Costs etc.?

4. What are the changes brought in by judicial decisions that are being followed after the
differentiation put forward by Insolvency and Bankruptcy Code, 2016 between
operational and financial creditors?

5. What are the economic and legal outcomes of Insolvency and Bankruptcy Code, 2016
and its way forward?

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METHODOLOGY
1. Research type and goal
 The proposed research is applied, descriptive, experimental and longitudinal.
 The proposed research is developed from quantitative point of view.
2. Methods and Techniques
In this research we will use the following methods to accomplish the proposed tasks:
 The historic- logic method was used to determine the previous research about
the status and position of rights, liabilities and claims of Financial Creditors in
Insolvency and Bankruptcy Code, 2016 and same in the relevant laws of
European Union and United States of America.
 The synthetic-analytic method was used to process the obtained informa tio n
from the various authoritative sources.
3. Statistical processing of information
 Effective percent and ratio analysis of the various quantitative informa tio n
related to Financial Creditors.
 The Prisoner’s Dilemma, Ex Post Costs, Ex Ante Costs, Nonparametric method,
Sanction and Incentives application on the significant differences amongst the
relevant data.
4. Work Schedule
Stage Task
Facto-Perceptible - Analysing the field of research amongst the various
important areas of Insolvency and Bankruptcy Code, 2016.
- Selection and location of the laws governing Financia l
Creditors.
- Selection of relevant countries and groups of nations with
pre-implemented insolvency and bankruptcy policy.
- Selection of techniques of Law and Economic Analysis.
Elaboration - Study of the relevant laws in United States of America and
European Union and their analysis for legal transplantatio n.
- Study and analysis through tool of Law and Economics and
the key finding in various cases.

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 - Key areas for better implementation of the legal and policy.
framework of Insolvency and Bankruptcy Code, 2016.
Application - Assessment and corroboration of the findings.
- Construction of the conclusions.
- Re-evaluation of the findings.
- Way forward and proposed solutions.
- Completion of the research.

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INTRODUCTION
A risk is involved whenever an extension of credit is granted to debtor scoping out to
the possibility of the debtor failing to pay the same. Therefore, the power is granted to the
creditor by the state to seize the assets of such a debt and sell them to cover the unwanted
liability that arose from the transaction. The market economy holds such remedies available to
the creditor as central to its purpose because without such a mechanism the whole process of
lending would turn into a wreckage. Yet, an ineffective “race to collect” could be initiated by
the powers exercised by such creditors against the debtor who defaults on multiple debts and
thus resulting into a disintegration and failure of the debtor’s business. Thus, the subject of this
paper, Corporate Insolvency Law revolves around the transformation of such rights of creditors
to collective from individualistic nature and thus reducing their incentives to behave in such a
wasteful manner.

Also, the cost of disintegration is not the only one aspect associated with the financ ia l
distress. A number of resolutions have to be thought upon which can viewed in conflic ting
ways such as the decision regarding the financial pay-outs to be handed to the claimants, the
claims filed by the existing financiers, the next legal owner of the assets, the continuation of
the business etc. The threat of such a financial distress can lead to various risky gambles that
the corporate actors can take, thus bringing in another cost that the well-structured and applied
legal mechanisms can assist in reducing. This is the area where the scholarship of Law and
Economics deal in to reduce such costs and contribute to a better legal framework and policies.

Historical Background

Several statutory instruments such as the Securitisation and Reconstruction of Financia l

Assets and Enforcement of Security Interest Act, 2002, the Recovery of Debt Due to Banks
and Financial Institutions Act, 1993, Sick Industrial Companies Act, 1985, and the Companies
Act, 2013 earlier operated under the aegis of insolvency resolution process in India. During the
colonial era the major statues dealing with the insolvency were the Provincial Insolvency Act,
1920 and the Presidency Towns Insolvency Act, 1909. This, however led to a confused state
of functioning in regards to the liquidation and insolvency processes in India and thus urged
the requirement of enactment of a proper legislature in the same regard.

The enactment of the Insolvency and Bankruptcy Code is a path towards the reform of
this shallow-comprehended and disjointed framework of insolvency in India. It facilita tes

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freedom of creditors in India and for increasing faith amongst the investors for speedy disposal
of their proposed claims. This code amongst the many useful applications has brought into one
umbrella all the existing laws in relation to insolvency of individuals as well as corporate
bodies. The rights, liabilities and powers of creditors are brought into a balanced ecosystem
where the debtors can also sustain their debts in a pacific and reliable manner without subduing
any of them.

LEGAL AND FACTUAL TERMINOLOGY

In a broad sense, ‘insolvency’ means the ability to the pay one’s creditors 1 . However,
for its varied interpretation, there can be many other terms associated with it. One such
accounting concept is ‘Balance Sheet Insolvency’ which refers to the simple mismatch in the
equation of assets and liabilities wherein the liabilities are more than the assets of a firm. It
differs from the ‘Cash Flow Insolvency’ which means the inability of a company to pay its
debts as and when they become due. Such insolvency is also referred as ‘equity insolvency’, in
the American terminology. The term ‘Financial Distress’ signifies the condition wherein a firm
is continuously facing difficulties in paying its creditors. Financial Distress is more emphasized
on the structure of outstanding obligation and the nature of assets available as compared to the
Balance Sheet Insolvency. The concept of ‘Solvency’ and ‘Economic Viability’ must be
differentiated from each other. A firm is economically viable given when it’s going concern
value is greater than the value of its assets when sold on a break-up basis and also is greater
than zero. However, the solvency is oriented with the amount of debt in its financial structure,
the firm’s assets and its cash flows. A firm which is economically viable may turn into
financially distressed one but not the opposite The outcomes of financial distress are
‘liquidation’ and ‘reorganisation’. Reorganisation is the restructuring of a financially distressed
firm by exchange of the old claims for the new ones. Whereas, Liquidation is part of winding
up of the firm by converting all the assets into cash and its equivalents. Other than winding up,
the liquidation can also take place through administrative receivership. However, for the
purpose of the study of this paper, the emphasis is only paid on corporate insolvency. The
individual insolvency referred to as “bankruptcy” in English laws is beyond the ambit of this
paper’s enquiry.

1 The OED Online defines ‘insolvency’ as ‘The fact of being unable to pay one’s debts or discharge one’s
liabilities.’ <http://dictionary.oed.com>

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 Defining Financial Creditors

The laws governing insolvency and reorganisation of the individual firms, partnership
firms and corporate persons has been amended and consolidated by the enactment of
Insolvency and Bankruptcy Code, 2016. It has been enacted to achieve the major goal of
facilitating the resolution in corporate discrepancies of bankruptcy and in a time bound manner.
The Insolvency and Bankruptcy Code, 2016 brings out the definitions of “Financial Creditors”
and “Operational Creditors” in contrast with the Companies Act, 2013 which did not give a
classification thereof in the term “creditors”. For the purpose of this research, it is very
important to highlight the differences between both the definitions and to understand and
analyse the importance of each.

In the present scenario the maintainability of any applications for initiating the
corporate insolvency process purely depends on whether the applicant satisfies the Tribuna l
and establishes its position as a Financial Creditor or an Operational Creditor. As defined in
the Insolvency and Bankruptcy Code, the Financial Creditor is:

“a person to whom a financial debt is owed and includes a person to whom such debt
has been legally assigned or transferred”.2

Further to ascertain the person as a financial creditor he must satisfy that his debt falls
under the ambit of “Financial Debt” which is defined as:

“a debt along with interest, if any, which is disbursed against the consideration for
time value of money and includes-

a. Money borrowed against payment of interest;

b. Any amount raised by acceptance under any acceptance credit facility or its de-
materialized equivalent;

c. Any amount raised pursuant to any note purchase facility or the issue of bonds,
notes, debentures, loan stock or any similar instrument;

d. The amount of any liability in respect of any lease or hire purchase contract which
is deemed as a finance or capital lease under the Indian Accounting Standards or
such other accounting standards as may be prescribed;

2 Insolvency and Bankruptcy Code, 2016, § 5(7), No. 31, Acts of Parliament, 2016 (India).

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 e. Receivable sold or discounted other than any receivable sold on non-recourse
basis;

f. Any amount raised under any other transaction, including, any forward sale or
purchase agreement, having the commercial effect of borrowing;

g. Any counter-indemnity obligation in respect of a guarantee, indemnity, bond,

documentary letter of credit or any other instrument issued by a bank or financial
institution;

h. The amount of any liability in respect of any of the guarantee or indemnity for
any of the items referred to in sub-clauses (a) to (h) of this clause”.3

The Insolvency and Bankruptcy Code defines “Operational Creditor” as

“any person to whom an operational debt is owed and includes any person to whom
such debt has been legally assigned or transferred”.4

And for the purpose of understanding whether a person falls under the definition of
Operational Creditor, “Operational Debt” is defined as:

“a claim in respect of the provisions of goods or services including employment or a

debt in respect of the repayment of dues arising under any law for the time being in
force and payable to the Central Government, any State Government or any local
authority.”5

The distinction between both the creditors is laid out by the Bankruptcy Law Reforms
Committee in para 5.2.1 in its final report. It states:

“Here, the Code differentiates between financial creditors and operational creditors.
Financial creditors are those whose relationship with the entity is a pure financial
contract, such as a loan or debt security. Operational creditors are those whose
liabilities from the entity comes from a transaction on operations. The Code also
provides for cases where a creditor has both a solely financial transaction as well as
an operational transaction with the entity. In such a case, the creditor can be

3 Insolvency and Bankruptcy Code, 2016, § 5(8), No. 31, Acts of Parliament, 2016 (India).
4 Insolvency and Bankruptcy Code, 2016, § 5(20), No. 31, Acts of Parliament, 2016 (India).
5 Insolvency and Bankruptcy Code, 2016, § 5(21), No. 31, Acts of Parliament, 2016 (India).

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 considered a financial creditor to the extent of the financial debt and an operational
creditor to the extent of the operational debt”.6

CORPORATE INSOLVENCY RESOLUTION PROCESS

Section 7, Insolvency and Bankruptcy Code, 2016

The following process has to be followed by a Financial Creditor for commenc ing
the Corporate Insolvency Resolution Process (CIRP). The process is more specifically defined
under Section 7 of the Insolvency and Bankruptcy Code:

" Initiation of corporate insolvency resolution process by financial creditor.

(1) A financial creditor either by itself or jointly with other financial creditors may
file an application for initiating corporate insolvency resolution process against
a corporate debtor before the Adjudicating Authority when a default has occurred.
Explanation. —For the purposes of this sub-section, a default includes a default
in respect of a financial debt owed not only to the applicant financial creditor but
to any other financial creditor of the corporate debtor.
(2) The financial creditor shall make an application under sub-section (1) in such
form and manner and accompanied with such fee as may be prescribed.
(3) The financial creditor shall, along with the application furnish— (a) record of the
default recorded with the information utility or such other record or evidence of
default as may be specified; (b) the name of the resolution professional proposed
to act as an interim resolution professional; and (c) any other information as may
be specified by the Board.
(4) The Adjudicating Authority shall, within fourteen days of the receipt of the
application under sub-section (2), ascertain the existence of a default from the
records of an information utility or on the basis of other evidence furnished by the
financial creditor under sub-section (3).
(5) Where the Adjudicating Authority is satisfied that— (a) a default has occurred and
the application under sub-section (2) is complete, and there is no disciplinary
proceedings pending against the proposed resolution professional, it may, by
order, admit such application; or (b) default has not occurred or the application

6 Ministry of Finance, The report of the Bankruptcy Law Reforms Committee: Rationale and Design, Volume I,
(2015), http://finmin.nic.in/reports/BLRCReportVol1_04112015.pdf

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 under sub-section (2) is incomplete or any disciplinary proceeding is pending
against the proposed resolution professional, it may, by order, reject such
application: Provided that the Adjudicating Authority shall, before rejecting the
application under clause (b) of sub-section (5), give a notice to the applicant to
rectify the defect in his application within seven days of receipt of such notice from
the Adjudicating Authority.
(6) The corporate insolvency resolution process shall commence from the date of
admission of the application under sub-section (5).
(7) The Adjudicating Authority shall communicate— (a) the order under clause (a) of
sub-section (5) to the financial creditor and the corporate debtor; (b) the order
under clause (b) of sub-section (5) to the financial creditor, within seven days of
admission or rejection of such application, as the case may be." 7

Application in NCLT

An application has to be filed before the National Company Law Tribunal

(NCLT) by the Financial Creditor, accompanied by a Demand Draft amounting to Rs.
25,000/- in the favour of "Pay and Accounts Officer, Ministry of Corporate Affairs "
payable at Delhi, India.

Once the matter is listed it be admitted to be taken for Corporate Insolvenc y

Resolution Process (CIRP). An Interim Resolution Professional (IRP) has to be
proposed by the Financial Creditor in the application filed with National Company Law
Tribunal.

The Interim Resolution Professional acts as Resolution Professional after he is

confirmed by the National Company Law Tribunal. Initially, the company pays for the
fees of the Interim Resolution Professional. And after the Interim Resolutio n
Professional becomes the Resolution Professional, within the time frame of one or two
months, the amount is paid back to the Financial Creditor.

Stages of Corporate Insolvency Resolution Process

Following are the stages of the Resolution Process:

7 Insolvency and Bankruptcy Code, 2016, §7, No. 31, Acts of Parliament, 2016 (India).

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a. Publication of Notice – A notice is published by the Resolution Professional in the
newspapers for calling and filling the claims against the Corporate Debtor within the
given stipulated time period.

b. Processing of Claim – After receiving all the claims, the same are verified by the
Resolution Professional through the books of Corporate Debtor.

c. Information Memorandum – A Memorandum is prepared by the Resolutio n

Professional which contains all the information about the Corporate Debtor in regards
to the Assets and Liabilities owned by him. All the Financial Creditor of this Corporate
Debtor who have got their claims accepted receive this Memorandum.

d. Meetings of COC – A meeting, of Committee of Creditor which includes only the

Financial Creditor of the is conducted, to take decision on whether the prepared
information memorandum is correct or not.

e. Calling for Resolution Plan – The resolution plans are called and invited by the
Resolution Professional through an Advertisement placed in the newspapers.

f. Acceptance or Rejection of Resolution Plan – A meeting of the Committee of

Creditors is again called for accepting or rejecting a Resolution Plan. The resolutio n
plan is adopted by a majority 2/3 of the committee.

This is then sent to NCLT for the final submission.

g. Time Duration and Extension – The time duration during which the Corporate
Insolvency Resolution Process has to be completed is 180 days. An extension of 90
days can be sought if the Resolution Plan fails to get accepted within this time frame
by the Committee of Creditors.

h. Liquidation – The Committee of Creditors opts for liquidation once the resolutio n
plan fails to get the required majority and also the maximum period of 270 days gets
lapse. This process of liquidation is followed with due recognition of the Liquida tio n
Estate as per the Code.

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ECONOMICS ANALYSIS OF INSOLVENCY LAW
An economist with interest in the field of finance would view the costs of financ ia l
distress as a connected feature of debt finance. Therefore, decreasing the costs of debt finance
is one of the prime objective of Insolvency law. Now, the way in which this objective can be
achieved to benefit the financial creditors, the subject matter of our paper, the economic
analysis of the nature of debt, the various ex ante and ex poste costs and insolvency procedures
to reduce the same would be considered. The power of creditors to legally seize and liquida te
the assets of a debtor in case of a default payment gives the debtors an ex ante incentive to
repay the same and it can be clearly apprehended that such a credit could be maintained without
the grant of this power. On the other hand, creditors may face violation on the hands of
shareholders who would restrain from paying the same if such powers are given up.

Ex Post and Ex Ante Costs

Ex post costs are created by the use of debts which include:

1. Direct Costs of Financial Distress such as the professional fees incurred by hiring
valuation experts, accountants and lawyers. This is a dead-weight loss as per the
allocative efficiency.
2. Costs of inefficient deployment of firm’s assets are the social costs that come up once
difference between the value of going concern and financial distress. This function of
deployment will be based on three major issues that are first, quality and reliability of
information available to the creditors. Second, the market function for the assets of the
firms and third, co-ordination between creditor’s actions.

Ex ante costs will also come up in the form of ‘financial agency costs’ which are the
costs that arise due to transfer of wealth from debt to equity in order to save the firm from
liquidating. For a solvent firm, the manner to reduce such costs will be its reputation.
However, a firm which is on the verge of dying out, such costs possess harms of long term
interests by giving bait to the financial creditors.

In case opposite to the above scenario, where there is not enough co-ordination between
the shareholders and managers these ex-ante costs are replaced by compromised manageria l
decision making to save their own employment and thus getting distract from the running
the firm in an efficient manner.

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 Prisoner’s Dilemma

The application of prisoner’s dilemma comes in with the deep understanding of the
court-sanction individual debt-collection procedures.8 The ‘first come, first served’
approach would become a total failure in the ‘race to collect’. For instance, if there are two
financial creditors, each owed ₹9 to the corporate debtor. Now in case where a piecemeal
of the debtor’s assets are sold, ₹10 will be realised.

If both of them go on with exercising this power, and agree on a collective decision for
the future of debtor’s assets, they may end up with two major strategies. First, by selling
the business of the debtor as a going concern and not as a collection of assets. Second, by
converting some loan into equity thus resolving the collective debt problems. If either of
the creditor do this, the major operation assets of the firm will be sold and it would become
unable for it to continue its business.

The collective decision would yield both the financial creditors greater payoff than the
liquidation of the piecemeal assets of the firm. Assuming a total return of ₹14 is generated
to the creditors through any of this method. Now, Co-operation would be strictly dominated
by enforcement as each creditor would be better off enforcing the law regardless of the
process carried out by the other. But, given that the payoff structure is common to both the
creditors they would both choose to enforce. However, this would be ineffic ie nt
collectively as it would realise ₹10 and not ₹14.

To avoid the prisoner’s dilemma for Financial Creditors, a mandatory insolve nc y

process should be opted. Perhaps, if the legal procedure is seen as costless measure to
ensure the correct deployment decision and the same is taken for ensuring the collectivis m,
it would help in reducing the costs drastically. Also, a unified asset pool can be created by
properly effecting the transformation of individual property rights as a proposed step
towards better insolvency.

8 Hutchinson v. Johnstone (1787) 1 Term Rep 729, 99 ER 1346

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INSOLVENCY LAW IN UNITED STATES OF AMERICA

United States of America, have a debtor-in-possession model. As a result of the

enactment of the current Bankruptcy Code in 1978, US law now decidedly favours debtors by
providing a unified and comprehensive treatment of business reorganization for financia lly
distressed companies – found primarily in "Chapter 11" of the Code. Unlike in India, where a
group of Financial Creditors who form Committee of Creditors or IRP perform various
functions like appointing attorneys, accountants, appraisers, auctioneers etc.., these functio ns
are performed by the debtors in the United States. The board of directors’ primary duties in
connection with an insolvency proceeding are the same as they are outside bankruptcy9 – to
maximise the value of the company.10

Though there is no clear distinction between financial creditor and operational creditor
provided by the code, the creditors are distinguished on certain basis. The claims by creditors
are ranked in the following hierarchy for distributing the debtor’s assets:

1. Secured claims
2. Administrative claims
3. Priority unsecured claims
4. Unsecured claims
5. Equity interests

The key distinction is that when a company is insolvent, the creditors, not the
shareholders, are the residual beneficiaries of the board’s fiduciary duties to the corporation
and are, thus, able to bring actions for breach of fiduciary duty. 11

This is governed by the absolute priority rule which provide a framework to assert that
claims are met according to the hierarchy and the lower groups are only paid once the higher
ones are paid in full.
This ranking though governed by a rule may be amended if the claim holders agree to
a different treatment from that established by the code in the absolute priority rule. Consent to

9 Commodity Futures Trading Comm’n v. Weintraub, 471 US 343, 355 (1985), citing Wolf v. Weinstein, 372 US
633, 651 (1963).
10 Trenwick America Litig Trust v. Ernst & Young, 906 A.2d 168, 175 (Del. Ch. 2006), aff’d, 931 A.2d 438 (Del.

2007).
11 Marshall S Huebner and Darren S Klein, ‘The Fiduciary Duties of Directors of Troubled Companies’, American

Bankruptcy Institute Journal, Vol. XXXIV, No. 2 (February 2015).

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the payment of a junior class can be obtained through a vote of the senior class on a plan of
reorganisation.12
Unsecured creditors do not enjoy much of remedies or any special remedy under the
code. It can be very clearly concluded by the provisions of the code that creditors only play a
very limited role in liquidation under chapter 11 or 7 of the U.S. Bankruptcy Code. The
provision in their favour is the formation of creditors’ committee which oversees that the
highest and best price is obtained for the assets of the company and can intervene in the court
if necessary.
The Bankruptcy Code also provides for the formation of an official committee
represented wholly by the unsecured creditors the purpose of which is to represent the whole
group of the general unsecured creditors. The basic motive of this committee is to maximise
the profits of these creditors. The creditors’ committee on the basis of seven largest claims
(typical practice which has been followed) that are willing to serve are appointed by the trustee.
Any issue that arises the committee has the right to be heard also in larger bankruptcy cases,
the creditors committee usually plays an engaging and herculean role. Members of the
creditors’ committee serve as fiduciaries for the interests of all unsecured creditors during the
case and are reimbursed for out-of-pocket expenses incurred.13

1211 U.S.C. § 1126.

13 Paterson,S. (2015). Insolvency Law, Restructuring Law and Modern Financial Markets. SSRN Electronic
Journal.

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INSOLVENCY LAW IN EUROPEAN UNION
The first attempt made by the European Union to regulate the Insolvency Laws among
the member countries was through Regulation No. 1346/2000 which came into force in May
2002. The EU Regulation is currently followed by 27 of its member states with the exception
of Denmark.
Some ground rules were established by it regarding:
 Which court exercise the jurisdiction when the debtor has operations, activities,
creditors, establishments or assets in more than one-member state?
 The laws and provisions of which country would govern all the proceedings related to
insolvency among the EU member country.
 The recognition of the decision given by the court when the debtor regarding whom it
is given becomes insolvent.
The basis of these is the location of the Centre of Main Interest (COMI) of the debtor
company.
1. The jurisdiction of the country which has the COMI would be applied.
2. In the absence of any proof the place where the company is registered would be
considered as the COMI.
3. COMI can be considered as the debtor’s principal place of direction & administration.
4. COMI can be located in any other member state also.
5. The country has to apply its own National Insolvency Law once it is decided to be the
COMI.

The updated regulation of 20 May 2015 entered into force on 26 June 2017.

“Extension of scope to cover hybrid and pre-insolvency proceedings, codification of

determination of COMI for the opening of main insolvency proceedings, secondary
proceedings where a company has an establishment in another member state, group companies,
registers of insolvency proceedings: greater transparency, improving rights of foreign
creditors: process for lodging claims.”14

14 deloitte.com. (2019). [online] Available at:

https://www2.deloitte.com/content/dam/Deloitte/global/Documents/Legal/dttl-legal-deloitte-europe-
insolvency-proceedings-guide.pdf [Accessed 3 Apr. 2019].

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 Austria
The proceedings of bankruptcy may be initiated whenever it is unable to pay the debt
or is indebted according to the insolvency law of Austria. A company is usually considered to
be bankrupt when its liabilities exceed the total value of its assets. With the prior consent of all
the affected creditors the out of court restructuring is a common practice permitted by the law.
After the opening of the cases of all insolvency proceedings by the courts all the unsecured
creditors are automatically stayed from making any claims against the debtors. In cases when
a debtor himself applies for the bankruptcy and restructuring, the estate is controlled and
administered by the one whom the court appoints as the administrator.
France
Whether the company is solvent or insolvent it can claim relief from its creditors. In
France the test used to decide whether the firm is insolvent or not is the Cash Flow test. If the
company is not able to make payments of a debt through the cash and its liquid assets and has
not paid within the grace period provided by the relevant creditors it is declared as insolve nt.
Informal proceedings are allowed after the consent of affected creditors. The debtor has the
option to go for either safeguard proceedings or administrative proceedings.
The safeguard proceedings are initiated if the company seek protection from the court
a formal relief from its creditors if the company is solvent and facing some anticipated
difficulties which it is unable to overcome. If the opening judgement is against the company,
then all the creditors’ action is stayed against the company.
The administrative proceedings are initiated if it is insolvent and want to claim
protection from the court and relief from its creditors. A stay against all the creditors’ action
arises automatically whenever the opening of the proceedings take place. 15
Cyprus
Cyprus company law is derived from the UK Companies Act 1948 and is more or less
based on it. All the arrangements and reconstructions are provided for under section 198 to 201
weather it is voluntary liquidation or compulsory liquidation. In Cyprus there are separate set
of procedures for insurance companies and banks.
The Cyprus laws states for no automatic stay against any action from the creditors on
application for an arrangement. No protection is given after the appointment of a receiver

15 Iflr.com. (2019). [online] Available at: http://www.iflr.com/pdfs/Insolv encyBKnew_Europe.pdf [Accessed 2

Apr. 2019].

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against the creditor. However, if the appointment is made under a lucid floating charge, the
creditor is not able to enforce any such judgement it may obtain. Though not impossible but it
becomes extremely difficult for the creditor to levy claim once a company is in liquidation.
The board of directors exercise the control over the process and company’s general
affairs during the restructuring period. Creditors’ voluntary liquidation is done when the
company becomes insolvent. In this case creditors have the power to appoint or replace the
liquidator.

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REFERENCES
WEBSITES:
1. www.bakermckenzie.com
2. www.cbr.cam.ac.uk
3. www.deloitte.com
4. www.dictionary.oed.com
5. www.ey.com
6. www.iflr.com
7. www.insol.org
8. www.livemint.com
9. www.mondaq.com
10. www.mydavo.in
11. www.nishitdesai.com
12. www.prsindia.org
13. www.thelawreviews.co.uk

ARTICLES:
1. Ministry of Finance, The report of the Bankruptcy Law Reforms Committee: Rationale
and Design, Volume I, (2015).
2. Marshall S Huebner and Darren S Klein, ‘The Fiduciary Duties of Directors of
Troubled Companies’, American Bankruptcy Institute Journal, Vol. XXXIV, No. 2
(February 2015).
3. Paterson, S. (2015). Insolvency Law, Restructuring Law and Modern Financia l
Markets. SSRN Electronic Journal.
CASE LAWS:
1. Hutchinson v. Johnstone (1787) 1 Term Rep 729, 99 ER 1346.
2. Commodity Futures Trading Comm’n v. Weintraub, 471 US 343, 355 (1985), citing
Wolf v. Weinstein, 372 US 633, 651 (1963).
3. Trenwick America Litig Trust v. Ernst & Young, 906 A.2d 168, 175 (Del. Ch.
2006), aff’d, 931 A.2d 438 (Del. 2007).

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CONCLUSION
The fact remains that though the legislation Insolvency and Bankruptcy Code, 2016 has
ingrained a sense of gravity, among the stakeholders, to resolve bad loans still without any
ounce of doubt it has to be considered as an evolving law.
This paper has sought to provide an overview of one such evolving provision of this
legislation. As suggested by section 5 (vii) and section 5(xx) of the code there is a clear
demarcation between financial creditors and operational creditors. The paper deals with the
position and stance of financial creditors as per Indian law and analyses it with the established
principles of economics.
The model proposed in the research paper deals with communalised solution and
unified pool through the economic analysis of the Insolvency Law by Ex Post Costs and Ex
Ante Costs along with Prisoners Dilemma based on the Game Theory. The paper fina lly
concludes with the comparative analysis of economic laws of Insolvency in United States of
America and European Laws in the European countries of Austria, France and Cyprus.

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