Insolvency Rescue Act to supersede Bhutan Bankruptcy Act 1999

The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency is one of the important features under the reforms

The Bankruptcy Act of the Kingdom of Bhutan 1999 is being reviewed, revised and will be finally amended as the Insolvency Rescue Act after being approved by the parliament.

However, it is not yet ascertained what and which specific provisions from the Bill will be amended. “It is still under review and it can undergo changes, so until finalized for submission to the Parliament, it is too early to be discussing any provisions from the Bill,” finance minister Lekey Dorji said.

Economic growth and attracting foreign investments are critical priorities for the government as part of the 13th Five Year Plan. According to the minister, reforming Bhutan’s insolvency system can play a significant role in achieving those outcomes.

He said, “Indeed, the global experience has been that effective, well-functioning restructuring and insolvency laws based on international best practices contribute to financial stability and long-term innovation, investor confidence, productivity and economic growth. With this aim and objective in mind, the Bankruptcy Act of the Kingdom of Bhutan 1999 is being amended/ revised.”

According to the foreign consultants working on the draft, the sausage factories of law reform in Bhutan have moved slowly but relentlessly towards the adoption of new Insolvency laws.

“In Bhutan, we have worked closely with the Asian Development Bank (ADB), its Bhutanese consultant, and Bhutan’s Ministry of Finance (MoF) to draft a comprehensive new law to be known as the Insolvency Rescue Act,” a foreign consultant noted.

“Informed by our previous work for the ADB in Myanmar as well as our wealth of experience in insolvency practice in Australia and elsewhere, the new law will include provisions for corporate rescue and rehabilitation, as well as the adoption of special provisions for Micro and Small to Medium Enterprises, Individual Rescue Arrangements, and Debt Relief Orders. These provisions have been drafted with the small scale of most business activity in Bhutan at the front of our minds.”

They shared that such provisions remain especially important in emerging markets and developing economies (EMDEs).

In its latest World Economic Outlook Report issued in October 2023, the International Monetary Fund (IMF) scaled back its projection for GDP levels in EMDEs at the end of 2024 to 3.8%. The IMF commented in its report, “… a full recovery towards pre-pandemic trends appears increasingly out of reach, especially in emerging markets and developing economies.”

While an EMDE GDP growth of 3.8% compares favourably with the 1.4% projected by the IMF for advanced economies, it suggests that business in EMDEs will face many challenges in the months ahead.

The ADB-led mission to Bhutan in April this year was the third for the consultants and included meetings with the MoF and other government and institutional stakeholders in the capital, before the three-day workshop in Paro to work through the first draft of the law (and accompanying rules and regulations) with insolvency practitioners and stakeholders from across Bhutan.

Consultants exclaimed that the implementation of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency as part of Bhutan’s new insolvency law is another key feature of a best practice insolvency process which forms part of the proposed insolvency law reform in Bhutan.

“If enacted, the adoption of the Model Law will enhance foreign investment and business confidence due to the predictable, principled system for cross-border recognition and cooperation that promotes efficiency, minimizes costs, and increases the likelihood of successful restructuring outcomes. This is highly appealing for both creditors and debtors in determining where and how to invest funds and structure businesses in a globalised, interconnected world,” they recommended.

According to the consultants, institutional building efforts remain the focus of their attention in Bhutan as they seek to establish effective insolvency regimes, driven by a skilled, specialized body of insolvency practitioners who are, in turn, supported and regulated by strong institutions responsible for interpreting and administering the underlying laws.

Meanwhile, Insolvency law pertains to the legal framework addressing situations where individuals or entities fail to meet their financial obligations to creditors. Its core objective is to manage the debtor’s insolvency in an organized manner, considering the interests of all involved parties.

Insolvency law sets standards for identifying when a debtor is insolvent. This usually involves assessing if the debtor can meet financial obligations as they arise or if liabilities exceed assets.

The law will facilitate Bankruptcy Proceedings (legal processes initiated by either an insolvent debtor or creditors seeking debt repayment). Bankruptcy can result in asset liquidation to satisfy creditors or restructuring of financial affairs under court oversight to allow continued operations and gradual debt repayment.

Insolvency law entails restructuring the debtor’s business and finances to facilitate ongoing operations and creditor repayment in a revised manner. It is common in corporate insolvencies where continuing business operations is feasible and advantageous for creditors. If reorganization isn’t viable, it will facilitate liquidation where the debtor’s assets may be sold off to settle debts, leading to business closure.

Insolvency proceedings often trigger a stay on legal actions by creditors against the debtor, ensuring orderly asset distribution or negotiation of a reorganization plan without disruption. The Insolvency law will offer protection from creditors:

Insolvency law establishes the order in which creditors’ claims are addressed, typically favoring secured creditors, followed by unsecured creditors, with equity holders receiving remaining assets.

It also has provisions for cross-border Insolvency: In cases involving debtors or creditors in multiple countries, cooperation among different legal systems is necessary.

Insolvency laws differ across jurisdictions due to varying legal systems and economic policies. These laws aim to ensure fair treatment of creditors, debt recovery, and, when feasible, business recovery to safeguard employment and economic value.

The first draft of the Insolvency Bill was discussed last month with stakeholders from the Judiciary, Office of the Attorney General, Office of the Registrar of Companies, Financial Institutions, Royal Monetary Authority, Ministry of Finance, Department of Revenue & Customs, Private Business Participants, and Private Lawyers.

The second draft of the Insolvency Bill will be submitted by the end of May 2024 after incorporating the views and comments received during the stakeholder consultation workshop. The target is for the submission of Bill in the winter session of the fourth parliament.

By Tashi Namgyal, Thimphu