Stigma, corporate insolvency, and law: international practices and lessons for India

Abstract

nsolvency and bankruptcy have always attracted a measure of stigma. The negative attitude towards insolvency emerged due to the historically harsh treatment of bankrupts and the perception of bankruptcy as a breach of a sacred relationship between the debtor and creditor. Majority of the existing legal scholarship studying the bankruptcy stigma focuses on personal insolvencies, while its influence on corporate insolvencies has largely been neglected. This paper attempts to fill this gap by examining the impact and manifestations of stigma in the context of corporate insolvency. The paper does so by contrasting the corporate insolvency schemes of the United States and the United Kingdom. It argues that while both jurisdictions prioritise the rehabilitation of corporate debtors, there is a divergence in the methodologies across the Atlantic due to the varied historical, cultural, and economic attitudes towards business failures. With this background, the paper explores bankruptcy stigma in the Indian context and shows how certain provisions of the Insolvency and Bankruptcy Code, 2016 seem to reinforce and perpetuate the stigma against incumbent management and promoters of corporate debtors. The paper argues that there is a need to ameliorate the stigma associated with corporate insolvency for the successful rescue and rehabilitation of distressed corporations and for promoting entrepreneurship, innovation, and economic growth in the country.