Proposed Insolvency Law Aims to Give Distressed Businesses a Second Chance

If adopted, the proposed Insolvency and Rehabilitation Act of Bhutan 2025 could become one of Bhutan’s most significant economic and legal reforms in recent years. Designed to modernize the country’s approach to financial distress, the legislation seeks to strengthen investor confidence and provide viable businesses with a pathway to recovery instead of closure.

The Bill has been finalized, approved by the Cabinet, and submitted to Parliament. It is expected to be tabled during the winter session. Once enacted, it will replace the Bankruptcy Act of 1999, which remained largely dormant and was never implemented despite being in force for more than two decades.

According to the Registrar of Companies under the Corporate Regulatory Authority (CRA), the new law addresses longstanding gaps in Bhutan’s legal and financial framework at a time when the country is pursuing private sector-led growth under the 13th Five-Year Plan.

Unlike the existing framework, which focuses primarily on liquidation, the proposed legislation emphasizes rehabilitation and restructuring of financially distressed but potentially viable enterprises.

“The new law is built on the principle that reviving a viable business creates greater value than liquidating it through a distress sale,” officials said.

The reform is expected to improve the credit environment, encourage entrepreneurship, and establish a more predictable system for resolving financial distress.

Shift from Liquidation to Business Rescue

A key feature of the proposed Act is its focus on business rescue.

The legislation introduces mechanisms aimed at preserving viable enterprises, protecting jobs, and maximizing asset value. One of the most significant provisions is a moratorium, or automatic stay, that takes effect once insolvency proceedings begin. During this period, creditors cannot initiate lawsuits, seize assets, or enforce securities against the debtor.

Officials say the moratorium provides struggling businesses with critical breathing space to develop restructuring plans without the immediate threat of liquidation.

For Cottage, Small and Medium Enterprises (CSMEs), the Act introduces a “Debtor in Possession” model, allowing owners to continue operating their businesses while pursuing rehabilitation. Authorities said this reflects the reality that small enterprises often depend heavily on personal relationships with customers, suppliers, and communities.

Larger corporations would be eligible for reorganization proceedings overseen by licensed administrators responsible for assessing viability and managing restructuring efforts.

Strengthening the Financial Sector

The legislation is also expected to benefit Bhutan’s banking and financial sector.

Financial institutions have long faced challenges in resolving distressed loans due to the absence of a comprehensive insolvency framework. Officials said the new Act would provide a predictable, time-bound process for handling non-performing loans, reducing uncertainty and improving financial stability.

The law introduces a statutory demand process under which debtors who fail to settle obligations within 21 days may be presumed insolvent, enabling creditors to initiate proceedings.

At the same time, it seeks to balance creditor rights with business continuity. Rather than relying solely on asset liquidation, creditors would be encouraged to participate in structured rehabilitation plans designed to maximize long-term recovery.

The Act also introduces a “majority creditors principle,” allowing courts to approve restructuring plans supported by creditors representing more than 50 percent in both number and value, even if a minority objects. Officials said this would prevent a small group of creditors from blocking arrangements that benefit the broader creditor community.

Enhancing the Investment Climate

Policymakers believe the reform will play an important role in improving Bhutan’s investment climate.

According to the CRA, modern insolvency regimes are increasingly viewed as essential for attracting foreign direct investment and supporting private sector development. The proposed law aligns Bhutan with international best practices and incorporates principles promoted by institutions such as the World Bank, including the concept of giving honest debtors a “fresh start” after financial failure.

The legislation would also establish a publicly accessible insolvency register under the CRA, providing information on insolvency proceedings, licensed practitioners, and court decisions. Officials say this will improve transparency and confidence in the legal system.

The reform is particularly relevant as Bhutan seeks greater foreign investment, expands international trade, and advances strategic initiatives such as the Gelephu Mindfulness City.

Cross-Border Insolvency Framework

For the first time, Bhutan will introduce a comprehensive framework for cross-border insolvency.

The current legal system contains only limited provisions for recognizing foreign insolvency proceedings. Under the proposed Act, Bhutanese courts would be able to cooperate with foreign jurisdictions, recognize overseas proceedings, and facilitate the recovery of assets located across borders.

Officials said the framework is essential in an increasingly interconnected global economy where businesses, investments, and assets frequently span multiple countries. It is also expected to enhance legal certainty for foreign investors and ensure compatibility with international standards.

Professional Oversight and Safeguards

The legislation establishes a new regulatory structure for insolvency administration through a seven-member Insolvency Practitioners Regulation Committee under the CRA.

The committee will license and regulate insolvency professionals, including administrators, liquidators, trustees, and rescue advisors responsible for managing proceedings. Officials said specialized oversight will improve efficiency, reduce procedural errors, and strengthen stakeholder confidence.

While the High Court will retain jurisdiction over insolvency, bankruptcy, and cross-border matters, day-to-day case management will be handled by licensed practitioners.

The Act also includes safeguards against abuse. Courts and insolvency practitioners will be empowered to reverse transactions that unfairly favor certain creditors or involve undervalued asset transfers before insolvency.

Directors may face personal liability for fraudulent or wrongful trading if they continue operating a business despite knowing there is no reasonable prospect of avoiding insolvency. Criminal penalties are also for conduct such as concealing assets, falsifying records, and making misrepresentations during insolvency proceedings.

Preparing for Implementation

Despite broad support for the reform, officials acknowledge that successful implementation will require significant institutional preparation.

The Act calls for capacity-building programmes for courts, regulators, and insolvency practitioners, along with adequate financial and human resources to support the new framework.

Officials said the law’s success will depend not only on its provisions but also on the ability of institutions to implement them consistently and professionally.

If enacted, the Insolvency and Rehabilitation Act of Bhutan 2025 will mark a major shift in Bhutan’s business and financial landscape, creating a modern framework that supports entrepreneurship, protects creditors, strengthens financial stability, and aligns the country more closely with global investment standards.

Tashi Namgyal, Thimphu

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