Understanding the Legal Aspects of Cross-Border Insolvency in India

This article has been written by B.Pooja, a 3rd year student pursuing BA. LLB(Hons) from SRM University.

ABSTRACT:

Cross-border insolvency comes into play when a company that is financially troubled has assets or debts that spread across different countries. This area of law has evolved over the years, reflecting the interconnected nature of today’s global markets.

Setting up IBC in India, in 2016, marked a sea change in the situation. This landmark legislation provided the structure to handle cross-border insolvencies. One major development is the growing interest in adopting the UNCITRAL Model Law on Cross-Border Insolvency, which marks a significant step toward aligning India with international norms.

This article delves into the historical context of cross-border insolvency in India, examines the current legal framework and practices, and highlights the challenges in implementation. It also explores key amendments and provisions of the UNCITRAL Model Law, as well as regions in India grappling with cross-border insolvency issues. Overall, the aim is to provide a clearer understanding of how India is navigating these complex legal waters in a globalized economy.

INTRODUCTION:

The increasing interdependence of global trade and commerce means that businesses these days tend to have assets, activities and creditors in many places. This makes more than one jurisdictional insolvency proceeding quite cumbersome. The term cross-border insolvency describes an economy in which the laws of a nation or several nations are required in order to accomplish a restructuring or a liquidation, such as those at the bankruptcy court, in which debtors do not pay their debts in full.

The Insolvency and Bankruptcy Code (IBC), enacted in 2016 fundamentally changed the contours of insolvency in India by decentralizing insolvency procedures due to the introduction of the IBC. But, still, the IBC is silent on the insolvency of legal entities across borders and this is a legal void, which can create problems of jurisdiction and loss of assets and extended delays in the resolution process. At present cross border insolvency problems in India are being solved with the assistance of international cooperation or bilateral treaties, which in general is rather useless and inconsistent.

The absence of such a model has made India resolve that the law of the jurisdiction would very likely follow the principles of framed laws of cross-border insolvency endorsed by the United Nations. This shift is likely to reinforce the sovereignty of the Indian insolvency system.

CONCEPT OF CROSS BORDER INSOLVENCY:

Cross-border insolvency arises where the insolvent debtor has assets or creditors in more than one country, requiring the application of more than one jurisdiction’s insolvency law. The primary issues are:

1. Recognition of foreign insolvency proceeding .
2. Coordination between different jurisdictions.
3. Management of assets present in more than one country.
4. Equal treatment of creditors across borders.

Cross-border insolvency can broadly be categorized in two approaches:
1. Universalism: There is only one insolvency proceeding in the debtor’s home country, which handles the global aspect of distribution.
2. Territorialism: Each country where the assets are based is separately bankrupted.

HISTORICAL BACKGROUND:

Historically, the insolvency laws of the country were fragmented and inefficient. Often the very packaging of SICA, the Recovery of Debts Due to Banks and Financial Institutions Act (RDBBFI) and even provisions of the Companies Act make way for resolution that draws on for an infinitely long time. What befell is a reform revolution with the coming of the new Insolvency and Bankruptcy Code (IBC) in 2016, consolidating various insolvency laws into one framework which aimed for faster resolution, maximization of asset value, and promotion of entrepreneurship.
However, the IBC had some inherent limitations in cross-border insolvency cases. It was not representative at all in the context of bilateral agreements with other countries, as enlisted in sections 234 and 235 of the IBC. Against this international background, India had begun to consider the UNCITRAL Model Law on Cross-Border Insolvency being incorporated into the country through a common legal framework for the resolution of such cross-border insolvency cases. Viewed in this context, India began thinking on the lines of embracing the UNCITRAL Model Law on Cross-Border Insolvency, which would bring into the arena a uniform legal framework within which such cases would be treated. It is on this basis that there is a push by the Model Law encouraging cooperation between courts and insolvency professionals from different jurisdictions to do just, fair, and efficient handling of the cases.

1. “The Insolvency and Bankruptcy Code, 2016 It has recently consolidated various earlier enactments relating to insolvency and bankruptcy in one piece of legislation and provided for a time-bound process for “resolution of insolvency.”[1] However, IBC does not address cross-border insolvency completely; it only offers provisions in sections 234 and 235 with permission for bilateral agreements with other countries and “also”[2] allows courts to issue letters of request to foreign courts.”[3]
2. Articles 234 and 235 of IBC
   Article 234 vest the right in Central Government of India to enter into bilateral agreements with countries within foreign lands so that they can enforce the provisions of IBC in their territories. The approach is repressive in the sense that a different agreement needs to be fabricated for every country, which will be quite a time-consuming activity and will not give an overall frame.
   Section 235 allows Indian insolvency professionals to request the foreign court’s support. Co-operation is not guaranteed by the foreign jurisdiction because it is subject to the laws of the other country
3. No cohesive and comprehensive easing framework exists that operates across borders.
   The existing provisions in the IBC regarding cross-border insolvency are incomplete. It has no mechanism for the major issues which range from recognition of foreign proceedings, cooperation between courts, and even mechanisms of coordination with multiple proceedings across various jurisdictions.

NEED FOR COMPREHENSIVE FRAMEWORK IN INDIA:

1. Increase in Foreign investment: With India witnessed an upsurge in the inflow of funds or foreign investments from various other countries, the introduction of a consistent and dependable bankruptcy system will encourage investors.

 International business Activities Indian organizations are engaged in many business activities outside the country; therefore, there is need for law that will deal with insolvency that cuts across nations.

 Protection Ensure that the rights of creditors which would be otherwise prejudiced in territorial jurisdictions are respected.

2. Prevention of The Economic Evaporation: A proper system in place allows for a better interrelationship and awareness of various insolvency proceedings so as to reduce the risk of loss of any assets held outside the country.

“THE UNICTRAL MODEL LAW ON CROSS BORDER INSOLVENCY:”[4]

Overview of the Model Law:

The UNCITRAL Model Law on Cross-Border Insolvency was introduced in 1997. It seeks to create a solution to the issues that arise from the occurrence of insolvency that transcends state borders so as:

• To provide a mechanism for domestic delegation and foreign delegation of court officers
• To allow the courts to recognize the insolvency of foreign countries.
• To allow the transfer of assets that are located in different countries.
• To give rise to appropriate sectors for communication between the boundaries.

The Model Law is centered around four cardinal concepts.

• Access – Allowing foreign representatives access to National courts
• Recognition – Giving effect to foreign proceedings and relief therefore.
• Cooperation – The local and foreign courts and representatives are able to deal with each other in an orderly manner.
• Coordination – Managing multiple proceedings.

 Geographical Applicability of the Model Law:

According to the United Nations Commission on International Trade Law, countries such as the United States (Chapter 15 of the U.S. Bankruptcy Code), the United Kingdom, Australia, Japan and Singapore have embraced the Model Law thus enabling a more unified cross-border insolvency system.

 The Report of the Insolvency Law Committee (2018)

Among other things, the report published by the Insolvency Law Committee in 2018 advocated for the adoption of the UNCITRAL Model Law with certain extent of modifications for the Indian context. The suggested system would be premised on the following:

• Automatic recognition of foreign main proceedings, subject to certain conditions.
• Non-main proceedings recognition based on a case-by-case determination.
• Discretionary relief to protect local creditors.
• Protection of public interest, and Indian court may refuse recognition in certain cases Formal Elements of the Proposed Structure
• Centre of Main Interests (COMI): The approach uses the model law’s provision of determining the jurisdictional competence where the insolvency would lead to the commencement of proceedings in a court as the main jurisdiction identified for court proceedings.
• Reciprocity: This may take the form of an agreement to y any foreign applications only on the basis that such country recognises any proceedings including domestic ones.
• Relief Measures: It would prescribe a set of remedies which the courts could grant such as a freezing order to prohibit the continuance of certain proceedings and the provision of the financial information.

  Issues in Implementing the Model Act:

• Interrelation of Jurisdictions: It may be difficult to ascertain the jurisdictions that India should consider for inter-jurisdictional cooperation and enforcement.
• Judicial Development: The Indian judiciary may require some assistance in the area of international insolvency law, in order to effectively use and implement the provisions of the Model Law.
• Public Policy Issues: Countries have the option under the Model Law to decline recognition on the basis of public policy. This would lead to divergence in practice.

BENEFITS OF ADOPTING THE UNICTRAL MODEL:

• Narrowing the Legal Boundaries: The Model Law presents a clear system conducting cross border bankruptcy that will motivate foreign investment since many creditors will have an assurance of an orderly and fair process.

On the other hand, too much harmonisation would not promote competitive behaviour in the management of the debtors’ assets, for it would result in managing conflicts of law and proceedings in a single forum.

• Ease in the Process of Reorganization: The Model Law is an enabler of business restructuring in that a mechanism for dealing with other countries has been put in place, well, it would make it easier for the business to run during the time of liquidation process.
• Guaranteeing of the Rights of the Creditors: With the adoption of the Model Law, it is easier to ensure fair treatment of the creditors regardless of their origin for their rights are upheld in the case of cross border insolvency.

CONCLUSION:

The way India is promoting cross-border insolvency laws shows its inclination towards the foreign market. Adoption of the UNCITRAL Model Law on Cross-Border Insolvency would be a step forward in terms of all countries adhering to one prescribed stance as well as promoting cooperation and collaboration between countries. This is further complicated by practical issues such as jurisdictional coordination, asset tracing, and the need to protect competing claims from several creditors. These developments reinforce India’s resolve to build a more dynamic and functional insolvency regime, and that should be good news for local and global players alike.

[1] https://www.investopedia.com/terms/s/sick-industrial-companies-act-sica.asp

[2] https://journals.sagepub.com/doi/full/10.1177/0256090920946519

[3] https://www.justice.gov/archives/jm/criminal-resource-manual-275-letters-rogatory

[4] https://uncitral.un.org/en/texts/insolvency