The growth in international trade has amplified cross-border insolvency challenges, highlighting the need for effective regulation.
About Cross-Border Insolvency
- Insolvency is a financial state where a person or company is unable to pay back their debts on time.
- Cross-border insolvency deals with cases where an insolvent debtor has assets or creditors in more than one jurisdiction.
- Essential for effective regulation in a globalized economy to:
- Facilitate corporate restructuring.
- Attract foreign investments and economic stability
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Historical Background of Cross-Border Insolvency in India
- Pre-Independence Era:
- Indian Insolvency Act, 1848: First insolvency law introduced under British rule, focusing only on domestic insolvencies.
- Presidency-Towns Insolvency Act, 1909: Applied to major cities (Calcutta, Bombay, and Madras).
- Provincial Insolvency Act, 1920: Governed insolvencies in mofussil (rural) regions.
- Limitation: These laws failed to address cross-border insolvency complexities as the focus was only on domestic insolvency issues.
- Post-Independence Era:
- Insolvency laws from the British era continued without substantial amendments.
- Third Law Commission’s 26th Report (1964): Recommended modernizing insolvency laws to keep up with economic developments, but no concrete steps were taken.
- 1990s Economic Liberalization:
- Globalization led to an increase in cross-border trade and investment.
- The need for a comprehensive insolvency law to manage cross-border cases became apparent.
- Committees like the Eradi Committee (2000), Mitra Committee (2001), and Irani Committee (2005) recommended adopting the UNCITRAL Model Law on Cross-Border Insolvency (1997).
- Insolvency and Bankruptcy Code (IBC), 2016:
- In 2015, the Bankruptcy Law Reform Committee, drafted the Insolvency and Bankruptcy Code (IBC) Bill, focusing on domestic insolvencies.
- Aimed to consolidate and modernize insolvency laws.
- Included Section 234 (reciprocal agreements) and Section 235 (requests to foreign courts) for cross-border insolvency.
- Limitation: These sections remain unenforceable due to the lack of reciprocal agreements and slow policy implementation.
Expert Recommendations
- Committees:
- Eradi Committee (2000), Mitra Committee (2001), and Irani Committee (2005) recommended adopting UNCITRAL Model Law on Cross-Border Insolvency (1997).
- Insolvency Law Committee (2018) and Cross-Border Insolvency Rules/Regulation Committee (2020) reinforced this recommendation.
- Parliamentary Reports:
- Thirty-Second Report (2021) and Sixty-Seventh Report (2024) stressed the urgent need for a structured cross-border insolvency framework.
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Insolvency and Bankruptcy Code (IBC), 2016
- IBC, 2016 was enacted to consolidate and amend laws relating to insolvency and bankruptcy for:
- Corporate entities.
- Partnership firms.
- Individuals.
- Goal: To resolve insolvency in a time-bound manner, ensuring creditor protection and debt recovery.
- Objectives
- Time-Bound Process: Resolves insolvency within 180 days (extendable by 90 days).
- Maximization of Asset Value: Avoids unnecessary asset depletion during proceedings.
- Promoting Entrepreneurship: Facilitates easy exit for failed businesses.
- Ease of Doing Business: Improves India’s global ranking by creating a predictable insolvency framework.
- Creditor Confidence: Ensures transparency and fairness in debt recovery.
- Key Features
- Adjudicating Authorities:
- National Company Law Tribunal (NCLT): Handles corporate insolvency.
- Debt Recovery Tribunal (DRT): Handles insolvency for individuals and partnership firms.
- Insolvency Professionals (IPs): Act as intermediaries managing the insolvency resolution process (IRP).
- Appointed by the Insolvency and Bankruptcy Board of India (IBBI).
- Corporate Insolvency Resolution Process (CIRP): Initiated by creditors or debtors for corporate entities.
- Resolution plan to be approved by the Committee of Creditors (CoC).
- Time-Bound Resolution: 180-day resolution period with an extension of 90 days in exceptional cases.
- Moratorium: Provides a legal stay on claims and actions against the debtor during insolvency proceedings.
- Liquidation Process: Initiated if no resolution is achieved within the stipulated timeline.
- Waterfall Mechanism: A prioritized repayment structure under IBC where insolvency resolution costs are paid first, followed by secured creditors, workmen dues, unsecured creditors, government dues, and lastly equity shareholders.
- It ensures orderly distribution of proceeds during liquidation.
- Key Provisions
- Section 7: Financial creditors can file an application to initiate the Corporate Insolvency Resolution Process (CIRP).
- Section 9: Operational creditors can file an application to initiate CIRP after delivering a demand notice to the debtor.
- Section 10: Debtors themselves can voluntarily initiate CIRP by filing an application.
- Section 29A: Disqualifies willful defaulters, promoters of defaulting companies, and related persons from submitting a resolution plan.
- Prevents misuse of the process by defaulting promoters.
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Reciprocal Agreements: Bilateral arrangements between countries under Section 234 of the IBC to mutually recognize and enforce insolvency proceedings.
- These agreements enable cooperation between jurisdictions for handling cross-border insolvency cases effectively.
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- Cross-Border Insolvency: Added in 2018 on the recommendations of The Bankruptcy Law Reforms Committee (BLRC).
- Section 234: Reciprocal agreements with foreign countries for cross-border insolvency proceedings.
- Section 235: Enables Indian adjudicating authorities to request assistance from foreign courts.
| Part Z: A proposed framework under the IBC, 2016, incorporating the UNCITRAL Model Law on Cross-Border Insolvency to govern recognition, cooperation, and resolution of international insolvency cases. |
Recent developments
- 2018: The Insolvency Law Committee (ILC) recommended the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, 1997, and proposed a new framework called Part Z to comprehensively address cross-border insolvency issues.
- 2020: The Cross-Border Insolvency Rules/Regulation Committee (CBIRC) was constituted to propose rules and regulations for implementing Part Z.
- Current Status: Cross-border insolvency provisions are yet to be fully implemented, and Sections 234 and 235 remain non-functional due to the absence of reciprocal agreements and required notifications.
- Legislative efforts to adopt the UNCITRAL Model Law and operationalize cross-border insolvency are ongoing.
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Need for Cross-Border Insolvency in India:
- Increasing Global Trade and Investments: India’s growing global economic integration requires a robust framework for handling insolvency involving multinational companies.
- India has been executing Free Trade Agreements (FTAs), Comprehensive Economic Corporation Agreements (CECAs), Comprehensive Economic Partnership Agreements (CEPAs) and their equivalents.
- As per the Commerce Ministry, India has signed such agreements with more than 54 countries.
- Protection of Creditor Interests: Ensures equitable treatment of domestic and foreign creditors, fostering investor confidence.
- Efficient Asset Recovery: Enables retrieval of assets spread across multiple jurisdictions, reducing delays and asset value loss.
- Addressing Jurisdictional Conflicts: Provides clarity on the Centre of Main Interest (COMI) to resolve disputes and prevent overlapping proceedings.
- Alignment with Global Standards: Adoption of the UNCITRAL Model Law will place India on par with countries like the USA, UK, and Singapore, attracting foreign investments.
Key Cases of Cross-Border Insolvency
Jet Airways (India) Limited Case (2019)
- Jet Airways faced insolvency proceedings in India and the Netherlands simultaneously.
- Dutch bankruptcy administrators sought recognition of the Netherlands proceedings by the National Company Law Tribunal (NCLT), Mumbai.
- Key Issues:
- No reciprocal agreement under Sections 234 and 235 of IBC.
- Jurisdictional conflict between Indian and Dutch courts.
- Outcome:
- The National Company Law Appellate Tribunal (NCLAT) directed joint insolvency resolution proceedings in India and the Netherlands under a Cross-Border Insolvency Protocol.
- Recognized the Centre of Main Interest (COMI) in India and Dutch proceedings as secondary.
Videocon Industries Limited Case (2019)
- Videocon Group’s insolvency proceedings involved domestic subsidiaries and foreign assets across multiple jurisdictions.
- Key Issues:
- Whether foreign subsidiaries’ assets should be included in Indian insolvency proceedings.
- Lack of clarity on group insolvency and cross-border frameworks.
- Outcome:
- NCLT ordered the inclusion of foreign subsidiaries’ assets under the resolution plan.
- Emphasized the need for legal provisions addressing group insolvency and cross-border disputes.
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UNCITRAL Model Law on Cross-Border Insolvency
- Adopted by the United Nations Commission on International Trade Law (UNCITRAL) in 1997.
- Provides a framework for managing cross-border insolvency cases to facilitate cooperation between countries.
- Focuses on procedural harmonization, not substantive insolvency laws.
- Core Principles (Four Pillars)
- Access: Foreign representatives can directly approach domestic courts.
- Recognition: Simplifies recognition of foreign insolvency proceedings as “main” or “non-main” proceedings.
- “Main proceeding” is where the Centre of Main Interest (COMI) is located.
- Relief: Provides assistance to foreign courts, including moratoriums and asset protection.
- Cooperation and Coordination: Courts and insolvency professionals must cooperate with their foreign counterparts.
- Adoption by Countries
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- Adopted by 60 countries, including the USA, UK, Australia, Japan, and South Africa.
- India is yet to adopt the Model Law but aims to implement it through Draft Part Z of the IBC, 2016.
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Key Challenges in Cross-Border Insolvency in India
- Absence of a Comprehensive Framework: India lacks a robust legal framework for cross-border insolvency; Sections 234 and 235 of the IBC remain unenforceable due to the absence of reciprocal agreements.
- In the Jet Airways (2019) case, Dutch proceedings were stalled as no legal mechanism existed for cooperation between Indian and Dutch courts.
- Jurisdictional Conflicts and COMI Determination: Determining the Centre of Main Interest (COMI) is often complex, leading to disputes.
- The absence of COMI-related provisions in India hampers clarity in cross-border disputes.
- Ad Hoc Protocols Instead of Structured Mechanisms: Cross-border insolvency cases are currently resolved through temporary protocols, increasing costs and delays.
- Lack of Judicial and Institutional Capacity: NCLT is overburdened, with more than 22,000 pending cases (as of 2024), leaving little bandwidth for cross-border matters.
- Cross-border cases require specialized knowledge, which the Indian judicial system is still developing.
- Unaddressed Group Insolvency Issues: India lacks a framework for group insolvency, leading to fragmentation in resolving cases involving multinational companies.
- In Videocon Industries Ltd. (2019), the NCLT had to extend jurisdiction over foreign subsidiaries without a formal framework.
- Uncertainty for Foreign Investors: The absence of clear rules on cross-border insolvency deters foreign creditors from engaging with Indian companies.
Recommendations on Cross-Border Insolvency in India
- Adoption of the UNCITRAL Model Law: Recommended by the Insolvency Law Committee (ILC, 2018) and Cross-Border Insolvency Rules/Regulation Committee (CBIRC, 2020).
- Provides a standardized framework emphasizing cooperation, recognition of foreign proceedings, and creditor protection.
- Incorporation of Draft Part Z into IBC: Proposed by the ILC to serve as India’s cross-border insolvency framework.Includes provisions for:
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- Determining the Centre of Main Interest (COMI).
- Simplifying recognition and cooperation processes.
- Ensures streamlined management of foreign insolvency proceedings.
- Empowering NCLT for Cross-Border Cases: Vest NCLT benches with jurisdiction over foreign entities and cross-border matters.
- Principal Bench of the NCLT to handle foreign cases to ensure consistency.
- Strengthening Judicial and Administrative Capacity: Conduct specialized training for judges and insolvency professionals to handle complex cross-border cases.
- Build infrastructure for seamless international communication and coordination.
- Improved Communication Mechanisms: Adopt the Judicial Insolvency Network (JIN) Guidelines for court-to-court communication.
- Enable direct communication between Indian and foreign representatives for efficient resolutions.
- Reciprocal Agreements: Expedite reciprocal agreements under Section 234 of the IBC to facilitate cross-border recognition and enforcement.
- Focus on Group Insolvency: Develop a framework for resolving group insolvency cases involving multinational corporations.
- Code of Conduct for Foreign Representatives: Introduce a minimalistic code of conduct to regulate foreign representatives under IBBI’s supervision.
- Ensure accountability through investigation and disciplinary mechanisms.
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Conclusion
A robust cross-border insolvency framework is critical for India’s economic stability, global trade participation, and foreign investment. Adopting the UNCITRAL Model Law through Part Z will streamline international insolvency processes, enhance judicial cooperation, and align India with global best practices. Swift implementation and capacity-building are essential to address current challenges.
January 6, 2025
