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​​.

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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• • 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.

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.

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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:
  • • 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.

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