Cross-Border Insolvency

Context: The ongoing debate on adopting harmonized laws to handle cross-border insolvency is gaining momentum, emphasizing the need for a coordinated legal framework.

What is Cross-Border Insolvency?

Cross-border insolvency occurs when a company with assets and liabilities in multiple countries becomes bankrupt. Such cases pose challenges, requiring cooperation between courts and insolvency professionals across different jurisdictions.

Key Aspects of Cross-Border Insolvency:

• Equal Treatment of Creditors: Ensuring that both domestic and foreign creditors are treated fairly.
• Asset Protection: Safeguarding the value of a debtor’s assets located in various countries.
• Uniformity: Harmonizing insolvency laws and practices across jurisdictions.
• Judicial Cooperation: Coordinating with judicial authorities in different countries to ensure efficient handling of insolvency cases.

Why Does India Need Cross-Border Insolvency Laws?

• The Insolvency and Bankruptcy Code (IBC), 2016, serves as India’s primary insolvency legislation, but it lacks comprehensive procedures for handling cross-border cases.
  • Section 234: Empowers the Central Government to enter into bilateral agreements with foreign countries to resolve cross-border insolvency issues.
  • Section 235: Allows the adjudicating authority to request assistance from courts in foreign countries to deal with assets of debtors located abroad.

However, these provisions are insufficient for a comprehensive cross-border insolvency framework.

How Does India Currently Handle Cross-Border Insolvency?

• India currently resolves cross-border insolvencies on a case-by-case basis through bilateral agreements.
• Despite engaging in Free Trade Agreements (FTAs) and similar international agreements, these do not sufficiently cover cross-border insolvency.

Recommendation for Improvement

The Insolvency Law Committee (ILC) suggested that India adopt the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, 1997, which offers a framework to address cross-border insolvency issues.

UNCITRAL Model Law on Cross-Border Insolvency, 1997:

• This law helps countries manage the insolvency of companies with assets or creditors in multiple countries by encouraging international cooperation while respecting national laws.
• Although adopted by only 60 countries, it has been implemented with various adaptations based on national requirements.
• India has not yet adopted this Model Law despite repeated recommendations.

Arguments in Favor of Adopting the Model Law:

• Enhanced Investment Climate: Adoption would make India more attractive for global creditors.
• Faster Information Exchange: It would improve the flow of essential information across borders.
• Better Asset Protection: It would ensure effective participation in protecting and reorganizing company assets.
• Improved Credit Recovery: It would streamline the process for creditors to recover debts.
• Boost to International Trade: By providing legal clarity, it would benefit cross-border businesses and trade.

Recent Developments:

• India has released Draft Z, which addresses the current shortcomings in the cross-border insolvency framework by determining the Centre of Main Interests based on a debtor’s registered office. This draft applies exclusively to corporate debtors.
• In 2020, the Cross Border Insolvency Rules and Regulations Committee (CBIRC) was formed by the Ministry of Corporate Affairs (MCA) to formulate subordinate legislation under Draft Part Z.