Insolvency and Bankruptcy Code of 2016 has undergone many amendments till date. However, as the code is being brought into practice more and more scope of betterment could be seen. Recently it has been in news that it will undergo an amendment whose bill will be proposed in the upcoming winter session of the Parliament. In this amendment, one draft of legal framework for cross-boarder insolvency cases will be put up by the government. The ministry of the Corporate Affairs and the Insolvency and Bankruptcy Board of India have finalized a framework to settle bankruptcy cases of companies which have business in more than one country.
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International Framework on Cross-Border Insolvency
The recent amendment in discussion is based on the international framework for cross-border insolvency. The UNICITRAL Model Law on cross-border Insolvency, 1997, was designed with the objective to facilitate state in cross-border insolvency where the corporate debtor has assets in more than one country. Further, it also applies in cases where some of the creditors of the insolvent are from state other than where the insolvency proceeding is taking palace.
Increase in foreign investments and globalization has, in turn, also increased the number of cross-border insolvency cases. Nonetheless, there is no uniform regime in the international or the national level to keep pace with these rising issues. The differences and uncoordinated approach in cross-border insolvency has led to time consuming proceedings, lack of transparency, and even conflict between national laws and insolvency framework. For all these reasons, this international framework came into existence.
The four main elements mentioned in this model law, which are the pillars for cross-border insolvency are: –
- Access– It allows the foreign creditors to get a right to access the court of the state where the insolvency proceeding is taking place. The access can be to seek assistant and authorize representatives of the enacting state to seek assistant elsewhere.
- Recognition– The model law has the objective to establish recognition for foreign proceedings. The qualified foreign proceeding should be recognized as either a main proceeding or a non- main proceeding. The main proceeding would be where the debtor had the center of business at eh time of initiation of the proceeding. While the non-main proceeding would be where the debtor has an establishment. The purpose of the recognition element is to avoid time-consuming proceeding and to provide certainty and uniformity with respect to decision. Further, it provided relief to assist the foreign proceeding.
- Relief– As per the model law the relief required for just and orderly conduct of cross-border insolvencies should be available to assist foreign proceedings. Interim relief at the discretion of the court between the filing of an application for recognition and the decision on that application, an automatic stay upon recognition of main proceedings, and relief at the discretion of the court for both main and non-main proceedings following recognition are key elements of the relief available.
- Cooperation and coordination– The model law focuses on bringing a coordination and between domestic and foreign courts with respect to insolvency. It empowers the courts where the proceeding is taking place to communicate directly with the foreign counterparts. It provides for cooperation between two or more concurrent insolvency proceedings being held simultaneously in separate countries.
The principles in the UNICITRAL model law must be incorporated in the new amendment of the IBC. Before moving on to what changes the amendment will bring, let us first see what is the current provision as per IBC.
Current Provision in IBC for Cross-Border Insolvency
The current provisions under IBC which governs the cross-border insolvency proceedings are: –
- Reciprocal agreement with foreign government- As per Section 234, IBC, there is provision for the central government to enter an agreement with the foreign government. They can create a reciprocal agreement. In this the central government may direct the application of IBC on the assets of the corporate debtor or the personal guarantor situated outside India.
- Request for corporate debtor’s asset situated outside India- The NCLT, on the basis of the application by either the resolution professional, liquidator, or bankruptcy trustee, can give a letter of request to the judicial authority of the country with whom reciprocal agreement has been formed. This provision is given under Section 235, IBC.[i]
Recently there have been many cases filed under IBC where the assets of the corporate debtor were in a jurisdiction outside India. In those cases, the frequent questions were that how can we access those assets. The first case with regard to cross-border insolvency after IBC came into existence was that of State Bank of India vs Jet Airways (India) ltd. [2019] 156 SCL 642. The Jet airways were facing insolvency proceeding simultaneously in India as well as in Netherlands. The NCLT has acknowledged that proceedings had been initiated in the Dutch Court. The Dutch court appointed administrator who moved the NCLT for recognition of the Dutch proceeding. However, it denied to recognise the judgment, even though it was true, because there was no relevant provision for it in the IBC. An appeal was filed against this decision in NCLAT. The NCLAT gave direction based on which a “cross-border insolvency protocol” was agreed upon. According to that, India was the “centre of main interest”, while the Dutch proceeding was a “non-main insolvency proceeding”.
This is one of the cases why India needs an amendment to incorporate cross-border insolvency. It was evident from this case that the present provisions for it is not that effective. In fact, the provision Under section 234 and 235 of IBC is yet to be exercised, i.e., till date India has not entered in any reciprocal agreement with any nation. This needed change was submitted as report by the Insolvency Law Committee on October 16, 2018. The draft proceedings provided and incorporated all the key elements of the UNICITRAL model.
Changes This Amendment Will Bring in the Insolvency Process
Till now the current provision for cross-border insolvency is not very effective. Further, there is no elaborate provision related to cross-border insolvency in IBC. This creates confusion related to jurisdiction, the authority over the assets of the debtor, and the relief to be followed.
The amendment would be beneficial for both Indian as well as foreign creditors. It would allow insolvency professionals (IPs) and creditors to access corporate debtors’ assets outside of India, maximizing value for all stakeholders. Foreign creditors to an Indian entity, similarly, become parties to bankruptcy proceedings if the borrower declares bankruptcy.[ii]
Some of the exceptions of this cross-border insolvency would be pre-pack process. The pre-packaged insolvency resolution process was introduced in the year 2021 itself. Thus, it is in the beginning stage. Further, the financial service providers would also be excluded form the cross-border insolvency. This exception would be owing to the provision of special insolvency process under Section 227 of the code.
Conclusion
To conclude it all, the present provision for cross-border insolvency under IBC is inefficient in tackling cross-border insolvency. The cross-border insolvency according to the UNICITRAL model has been adopted by more than 50 nations. With more inflow of foreign investments in India and vice versa and e-commerce, this change is a need now for the insolvency regime in India.
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[i] https://blog.ipleaders.in/implication-foreign-court-insolvency-proceedings-india/#Current_laws_on_foreign_insolvency.
[ii] https://economictimes.indiatimes.com/news/economy/policy/cross-border-insolvency-cases-government-will-soon-put-out-for-consultation-the-draft-legal-framework/articleshow/87792048.cms.
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