Addressing cross border insolvency

News:  Recently, the Ministry of Corporate Affairs (MCA) has published a draft framework for cross-border insolvency proceedings based on the UNCITRAL Model Law.

Why there is a need for a separate law for cross-border insolvency?

Cross-border insolvency involves a situation where an insolvent debtor has assets or creditors in more than one country. Thereby, a single legal system will not be sufficient to address the issue of insolvency. So, there is a need for a separate law for cross-border insolvency.

What are the steps taken in this regard?

To handle such cases involving cross-border insolvency, the United Nations Commission on International Trade Law proposed the UNCITRAL Model Law on Cross Border Insolvency.

It has provisions allowing foreign insolvency courts, and officials access to domestic courts. It also provides for recognition of orders and judgments passed by insolvency courts located in foreign jurisdictions.

Countries can adopt the UNCITRAL Model Law with modifications, that suit their domestic context. The Model Law has to date been adopted by 49 countries.

What is the status in India?

The insolvency proceedings of Jet Airways and the Videocon Group that had assets and claims from outside India highlighted the need for enacting a law, harmonious with the international best practices.

Consequently, the Ministry of Corporate Affairs (MCA) has published a draft framework for cross-border insolvency proceedings based on the UNCITRAL Model Law.

Why it is considered a step in the right direction?

As of now, India enters into bilateral arrangements with countries for recognizing our insolvency proceedings on a reciprocal basis. This is not a permanent solution.

Entering into separate agreements with countries is time-consuming and involves multiple negotiations.

Moreover, as businesses expand beyond national borders, it is critical for countries to adhere to a common set of principles governing cross-border trade.

For example, take the case of the United Nations Convention on Recognition and Enforcement of Foreign Awards, popularly known as the New York Convention.

It has been signed by 167 countries. Thereby, an arbitral award passed in any of the signatory countries will be readily enforceable in the other signatory country without having to initiate separate proceedings.

What are the key provisions in the draft framework for cross-border insolvency?

Firstly, it enables the assistance of foreign courts or representatives during insolvency proceedings pending in India and vice versa.

Secondly, it enables the central government to exclude a certain class of entities, such as those providing critical financial services (banks, insurance companies, etc.) from being subjected to cross-border scrutiny.

Thirdly, NCLT is vested with the power to recognize a foreign proceeding as either a “main proceeding” or a “non-main proceeding”

    Main proceeding – a country where the debtor company has its center of interest

    Non-main proceeding – a country where the debtor merely has an establishment.

Further, the NCLT has been vested with the power to impose moratoriums to preserve the assets of the foreign entity in India.

What are the concerns in the draft framework for cross-border insolvency?

First, there is no provision for enforcement of insolvency-related judgments.

Second, the term public policy that has been included as one of the major grounds to resist the recognition of foreign proceedings has not been defined.

What is the way forward?

First, need to include the provisions for the enforcement of insolvency-related judgments and orders as per the CBIRC’s recommendation.

Second, considering the wide ambit of the term “public policy”, the lawmakers should streamline its scope to lend clarity to the process.

Source: This post is based on the article “Addressing cross-border insolvency” published in Indian Express on 17^th Dec 2021.