Cross-Border Insolvency in India

Source: This post on Debate related to One Nation, One Election has been created based on article “The Looming Threat to Federalism and Democratic Tenets” published in The Hindu on 4^th January 2025.

UPSC Syllabus topic: GS 2-Polity

Context: The article discusses the challenges and gaps in India’s current legal framework for handling cross-border insolvency cases. As international trade and globalization have grown, India’s insolvency laws have struggled to adapt to the complexities of Cross-Border Insolvency in India.

What challenges does cross-border insolvency pose for India?

1. The growth in international trade has amplified cross-border insolvency challenges, necessitating effective regulations.
2. A reliable insolvency framework is vital for economic stability, attracting foreign investment, and corporate restructuring.
3. Historically, India’s insolvency laws under the British Raj, like the Indian Insolvency Act (1848), and later the Presidency-Towns Insolvency Act (1909) and Provincial Insolvency Act (1920), focused on domestic insolvencies, leaving cross-border insolvencies unaddressed.

How did India’s approach to insolvency laws evolve?

1. Pre-Independence: Existing laws focused on domestic cases with no provision for cross-border insolvency.
2. Post-Independence: Despite the Third Law Commission’s recommendations in 1964, these laws remained outdated.
3. Economic Liberalisation: The 1990s brought discussions on comprehensive insolvency reform.
   1. Committees such as the Eradi (2000), Mitra (2001), and Irani (2005) Committees recommended adopting the UNCITRAL Model Law on Cross-Border Insolvency (1997).
4. IBC 2016: The Insolvency and Bankruptcy Code (IBC) was introduced but lacked robust cross-border provisions.

What provisions in the IBC address cross-border insolvency?

1. Sections 234 and 235 of IBC:
   1. Section 234 allows the government to enforce IBC provisions in foreign countries through reciprocal agreements.
   2. Section 235 outlines procedures to seek assistance from foreign courts via letters of request.
2. Challenges: These sections remain unenforceable due to the lack of reciprocal arrangements and non-notification by the central government.

How did landmark cases highlight cross-border insolvency issues?

1. State Bank of India vs Jet Airways (India) Limited (2019):
   1. Highlighted the absence of reciprocal arrangements with the Netherlands.
   2. Exposed the inactive status of Sections 234 and 235, rendering them “dead letters.”
2. Jet Airways vs State Bank of India (2019):
   1. NCLAT employed an ad hoc “cross-border insolvency protocol” for resolution, showing the lack of a structured framework.

What expert recommendations have been made to address these issues?

1. Committees and Reports:
   1. The Insolvency Law Committee (2018) and Cross-Border Insolvency Rules/Regulation Committee (2020) recommended adopting the UNCITRAL Model Law.
   2. Parliamentary Standing Committee Reports (2021, 2024) stressed the urgent need for cross-border insolvency reforms.
2. Key Recommendations:
   1. Adopt the UNCITRAL Model Law to provide a structured, efficient framework.
   2. Modernise court-to-court communication by adopting Judicial Insolvency Network (JIN) Guidelines (2016) and Modalities (2018).

What are the limitations of the current legal framework?

1. NCLT Jurisdiction:
   1. Section 60(5) of the IBC restricts civil courts from handling insolvency matters, leaving NCLT as the sole adjudicating authority.
   2. NCLT lacks the power to recognise or enforce foreign judgments or proceedings.
2. Operational Challenges:
   1. Failure to implement Rule 11 of the NCLAT Rules (2016) limits the NCLT’s ability to exercise inherent jurisdiction or comity.
   2. Ad hoc solutions like protocols increase judicial burden, transaction costs, and delays.

What reforms are essential for strengthening India’s cross-border insolvency framework?

1. Adopt the UNCITRAL Model Law: Establishes a predictable and efficient cross-border insolvency framework.
2. Modernise Judicial Coordination:
   1. Implement JIN Guidelines (2016) and Modalities (2018) for better court-to-court communication.
3. Expand NCLT Powers:
   1. Enable recognition and enforcement of foreign judgments.
   2. Amend Rule 11 to empower the NCLT with inherent jurisdiction over cross-border matters.

Why is reform urgent for India’s cross-border insolvency framework?

1. Current provisions are inadequate and unenforceable.
2. Reliance on temporary protocols adds delays and costs, reducing asset value.
3. Implementing these reforms will enhance legal predictability, attract foreign investments, and ensure efficient resolution of cross-border insolvencies.