Planely Evident – India needs a cross-border insolvency framework soon as supply chains are global

Source: The post is based on the article “Planely Evident – India needs a cross-border insolvency framework soon as supply chains are global” published in The Times of India on 16th May 2023.

Syllabus: GS – 3: changes in industrial policy and their effects on industrial growth.

Relevance: About cross-border insolvency framework.

News: India’s aviation industry is dependent on a global supply chain for its operations. The voluntary insolvency sought by Go First has once again highlighted the cross-border spillover of a domestic problem.

What are the reasons behind Go Air’s insolvency?

What is the core issue with India’s cross-border insolvency framework?

Barring foreign firms: The Insolvency and Bankruptcy Code represents a transition from a regime of ‘debtor-in-possession’ to ‘creditor-in-control’. For example, in aviation, foreign aircraft lessors are barred from taking possession of their assets when the insolvency process is on. This can have negative fallout for other domestic airlines in cross-border insolvencies.

Non-adhere to time limits: The biggest challenge IBC faces is overshooting the legally mandated time to complete the process. For example, against the mandated timeline of a maximum of 330 days to finish the resolution process, the average time taken for closure at the end of March was 614 days. Of the ongoing resolution cases, 64% have already exceeded 270 days.

This creates the following issues a) erodes the value of firms facing resolution, b) limits financial creditors’ claims. For instance, on average creditors are able to realise just 32% of their claims, and c) undermines the credibility of IBC.

What are the other issues with the cross-border insolvency framework?

There’s a template available in the form of a UN model law on cross-border insolvency. Despite that, the cross-border insolvency laws across countries are not uniform. For instance, during the Jet Airways insolvency, a parallel proceeding was underway in the Netherlands. Both Indian and Dutch resolution efforts managed to agree on a cross-border insolvency protocol that received NCLAT’s approval.

What should be done?

NCLTs need to find ways to reduce the time taken to decide on the admission of a firm into insolvency proceedings. During the process, stakeholders also need to follow deadlines to end procedural uncertainty.

India also needs a cross-border insolvency framework as the supply chains are becoming more global.