Given the increased intertwining of national economies, cross-border insolvency presents salient legal and financial difficulty. Upon the existence of an insolvent debtor in more than one country, the necessity to deal with assets and/or creditors creates very complicated jurisdictional problems and other legal issues. Most of the time, a company will operate in several jurisdictions and hence face very complicated transnational insolvency scenarios. Cross-border insolvency involves a situation where an insolvent debtor has assets or creditors in several countries, making it necessary to combine different legal systems to deal with the estate of the debtor effectively. With globalization constantly propelling global trade and commerce, the cross-border insolvency legal structures have undergone tremendous transformations. The article aims at discussing the concept of cross-border insolvency, its theoretical base, international regulatory mechanisms, the existing legal framework of India, difficulties faced, significant case law, and new developments.
Current Scenario of Cross-Border Insolvency in India
The Ministry of Corporate Affairs (MCA) in India continues to strive towards enhancing a proper cross–border insolvency system. For the IBC, in particular, the Ministry of Justice sought public input on the framework in November 2021 to apply the UNCITRAL Model Law while making certain changes.
For example, the case of insolvency proceedings of companies such as Byju's reflected a common problem that management of international creditors and assets is still very relevant in a cross-border environment. This is why a clear, certain legal system of Cross-border insolvency becomes so vital for India.
Cross-border insolvency has become a critical legal and financial challenge in the present increasingly global economy. The existing legislative framework includes 'The Insolvency and Bankruptcy Code, 2016, which so far has only provided scant cross-border insolvency provisions through sections 234 and 235. These are considered to be widely inadequate for full international insolvency management.
Section 234 gives the Indian government the power to enter into bilateral agreements with other countries in order to manage cross-border insolvency cases.
Section 235 provides for the Indian courts to approach foreign courts for cooperation in the distribution of corporate debtor assets lying abroad.
Insolvency Law Committee
In October 2018, this committee submitted a detailed report, advising on a framework for cross-border insolvency that is to be strongly provided for. Amongst various recommendations put forth by the committee, some vital recommendations are as follows-
- Adoption of the UNCITRAL Model Law on Cross-Border Insolvency;
- Creation of a separate chapter in the IBC meant to deal with international insolvency situations;
- Clear protocols for cooperation between domestic curators and foreign courts.
Cross-Border Insolvency Rules and Regulations Committee
The CBIRC made very procedural recommendations such as:
- To allow foreign representatives to access Indian insolvency proceedings
- Set up inter-jurisdictional protocols on communication among the adjudicating authorities
- Building institutional capacities of the National Company Law Tribunal (NCLT) and Insolvency and Bankruptcy Board of India (IBBI).
Theoretical Foundations Of Cross-Border Insolvency
Knowledge of the following theoretical approaches is necessary to understand cross-border insolvency and some of the types are delineated below-
- Territorial Approach – This is the application of a country's own bankruptcy law for assets and creditors in its area, irrespective of legal processes in other countries. Control is exercised over each area; however, results can become chaotic and ineffective.
- Universalist Approach – One bankruptcy case is held in the main place where the debtor is located, and the decision is recognized and enforced worldwide. This leads to consistency and efficiency, as shown in the UNCITRAL Model Law on Cross-Border Insolvency.
- Hybrid Approach – The hybrid approach thus combines the elements of both territorial and universalist approaches. It aims to help jurisdictions cooperate together yet simultaneously have the opportunity to apply their respective laws.
International Frameworks For Cross-Border Insolvency
UNCITRAL Model Law on Cross-Border Insolvency
The United Nations Commission on International Trade Law adopted the UNCITRAL Model Law on Cross-Border Insolvency back in 1997. It is a comprehensive model law designed to promote cooperation and coordination in cross-border insolvency matters. The four core elements of this law include:
- Access – Gives foreign insolvency representatives and creditors access to local courts to seek aid.
- Recognition – It enables courts to recognize foreign insolvency proceedings and determine their effectiveness in domestic jurisdictions.
- Relief – Courts can offer relief for the assistance of foreign insolvency proceedings.
- Cooperation – Domestic and foreign courts and insolvency practitioners are encouraged to cooperate.
So far, 46 jurisdictions have adopted this model. Some of the major economies are the United States, Japan, the United Kingdom, Australia, and Canada.
European Union Regulation on Insolvency Proceedings
The European Union Regulation on Insolvency Proceedings, EC Regulation 2000 is supposed to make insolvency procedures in the EU more effective. This regulation has been operational since May 31, 2002. It provides for a framework to start and recognize proceedings, automatically recognized between member states. In determining the jurisdiction where the principal insolvency action will be managed, the regulation uses the "centre of main interests" or COMI concept.
Cross-Border Insolvency in India
The Insolvency and Bankruptcy Code of 2016, in India, deals with the issue of insolvency but only provides a minimalistic view towards cross-border insolvency. To be more specific, sections 234 and 235 of the IBC allow the Indian government to sign bilateral agreements with other countries and provide the Indian courts with the opportunity to seek help from foreign jurisdictions while administering cases involving cross-border insolvency. Yet, there is a lack of a comprehensive framework that impedes the smooth handling of these cases.
The Insolvency Law Committee was formed to suggest the adoption of the UNCITRAL Model Law adapted to the Indian context. The committee's report submitted on October 2018 stated that the adoption of the Model Law would increase investor confidence and provide an orderly approach to cross-border insolvency issues.
Cross-Border Insolvency Issues
Though the international framework is expanding, several cross-border insolvency cases face challenges in the following ways:
- Conflicting Jurisdictional Claims- Questions regarding the place of insolvency can always be disputed with more than one country holding interests.
- Recognition and Enforcement- As mutual recognition platforms are lacking, enforcing insolvency judgments between the borders becomes hard and unpredictable.
- Divergent Legal Systems- Differences in laws related to insolvency, creditors' rights, and procedural provisions between countries further add to the complexity of coordination in cross-border insolvency procedures.
- Asset Recovery- Discovery, protection, and return of assets lying in a foreign country are still one of the huge challenges in cases of cross-border insolvency.
Judicial Precedents of Cross-border Insolvency in India
The Indian judiciary has through various cases identified the intricacies of cross-border insolvency such as Jet Airways (India) Ltd. v. State Bank of India & Anr. (2020 SCC OnLine NCLAT 1198) wherein the NCLT permitted participation in the Indian insolvency procedure for Jet Airways from the Dutch administrator on the platform of cross-border cooperation. On these grounds, formal recognition has become a necessity even when foreign proceedings exist.
In Ruchi Soya Industries Ltd. v. Union of India (2021 SCC OnLine SC 567), the Supreme Court addressed various issues related to the rights of creditors in the different jurisdictions while underlining the importance of harmonised laws for equitable treatment
State Bank of India & Others v. Kingfisher Airlines (AIRONLINE 2017 SC 750) brought the question of applicability of Indian insolvency law to foreign creditors and assets outside India.
Conclusion
That is why the problem of cross-border insolvency is considered to be one of the most significant trends in modern legislation governing this process, especially while progressively more companies are becoming international. Currently, India has an IBC, 2016, that addresses the domestic issue of insolvency but there isn't a well-established framework to handle cross-border insolvency. Even in the areas where NOCs are allowed under Sections 234 and 235 of the IBC through bilateral agreements and assistance from foreign courts, there is evidently little action needed for reform.
Amendments in these rules would ensure that the framework relating to cross-border insolvency is codified in a structured and reasonable manner involving the Indian legal system which is the UNCITRAL Model Law on Cross Border Insolvency needs to be adopted with slight variations. This would enhance economic stability, overseas investment and corporate remodelling. Though, there has been a progressive attempt in handling insolvency problems locally in India, yet, the lack of adequate legislation on cross-border insolvency still persists as the black spot which should be closed to Foreign Liabilities and Assets that aims to provide a better and more efficient conclusion for overseas creditors and debtors .ng the UNCITRAL Model Law with necessary modifications.
Notably, the insolvency proceedings involving a multinational company such as Byju's highlight challenges in managing international creditors and assets in a cross-border context. In this regard, these cases are a reminder that India needs to have a better-structured and predictable legal framework for cross-border insolvency.
In modern insolvency law, cross-border insolvency becomes one of the very critical areas as it has developed with globalization across various jurisdictions for businesses. Under the present scheme of things, India has mostly dealt with issues of domestic insolvency under the IBC 2016 and lacks a coherent mechanism to handle cross-border insolvency. Bilateral agreements or foreign court assistance under Sections 234 and 235 of IBC remain on paper as largely unimplemented measures of the present regime and require reforms in the area.
The adoption of the UNCITRAL Model Law on Cross-Border Insolvency, suitably adapted to the Indian legal framework, would provide for a structured and predictable process in handling cases involving insolvency spread across multiple jurisdictions. This would enhance economic stability, attract foreign investment, and facilitate corporate restructuring. While India has taken significant strides in addressing insolvency issues domestically, the absence of a comprehensive cross-border insolvency framework remains a gap that must be addressed to ensure a more efficient and effective resolution process for international creditors and debtors alike.
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