Insolvency Globalization: India's Adoption Of The UNCITRAL Model Law

Abstract

This article talks about India's initiative taken to develop and accommodate the UNCITRAL Model Law on Cross-Border Insolvency and also the expected results on the domestic insolvency framework. The need for an efficient cross-border insolvency mechanism has been stressed through cases such as the Jet Airways and Videocon Industries, where legal jurisdictional complexities coupled with asset recovery challenges have highlighted gaps in India's existing legal framework. The Insolvency and Bankruptcy Code (IBC) is a significant reform in India, yet it does not provide an exhaustive mechanism for dealing with cross-border insolvency. This article discusses the fundamental principle of the Model Law, such as the recognition of foreign proceedings, coordination mechanisms, and asset protection mechanisms, to abate the highlighted shortfalls. The study also analyses the challenges to be faced while implementing the Model Law in India, such as public policy concerns, judicial infrastructure inadequacies, and the necessity to protect domestic creditors. In the end, the article talks about the potential benefits of such harmonization and the hurdles of practical nature standing in the way of its successful implementation.

Introduction

The Jet Airways case, one of India's leading private airlines, was filed simultaneously in India and the Netherlands. This case highlighted the huge lacunas in the current cross-border insolvency framework. This situation underlined the need for a robust mechanism to resolve conflicts arising from the insolvency of multinational corporations and the management of their assets across borders. It further brings about an important opportunity to address the issues and to harmonize with global practices as India proceeds to adopt the UNCITRAL Model Law on Cross-Border Insolvency.

This article analyses the intricacies involved in cross-border insolvency, the relevance of the UNCITRAL Model Law, and its implications for India. In itself, this legal framework, when introduced, does offer some promising benefits but throws up varied challenges, which are worth considering thoughtfully and tactically implemented.

Understanding Cross-Border Insolvency

What Is Cross-Border Insolvency?

In case an insolvent debtor has credit and/or debtors in more than one jurisdiction i.e. in different countries, then the situation is termed to be cross-border insolvency or international insolvency. In the home insolvency procedure, identification of the debtor's assets, identification of credits, and due payable to them is done by the Insolvency Professional whereby, on the basis of the priority rule, claims are settled after receiving approval from the Adjudicatory Authority.

The Insolvency and Bankruptcy Code 2016 was introduced into the Indian market as flagship legislation pertaining to insolvency and bankruptcy. IBC has streamlined the process of insolvency in India but has not provided details on the process for regulating cross-border insolvency proceedings.

Through its Insolvency Law Committee on Cross-Border Insolvency (ILC), the Ministry of Corporate Affairs also examined the use of the Code. Since the present structure of insolvency is not in accordance with the Global Standards, the ILC report further recommends the restructuring of the current framework of law of insolvency and the incorporation of the UNCITRAL Model Law on Cross Border Insolvency 1997 commonly known as Model Law to deal with the issues pertaining to cross-border insolvency in India.¹

Key Challenges in Cross-Border Insolvency

1. Jurisdictional Conflicts: Jurisdictional disputes are common in cross-border insolvency cases. It becomes complicated to decide whether the proceeding should be held in the forum when a debtor's assets and operations are present in another country. Jurisdictional disputes may lead to conflicting judgments and, hence, may delay the proceeding. Parties may take advantage of such uncertainty and agree on an advantageous legal framework. Furthermore, jurisdictional disputes may affect the fairness of the proceeding, for jurisdictions vary in their treatments of debtors and creditors.²
2. Asset Recovery: Cross-border insolvency has significant traceability and asset recovery challenges regarding tracing and retrieving assets located within other countries' jurisdictions. Large international debtors tend to either transfer or hide their assets to another country to prevent creditors or insolvency practitioners from locating and realizing those assets elsewhere. The diversification of systems with regard to the protection of assets, enforcing judgments, and the mechanisms in place for asset recovery may lead to considerable hindrances to effectively retrieving assets. Different countries might have their different regulations in place regarding the freezing of assets orders, recognition of foreign judgments, or creditors' rights to collect assets in foreign countries. In other instances, international agreements or treaties that would enable cross-border claims to be enforced might be missing, and hence hinder the collection of assets.³
3. Coordination: Successful cross-border insolvency resolution essentially depends on the coordination of courts and other stakeholders working under different jurisdictions. However, most of these frameworks lack efficient mechanisms for effective communication and coordination. This results in divergent decisions, higher costs, and longer times. The pertinent issue of a common platform for information distribution among insolvency practitioners, creditors, and other stakeholders working under various legal contexts hampers efficiency and fairness in the process

The UNCITRAL Model Law on Cross-Border Insolvency

Overview

Adopted in 1997 by the United Nations Commission on International Trade Law (UNCITRAL), The Model Law aims to assist States in strengthening their insolvency legislation by providing a modern legal framework that better addresses cross-border insolvency proceedings involving debtors who are under significant financial stress or insolvency. It places greater emphasis on the authorization and encouragement of cooperation and coordination between jurisdictions rather than seeking the unification of substantive insolvency law, and still takes into account the differences among national procedural laws. A cross-border insolvency is that situation where an insolvent debtor possesses assets in several States or when a number of the creditors of the debtor do not originate from the State within which the insolvency proceedings take place.⁴

Key Features

1. Recognition of Foreign Proceedings: One of the key purposes of the Model Law is to ensure that the procedures for the recognition of qualifying foreign proceedings are streamlined in a way that avoids the long-winded legalization and other associated procedures. The aim is that there should be no obscurity about the recognition decision. Such fundamental provisions allow for the recognition of orders granted by foreign courts that initiate qualifying foreign proceedings and appoint the foreign representative for such proceedings. A qualifying foreign proceeding should, if it meets the requirements established, be recognized as either a main proceeding which takes place in the place where the debtor had its centre of main interests at the time when it commenced the foreign proceeding, or as a non-main proceeding which takes place in the place where the debtor has an establishment. The recognition of foreign proceedings under the Model Law gives rise to various effects related to the most important relief provided in order to support the foreign proceeding.
2. Access for Foreign Representatives: These provisions grant representatives of foreign insolvency proceedings and creditors the right to access the courts of an enacting State to seek assistance and allow representatives of local proceedings conducted within the enacting State to seek assistance from other jurisdictions.
3. Relief and Cooperation Mechanisms: A fundamental principle of the Model Law is that any relief deemed central to the adequate and equitable supervision of cross-border insolvencies must be available for the purpose of assisting foreign proceedings. As the Model Law defines the relief available, neither imports the effects of foreign law into the insolvency regime of the enacting State nor grants to the foreign proceedings the relief that would be available under the legislation of the enacting State. The key elements of relief available include interim relief at the discretion of the court between the making 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.
4. Public Policy Exception: These provisions are about the cooperation of the courts of states within which the assets of the debtor are found as well as in the coordination of concurrent proceedings regarding that debtor. The Model Law clearly grants jurisdiction to the courts to cooperate under the areas it covers and direct communication with other foreign courts, and also inter-court cooperation along with foreign representatives and local ones. The provisions relating to coordination of concurrent proceedings are made to promote decisions that would best achieve the purposes of both the proceedings, such as local and foreign proceedings, or multiple foreign proceedings.

Global Adoption

Several jurisdictions, including the United States, United Kingdom, Australia, and Singapore, have successfully implemented the Model Law. Their experiences demonstrate its effectiveness in resolving cross-border insolvencies while ensuring fairness and transparency.

India's Cross-Border Insolvency Landscape

Current Status

The present insolvency regime in India is governed primarily by the Insolvency and Bankruptcy Code (IBC) of 2016, framed by law for addressing the insolvency matters of a domestic nature. It is silent on an altogether comprehensive framework for resolution of the cross-border insolvencies. This has resulted in severe consequences in managing real multinational debtors whose assets are situated in foreign jurisdictions. At the moment, cross-border insolvency cases in the Indian jurisdiction are exercised for the greater part by judicial discretion and limited bilateral treaties with select countries.

1. Judicial Discretion: In absence of any clear and codified framework for cross-border insolvency, Indian courts find themselves relying heavily on judicial discretion to address any issues arising from cases. While interpreting the provisions of the IBC, the Indian judges in meeting the issues on a case-to-case basis may resort to ad hoc solutions, many times based on international precedents and existing legal principles like comity of courts or principles of justice and fairness. Such discretionary powers leave room for an inconsistent outcome as different judges tend to interpret the law differently based on their own consideration of the facts and circumstances of the case. To illustrate, it will be the purview of Indian courts to determine the accepting recognition of foreign insolvency proceedings or for the extent to which relief is granted or enforcement of foreign judgments is verified. The problem of lack of consistency and predictability in the legal process leads to hampered dispute resolution and heightened uncertainty for both creditors and debtors.⁵
2. Bilateral Treaties: At present, India has signed a few limited treaties with some countries that deal with cross-border insolvency matters. Such treaties set general provisions in case, there may be certain specifics for the recognition and enforcement of foreign insolvency proceeding in India. The number of such treaties is still limited as not all countries are covered where Indian corporations or Indian asset may operate. A limited treaty-based bilateral approach creates a fragmented system, where insolvency matters involving multi-jurisdictional interests do not enjoy streamlined procedures or coordination between legal systems. For this reason, cross-border insolvency cases often come up against significant hurdles--inefficiencies and delays--to the extent that recovering assets and coordinating with various legal actions across jurisdictions is concerned.⁶

The Insolvency and Bankruptcy Code (IBC)' in India- the existing law for insolvency- is incomplete in its nature as it covers aspects and the procedure of insolvency only at national or the domestic level by the NCLT; does not talk or discuss anything about the cross-border insolvency related laws. Even there is no provision in the IBC which deals with scenarios of insolvency procedure where the concerned company has its assets or liabilities in more than one country. The process of insolvency for the companies; needs to be fair, clear and transparent irrespective of the area of operations.⁷

Notable Case Studies

1. Jet Airways Case: Insolvency Proceedings in Both India and the Netherlands: The Jet Airways case stands tall among the most conspicuous cases exposing the loopholes in India's cross-border insolvency framework. The year 2019 saw simultaneous commencement of insolvency proceedings in India and the Netherlands, as the airline operated in these two jurisdictions at the same time. Jet Airways went for insolvency proceedings in India under the IBC in NCLT, while its subsidiary in the Netherlands entered into proceedings in the Netherlands. This perfectly showcases the challenges of running multinational corporations when the operations are conducted in multiple jurisdictions.
   The main problem that arose from this case was that there existed no formal, structured mechanism for cross-border cooperation between jurisdictions. Coordination with the Dutch authorities for the purposes of recognition of the foreign proceedings, sharing of information, or even working collaboratively to preserve the assets was beset by judicial discretion in Indian courts. Such independence in proceedings in both countries, in the absence of any clear framework for mutual cooperation, led to delays and complex resolution processes.
   The case emphasized the need for a unified approach towards cross-border insolvency due to discordant handling of assets and liabilities created by the lack of mechanisms facilitating coordination in the IBC. Concerning foreign insolvency proceedings, their lack of formal recognition in India led to disparate legal processes being conducted, which compromised the efficiency of resolving a multi-national company's insolvency.⁸
2. Videocon Industries Case: Complexities arose in recovering assets spread across multiple jurisdictions.
   Videocon's assets were international, making it all the more daunting for creditors and insolvency practitioners to comply with some various legal frameworks and recovery processes in each continent. Different jurisdictions had their rules for recognition of foreign insolvency orders, asset freezing, and creditor claims, which tended to frustrate attempts to identify and liquidate Videocon's global assets. A central or significant coordination process to work with multinational assets under Section 230 of the IBC was absent, severely impeding the enforcement of Indian insolvency orders abroad.
   State Bank of India v. Videocon Industries Limited & Ors. held that for the purpose of the corporate insolvency resolution process, the foreign oil and gas assets and properties, including any claim, interest therein, of Videocon Group held through the foreign subsidiaries of the Corporate Debtor will be regarded as the property of the Corporate Debtor.⁹

Proposed Adoption of UNCITRAL Model Law in India

Key Features of the Proposal

The government aims to incorporate the following principles of the Model Law into the IBC:

1. Recognition of Foreign Judgments: One of the property principles asserted in UNCITRAL Model Law deals with acknowledgement of other jurisdictions as proceedings of extern insolvency. The amended changes would enable the Indian courts to acknowledge insolvency proceedings taken under foreign jurisdictions. This would work to implement orders passed by foreign judicial entities like the United States of America, the European Union, or any other jurisdiction, allowing those foreign insolvency orders to be effective in India.
   This change would, however, mean that the enforcement of orders and judgments for bankruptcy and insolvency of MNCs would no longer require separate proceedings in India by Indian creditors and stakeholders. This would create a faster and streamlined recognition of foreign insolvency proceedings and lessen delays resulting in a more effective mechanism for resolving cross-border insolvency matters. For example, if the liquidation is ordered in a foreign court, this would mean the recognition and enforcement of that liquidation order by Indian courts, thus aiding in the global resolution of insolvencies.¹⁰
2. Coordination Mechanisms¹¹: This cooperation would include:
   
   • Information Sharing: Courts and insolvency practitioners in different countries would be able to share information relevant to the insolvency case. This could include the status of proceedings, assets held by the debtor, and claims filed by creditors.
   • Coordinated Proceedings: Indian courts would work with their foreign counterparts to ensure that insolvency proceedings are conducted in a way that minimizes conflicts and delays. For example, parallel insolvency proceedings in different jurisdictions can be harmonized to avoid contradictory decisions or inconsistent treatment of creditors.
   • Joint Hearings: In certain cases, Indian and foreign courts may hold joint hearings to address issues that involve assets or stakeholders in multiple countries.
3. Asset Protection: Another critical aspect of the proposal is the development of frameworks to protect assets in foreign jurisdictions. The assets often held by multinational companies are often in several countries, and their insolvency dangers and difficulties of protecting and taking control of those assets across borders. The jointly created UNCITRAL Model Law sets out Indian and all national legislation rules for the protection of assets across foreign jurisdictions.
   Aspects proposed involve issuance by Indian courts of orders protecting foreign assets as a part of insolvency proceedings. This could involve freezing orders or some provisional measures preventing the transfer or disposition of assets located in the foreign jurisdiction. In addition, mechanisms to recognize and enforce such orders in other countries would be put in place.

Challenges in Implementation

1. Public Policy Concerns

The public policy exception contained in the UNCITRAL Model Law allows courts the discretion to reject foreign insolvency proceedings if they conflict with core domestic laws or principles. While this protects national interests, it can be overused to reject legitimate claims from abroad. Indian courts should exercise caution, lest they undermine international cooperation and fairness in cross-border insolvency cases.

2. Judicial Infrastructure

Indian courts face challenges in cross-border insolvency due to:

• Limited Expertise: Judges may lack specialized knowledge in international insolvency law, which complicates the handling of complex cases.
• Overburdened System: The judicial backlog in India can delay proceedings, especially for multinational insolvencies requiring international coordination.

Strengthening judicial infrastructure and providing training in cross-border insolvency can help mitigate these challenges.

3. Coordination Issues

The difference in laws between India and other countries gives rise to conflicts arising in the course of proceedings related to:

• Creditor Priority: Since the rules can vary between jurisdictions, it can also lead to differences in how creditors are treated and which can, in turn, create extreme injustices.
• Recognition of Claims: Divergent views regarding the recognition of claims by various legal systems can complicate asset distribution. There must be effective coordination between jurisdictions in order to prevent conflicts and, thereby, ensure equal treatment of all creditors.¹²

4. Domestic Creditors' Protection

In such cases, one of the main concerns involved in the cross-border insolvency is ensuring that the domestic creditors are not worse off for the benefit of the foreign creditor's claims. The fact that the assets were situated abroad or that the insolvency proceedings were initiated outside the jurisdiction may lead to the disposition of other creditors within the country, like domestic creditors, leaving them to feel side-lined by the claims of foreign creditors. If for some reason, the foreign creditors are to be paid ahead of domestic creditors, this could create serious doubts in the minds of very many people regarding the fairness of the whole bankruptcy process and could thus deter investment.

The balance struck in this regard is very important to enhance the integrity and trust of the insolvency regime. There has to be proper consideration by Indian courts in ensuring that the rights and interests of domestic creditors are protected under the foreign order of insolvency, which might treat them barely or not at all. This would include scrutinizing the fairness of the foreign insolvency proceedings and possibly a possibility of coercive measures and exceptions that would ensure proper protection to domestic creditors.

Conclusion

There is a need to spearhead India's efforts toward aligning its insolvency regime with the global standard under the UNCITRAL Model Law on Cross-Border Insolvency. In this globalized economy, complexities concerning cross-border insolvency must be addressed. Cases surrounding Jet Airways and Videocon showed how urgent it was for an orderly handling of insolvency involving various jurisdictions. The proposed integration of the *Model Law* into India's Insolvency and Bankruptcy Code (IBC) augurs well for streamlined proceedings and enhances the cooperation of the courts and the treatment of domestic and foreign creditors alike.

But there are some roadblocks to effective implementation, such as judicial discretion, overlapping with other countries' administration, and really focusing on the need to help the local creditors. Such issues need a balanced reconciliation, achieving global cooperation while mitigating national interests. Strengthening judicial infrastructure and equipping its courts to handle cross-border bankruptcy suits will be vital to the success of the reforms.

In conclusion, though India has moved quite far down the road toward adopting the UNCITRAL Model Law, thus opening an enormous world of opportunities, its success will depend largely on the candidates selected and the manner in which the legal, procedural, and practical hurdles are managed. It is only through a systemic and patient transition that India will gain its well-earned place in the global insolvency space a little more exceptionally, in the service of speedy, equitable, and fair resolution of cross-border insolvencies to creditors and debtors.

Footnotes

1. Lalwani, R., & Tiwari, A. (2022, March 18). An overview of Cross-Border Insolvency in India. Lexology. https://www.lexology.com/library/detail.aspx?g=83c36e66-e1e2-4804-a2ca-329ddb9d8fc1#:~:text=In%202019%2C%20Jet%20Airways%20became,2019.

2. International Insolvency Institute. "Cross-Border Insolvency: Jurisdictional and Procedural Challenges." Retrieved from https://www.iiiglobal.org.

3. Oxford Academic Journals. "The Challenge of Cross-Border Asset Recovery." Journal of International Business Law. Retrieved from https://academic.oup.com

4. UNCITRAL Model Law on Cross-Border Insolvency (1997) | United Nations Commission On International Trade Law. (n.d.). https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency

5. Khanna, P. (2020). "Judicial Discretion and Cross-Border Insolvency: The Indian Perspective." Indian Business Law Journal. Retrieved from https://www.indianbusinesslawjournal.com .

6. Bhattacharya, S. (2019). "India's Bilateral Approach to Cross-Border Insolvency: Current Limitations." Journal of International Insolvency and Bankruptcy Law. Retrieved from https://www.jiibl.com.

7. Cross Border insolvency': the Indian legal regime v rest of the world. (n.d.). Indian J. Integrated Rsch. L., 2–2(III).

8. Cbcl. (2021, November 5). Dealing with Cross-Border Insolvencies: An Analysis of the Jet Airways saga. NLIU CBCL. https://cbcl.nliu.ac.in/insolvency-law/dealing-with-cross-border-insolvencies-an-analysis-of-the-jet-airways-saga/

9. Chandrasekhar, C. (2021, August 8). The strange case of Videocon's insolvency. Frontline. https://frontline.thehindu.com/columns/C_P_Chandrasekhar/the-strange-case-of-videocons-insolvency/article35783499.ece

10. Barot, R., Barot, Sinha, S., Sinha, Jegadeesh, A., Jegadeesh, & AZB & Partners. (2024). How to Obtain Recognition of a Foreign Insolvency Process and How to Enforce Insolvency Related Judgments (India). Practical Law UK. https://www.azbpartners.com/wp-content/uploads/2024/07/How-to-Obtain-Recognition-of-a-Foreign-Insolvency-Process-and-How-to-Enforce-Insolvency-Related-Judgements.pdf

11. Ias, L. (2024, September 27). NAVIGATING CROSS-BORDER INSOLVENCY. Lukmaan IAS. https://blog.lukmaanias.com/2024/09/27/navigating-cross-border-insolvency/

12. Mevorach, I. (2021). Overlapping International Instruments for Enforcement of Insolvency Judgments: Undermining or Strengthening Universalism? European Business Organization Law Review, 22(2), 283–315. https://doi.org/10.1007/s40804-021-00204-4

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