Our Indian legal system on insolvency and bankruptcy has been criticized for being outdated and creditor unfriendly. The Indian Insolvency and Bankruptcy Code came into effect on May 28, 2016, which provides a consolidated framework for the insolvency of companies, limited and unlimited liability partnerships, and individuals.
The Indian Insolvency and Bankruptcy Code is being framed for time-bound recovery of dues from insolvent debtors in India and for contributing to the ease of doing business in India.
This code helps in filling the gaps which are required to be filled to make cross-border insolvency provisions more effective.
Cross-border insolvency is also referred as international insolvency. Bankruptcy Code regulates the treatment of financially distressed debtors where such debtors have assets or creditors in more than one country across the world.
When the Bankruptcy Code was first introduced in India, it was completely silent on the issue of cross border Insolvency. However, a mechanism for dealing with cross-border insolvency was introduced into the Bankruptcy Code on the basis of recommendations from the Report of the Joint Committee on the Insolvency and Bankruptcy Code 2015. Every day, Indian businesses are having more and more international transactions which create a requirement for a strong mechanism to resolve international creditor-debtor relationship.
What is cross-border insolvency?
Issues related to Cross border insolvency arise When operations of a company are in financial distress. It can be classified as:
- Foreign creditors have rights/claims over a debtor’s assets in another jurisdiction where insolvency proceedings are underway;
- Debtor has branches/assets in several jurisdictions, including a jurisdiction other than where the insolvency proceedings are underway;
- Debtor entity is subject to insolvency proceedings simultaneously in one or more jurisdictions.
- Recognition of foreign insolvency proceedings is the main objectives of a legal system that seeks to address cross-border insolvency.
Following situations can arise under cross border insolvency cases:
- There has been a growth in cross-border investment activity, with increasing globalization. With the effective system of cross-border insolvency laws, it will strengthen global trade and investment.
- There may be a number of foreign creditors of an insolvent company who would like to ensure that their rights are protected even though they may not be based in the country where the insolvency resolution is taking place.
- It can happen that assets of an insolvent company located in another jurisdiction of any other country, which its creditors may want to access as part of the insolvency proceedings.
- There can be insolvency proceedings with respect to the same debtor and ongoing in more than one country.
- The corporate group could face financial difficulties and proceedings within the group which is commenced in different jurisdictions against different legal entities. In our country, the enforcement of decrees is governed by the Code of Civil Procedure 1908, which is the applicable procedural law for civil cases.The Insolvency and Bankruptcy Code stipulates following solutions regarding cross-border insolvency:
- The decision taken by an executive body or a quasi-judicial body shall not be treated as a foreign judgment. During insolvency proceedings, orders passed by a foreign tribunal are not enforceable by Indian courts.
Circumstances under Which Courts in your Jurisdiction Recognize the Validity of Foreign Insolvency Proceedings
- Government can enter into agreements with other countries to enforce the Insolvency and Bankruptcy Code;
- National Company Law Tribunal can issue orders to the authority to write a letter to the courts and authorities of other countries to seek information or request action in relation to the assets of the debtor situated outside India.
Cross Border Insolvency and Bankruptcy Code
It is very important to ensure that foreign entities have full rights to collect their dues like Indian entities.
- Bankruptcy code helps in following ways for promoting FDI in India and standardize regulations on par with foreign countries:
- Some provisions have been made under the Bankruptcy Code to address the issue of cross border insolvency. Under this foreign & domestic creditors are not discriminated. Under the new legislation, foreign creditors can participate in the cross border insolvency proceedings because “person not resident in India” has been included in the definition of persons and under the definition of creditors. On the liquidation of an Insolvent company, foreign creditors shall have the same right as domestic creditors regarding the distribution of assets.
- United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency has not been adopted by India yet. In case of bilateral agreements, it will be a difficult and lengthy process to negotiate an agreement with each country.
- By promoting cooperation between the courts and other competent authorities of different countries, a law regarding cross-border insolvency helps in providing effective mechanisms for dealing with cross-border insolvency.
- Greater legal certainty for trade and investment, fair and efficient administration of cross-border insolvencies that protects the interests of all stakeholders.
- Protection and maximization of the value of the debtor’s assets.
- Rescue of financially troubled businesses, thereby protecting investment and preserving employment.