The Economic Survey 2021-22 has called for a standardised framework for Cross-Border insolvency as the Insolvency & Bankruptcy Code (IBC) at present does not have a standard instrument to restructure the firms involving cross border jurisdictions leading to several issues.
The proposal to frame a robust cross border insolvency framework has already been highlighted in the report of the Insolvency Law Committee (ILC) which hadrecommended the adoption of the United Nations Commission on International Trade Law (UNCITRAL) with certain modifications to make it suitable to the Indian context.
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“In fact, UNCITRAL on Cross-Border Insolvency, 1997 has emerged as the most widely accepted legal framework to deal with cross-border insolvency issues,” the Survey said.
It provides a legislative framework that can be adopted by countries with modifications to suit the domestic context of the enacting jurisdiction.
It has been adopted by 49 countries until now, such as Singapore, the U.K., the U.S., South Africa and Korea.This law addresses the core issues of cross border insolvency cases with the help of four main principles which includes access, recognition, cooperation, and coordination.
It allows foreign professionals and creditors direct access to domestic courts and enables them to participate in and commence domestic insolvency proceedings against a debtor. It also allows recognition of foreign proceedings and enables courts to determine relief accordingly.
Besides, it provides a framework for cooperation between insolvency professionals and courts of countries andallows for coordination in the conduct of concurrent proceedings in different justifications.
Cross border insolvency signifies circumstances in which an insolvent debtor has assets and/or creditors in more than one country.
Typically, domestic laws prescribe procedures, for identifying and locating the debtors’ assets; calling in the assets and converting them into a monetary form; making distributions to creditors in accordance with the appropriate priority etc. for domestic creditors/debtors.
However, there are various insolvency cases in which corporations owes assets and liabilities in more than one country which has created the need for a cross border insolvency framework.
At present, the IBC provides for the domestic laws for the handling of an insolvent enterprise but not to restructure the firms involving cross border jurisdictions. “The problem of not having a cross border framework problem was also expressed by the National Company Law Tribunal (NCLT) in Mumbai in a cross-border insolvency case involving an Indian entity [Jet Airways],” the Survey said.
NCLT stated that while insolvency proceedings against the corporate debtor have already been initiated before a district court in Netherlands, “there is no provision and mechanism in the IBC, at this moment, to recognise the judgment of an insolvency court of any foreign nation. Thus, even if the judgment of foreign court is verified and found to be true, still, sans the relevant provision in the IBC, we cannot take this order on record.”
“The absence of a standardised cross border insolvency framework creates complexities and raises various issues such as theextent to which an insolvency administrator may obtain access to assets held in a foreign country,” the Survey said.
The other issue is priority of payments. Whether local creditors may have access to local assets before funds go to the foreign administration or not. Recognition of the claims of local creditors in a foreign administration is yet another issue.“Recognition and enforcement of local securities, taxation system over local assets where a foreign administrator is appointed,” the survey said.
Presently, while foreign creditors can make claims against a domestic company, the IBC currently does not allow for automatic recognition of any insolvency proceedings in other countries.Cross border insolvency is regulated by Section 234 and 235 of IBC. Section 234 empowers the Central government to enter into bilateral agreements with other countries to resolve situations about cross-border insolvency.
Further, the Adjudicating Authority can issue a letter of request to a court or an authority (under Section 235) competent to deal with a request for evidence or action in connection with insolvency proceedings under the Code in countries with the agreement (under Section 234).
“As can be seen, the current provisions under IBC are ad-hoc in nature and are susceptible to delay. Entering into mutual (reciprocal) agreements require individual long-drawn-out negotiations with each country,” the Survey pointed out. “This leads to uncertainty of outcomes of claims for creditors, debtors and other stakeholders as well,” it emphasised.
