The proposal to create a robust cross-border insolvency framework has already been highlighted in the report of the Insolvency Law Committee
Economic Survey 2021-22 has called for a standardized framework for cross-border insolvency as the Insolvency and Bankruptcy Code (IBC) currently does not have a standard instrument for restructuring firms with cross-border jurisdictions due to several issues.
The proposal to create a robust cross-border insolvency framework has already been highlighted in the report of the Insolvency Law Committee (ILC), which submitted to the United Nations Commission on International Trade Law (UNCITRAL) with some modifications to make it suitable. was recommended for adoption. Indian context.
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“Indeed, UNCITRAL on Cross-Border Insolvency, 1997 has emerged as the most widely accepted legal framework for dealing with cross-border insolvency issues,” the survey said.
It provides a legislative framework that can be adopted by countries with amendments to suit the domestic context of the enacted jurisdiction.
It has been adopted by 49 countries so far, such as Singapore, UK, US, South Africa and Korea. The law addresses the core issues of cross-border insolvency cases with the help of four main principles which include access, recognition, cooperation. , and coordination.
It allows direct access to domestic courts to foreign professionals and creditors and enables them to participate in and initiate domestic insolvency proceedings against the debtor. It also allows recognition of foreign proceedings and enables courts to determine relief accordingly.
In addition, it provides a framework for cooperation between insolvency professionals and the courts of countries and allows coordination in the conduct of concurrent proceedings in various justifications.
Cross border insolvency refers to situations in which an insolvent debtor has assets and/or creditors in more than one country.
Typically, domestic laws set out procedures for identifying and locating debtors’ assets; Calling assets and converting them into monetary form; To make distribution to the creditors as per due priority etc. to the domestic creditors/debtors.
However, there are many bankruptcy cases in which corporations owe assets and liabilities in more than one country, creating the need for a cross-border insolvency framework.
Currently, the IBC provides domestic laws for handling an insolvent enterprise, but not for restructuring firms with cross-border jurisdictions. “The problem of not having a cross-border structure was also articulated by the National Company Law Tribunal (NCLT) in Mumbai in a cross-border insolvency case involving an Indian entity. [Jet Airways],” said the survey.
The NCLT noted that insolvency proceedings have been initiated against the corporate debtor before a district court in the Netherlands, but at present there is no provision and mechanism in the IBC to recognize the decision of an insolvency court of a foreign nation. Thus, even if the decision of the foreign court is verified and found to be correct, yet, without the relevant provision in the IBC, we cannot take this order on record.
“The absence of a standardized cross-border insolvency framework creates complications and raises various issues such as how an insolvency administrator can gain access to assets held in a foreign country,” the survey said.
The second issue is the priority of payment. Whether local creditors may or may not have access to local assets before the money goes to the foreign administration. The recognition of the claims of local creditors in a foreign administration is yet another issue. “Recognition and enforcement of local securities, taxation systems on local properties where a foreign administrator is appointed,” the survey said.
Currently, while foreign creditors can make a claim against a domestic company, the IBC does not currently allow the automatic recognition of any insolvency proceedings in other countries. Cross-border insolvency is regulated by sections 234 and 235 of the IBC. Section 234 empowers the central government to enter into bilateral agreements with other countries to resolve situations regarding cross-border insolvency.
In addition, the adjudicating authority may issue a letter of request to any court or authority (under section 235) competent to deal with a request for evidence or action in relation to insolvency proceedings under the Code in the countries of agreement (under section 234). under).
“As can be seen, the existing provisions under IBC are ad-hoc in nature and are susceptible to delays. Entering into reciprocal (reciprocal) agreements requires individual long-term negotiations with each country,” the survey pointed out. “It also leads to uncertainty of the consequences of claims from creditors, debtors and other stakeholders,” it emphasized.
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