File No. 30/27/2018-Insolvency Section
Government of India
Ministry of Corporate Affairs
Date: 24th November 2021
Invitation of comments from public on Cross-Border Insolvency under Insolvency and Bankruptcy Code, 2016
'Cross-border insolvency' denotes circumstances in which an insolvent debtor has assets and/or creditors in more than one country. With the rapid increase in globalisation and the advent of sophisticated communications technology, cross-border trade and investment has increased the dependence of national economies on each other. The impact of business failure in such a globalised market economy often spans beyond national boundaries. Consequently, insolvency laws need to account for domestic as well as cross-border scenarios.
Domestic insolvency laws, inter alia, deal with establishing rights of various stakeholders during insolvency proceedings and prescribe procedures at various stages of the proceedings, such as locating the debtor's assets; identifying creditors of the debtor and their claims; establishing the manner of determining the means of repaying creditors and making distributions based on priority rules, etc. In a cross-border insolvency context, the law in a country will need to provide additional rules to deal with complexities such as the extent of access available to foreign insolvency practitioners to assets held in the respective country; rights of foreign creditors in respect of distribution in the respective country; the validity of orders of an adjudicatory forum in a foreign country, etc.
Such additional complexities in dealing with cross-border insolvencies result in uncertainty, risk, and ultimately costs to businesses. To resolve these concerns holistically, the need for having robust institutional arrangements to deal with cross-border insolvency issues has gained momentum in various jurisdictions, particularly under the aegis of UNCITRAL Model Law, during the last few decades. This note discusses the policy deliberations on the enactment of a cross-border insolvency law in India.
India reformed its erstwhile insolvency regime by enacting the Insolvency and Bankruptcy Code, 2016 ("IBC/Code") that inter alia consolidates the laws relating to insolvency of corporate entities, individuals and partnership firms. The Code has transformed the insolvency landscape in the country by providing reorganization, liquidation and bankruptcy processes that aim at maximizing the value of assets in a time-bound manner, promote entrepreneurship, availability of credit, and balance the interests of all stakeholders.
The initial draft of the Insolvency and Bankruptcy Bill did not contain any provisions to deal with cross-border insolvency. The Bankruptcy Law Reforms Committee ("BLRC"), which recommended the design of the IBC, noted the following in its report in November 2015 –
"The Committee has taken up, and attempted to comprehensively solve, the question of bankruptcy and insolvency insofar as it is a purely domestic question. This is an important first milestone for India.
The next frontier lies in addressing cross-border issues. This includes Indian financial firms having claims upon defaulting firms which are global, or global financial persons having claims upon Indian defaulting firms.
Some important elements of internationalization – foreign holders of corporate bonds issued in India, or borrowing abroad by an Indian firm – are dealt with by the present report. However, there are many other elements of cross border insolvency which are not addressed by this report. Examples of these problems include thousands of Indian firms have become multinationals, and Indian financial investors that lend to overseas persons.
The Committee proposes to take up this work in the next stage of its deliberations." The draft Bill prepared based on the recommendations of the BLRC was reviewed by a Joint Parliamentary Committee ("JPC") before its enactment. The JPC made several changes to the draft Bill and made the following observations in respect of cross-border insolvency in its report in April 2016 –
"The Committee deliberated the issue and noted that 'The Code at present does not explicitly deal with issues and text related to cross border insolvency. However given that many corporate transactions and businesses today involve an international and cross border element, the implications of cross border insolvency cannot be ignored for too long if India is to have a comprehensive and long lasting insolvency law as the Code aims to achieve. Not incorporating this will lead to an incomplete Code"
Thereafter, two provisions were added to the draft Bill to deal with cross-border insolvency issues - Sections 234 and 235 of the IBC. Section 234 empowers the Central Government to enter into bilateral agreements with other countries to resolve situations of cross-border insolvency. Section 235 allows the Adjudicating Authority ("AA") to issue a letter of request to a court in a country with which an agreement under Section 234 has been entered into, to deal with assets situated in that country.
These provisions provide a basic framework for cross-border insolvency. Entering into agreements or treaties with various countries may be time-consuming, costly, and involve multiple negotiations. Further, in scenarios where multiple countries are involved in an insolvency proceeding, balancing competing clauses of such treaties may become difficult to handle. This was also acknowledged by the JPC and is evident from its observation where it
noted that "But cross border insolvency has a larger issue. There can be a multinational company having branches elsewhere and they actually go for liquidation somewhere. That may have a ramification. There are various other issues. Later on, these issues perhaps could be considered."
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