Contributed by Sarthak Bhatia and Mansi Joshi

The volume of transactions involving international trade and investment has increased in tandem with the pace of globalisation. As a direct result, there is currently a network of intrinsic global interactions as the economies of the world become more interconnected. Consequently, in a worldwide market like this one, the inability of any corporate organisation to meet its commitments has an impact on several different countries

In India, the Code of Civil Procedure, 1908 hereinafter referred as CPC, acknowledges foreign courts and rulings as well as foreign jurisdictions. However, the Bankruptcy Law Reforms Committee’s (BLRC) recommendations were the basis for a draft law that eventually became the Code, which incorporated the mechanism for cross-border insolvency. The Joint Parliamentary Committee then had a look at this proposed bill in 2016. Later on, the statute was amended to include Sections 234 and 235 that addressed the issue. Section 234 provides that an agreement can be made by the Indian government with another country’s government for enforcing the provisions of the Insolvency and bankruptcy code.  Under this, assets located in a country where an agreement under the said section has been made can be handled by a court there, and under Section 235, the Central Government can sign bilateral agreements with other nations to further the goals of enforcing the Code.

Establishing a cross-border insolvency regime can provide several benefits; nevertheless, numerous issues that must be addressed, one of which is the bankruptcy ecosystem’s overall preparedness. Furthermore, it would enable Indian creditors to look for overseas assets owned by Indian debtors in the course of debt settlement negotiations. Not only that, but it would also enable foreign creditors to start or take part in bankruptcy procedures in local courts. Under such a regime, any moratorium on the collection of dues ordered by a court outside India would likewise apply, and in some cases, it would also apply in India.

The UNCITRAL Model Law on Cross Border Insolvency, 1997

“The United Nations Commission on International Trade Law (UNCITRAL)” introduced the “UNCITRAL Model Law on Cross-Border Insolvency in 1997” as a solution to effectively handle cases involving insolvency across different countries. This Model Law, adopted on May 30, 1997, offers a framework for countries to streamline and coordinate their approach to cross-border insolvency proceedings. It facilitates the recognition of foreign insolvency proceedings, encourages cooperation among courts, and protects the rights of creditors. The aim is to create a fair and transparent process for resolving insolvency cases that span multiple jurisdictions. Many countries have embraced this Model Law to enhance their legal systems in dealing with international insolvency matters.

Nations can integrate the “UNCITRAL Model Law on Cross-Border Insolvency” into their legal systems to effectively handle and resolve complex cross-border insolvency matters. In contrast to a United Nations convention, the Model Law does not mandate a country to formally inform the United Nations or other nations when implementing it. This flexibility allows states to adopt the Model Law independently, without the need for extensive international notifications. The goal is to empower countries to strengthen their domestic legal frameworks autonomously, promoting smoother collaboration in addressing challenging cross-border insolvency issues.

The Model Law is relevant in the following situations:

a. When a foreign court or insolvency professional seeks assistance in specific countries.

b. When assistance is requested in a foreign country concerning ongoing domestic proceedings, and both foreign and domestic proceedings are happening simultaneously,

c. When international creditors and other interested parties want to start or participate in bankruptcy procedures within their own country.

The Model Law does not require the compulsory alignment of the substantive domestic laws of the different nations adopting it. Instead, it suggests four components to streamline the cross-border insolvency resolution process.

The following outlines how the Model Law procedure works in a nutshell.

1. Access: With the Model Law, international creditors and insolvency officials can interact with domestic courts “directly,” which gives them the ability to take an active role in and start insolvency proceedings against a debtor.
2. Recognition: Under the Model Law, domestic courts can recognize and acknowledge foreign proceedings and their remedies. If the domestic court determines that the debtor’s primary interests lie in a foreign country (referred to as the “centre of main interests” or “COMI”), it views the primary proceedings as the insolvency procedures in that foreign nation. Automatic remedy, such as a stay or moratorium on connected domestic procedures, is initiated by this recognition Greater powers are granted to the foreign representative for managing the company’s assets. In cases of non-main proceedings, the domestic court has discretionary power to grant relief.
3. Cooperation: The Model Law establishes the framework for collaboration between international and domestic insolvency experts as well as courts. It creates channels of direct interaction between foreign insolvency representatives and domestic insolvency professionals, as well as between domestic courts and foreign courts, foreign insolvency representatives and domestic insolvency professionals, and domestic courts and foreign courts. These channels enable efficient cooperation to effectively manage the conduct of concurrent processes in several countries and to foster collaboration between insolvency professionals and courts in different jurisdictions.
4. Coordination: When cross border insolvency procedures are already in progress, the Model Law provide a basis for starting domestic proceedings, and vice versa. It promotes cooperation between courts in managing two or more concurrent insolvency cases in several jurisdictions for professionals.

Draft Part Z

To address the deficiencies of present-day cross-border insolvency procedure, or lack thereof, India produced a set of draft rules that included a specific chapter on the subject, termed Part Z (the Draft chapter).

Model Law is the foundation of the Draft. The ILC submitted a report on October 16, 2018, endorsing the Draft guidelines. The provisions of the Model Law were integrated into the Indian framework as soon as it became clear that it had to be accepted. The “Cross-Border Insolvency Rules/ Regulation Committee (CBIRC)” described as the Draft Part Z subordinate legislation is a result of this.

Hurdles and Lacunae in the Proposed Draft

The Model Law does not offer an enterprise-wide structure; it is exclusively intended for individual businesses. With global financial integration growing and the number of multinational corporations rising, the current model framework is predicted to become less applicable. Importantly, it is also important to remember that Part III of the IBC has not been informed yet, therefore it is anticipated that the existing model framework will become less relevant as multinational firms proliferate and global financial integration increases. This limits the Model Law’s applicability to corporate debtors alone, excluding partnerships and private people. Singapore had initially used a similar strategy. Nonetheless, the legislation is not limited to corporate debtors in the US and the UK.

The Companies Act, 2013, Section 375(3)(b) addresses the insolvency of unregistered firms, which may also include international corporations under its purview. This clause states that an unregistered business that can’t pay its debts will be closed up. Section 220 of the Companies Act, 2006 (US) addresses insolvency for all categories of businesses in the US. In the United Kingdom, on the other hand, there is no equivalent provision and all forms of enterprise insolvency are controlled solely by the Insolvency Law. This abundance of provisions causes regimes to be deceptive and confusing to rule. These parts must be harmonised by making the required changes to unify all bankruptcy procedures under one roof.

The proposed draft’s Section 17 gives the tribunal the authority to establish a moratorium in relation to international primary proceedings, allowing debtors to legally delay payment. A foreign primary proceeding is one that is being handled outside of the nation in which the debtor has its principal place of business, such as its incorporation or headquarters. If a foreign process is filed in a location where the debtor just has an establishment or place of business, it is considered a “non-main” proceeding.

Conclusion

There is no clear legal structure in India for handling international bankruptcy cases. Nonetheless, the nation has sensed the necessity to create the aforementioned legal structure for many years and is making a real effort to complete it. Numerous committees composed of scholars have been formed in the endeavour to address this issue. The government intends to amend the bankruptcy and Bankruptcy Code to include a chapter on cross-border bankruptcy based on the recommendations of the aforementioned committees. The Indian government’s revision to the IBC is, in some ways, a positive move in the right direction. The main objective of the Code is to maximise asset value in a time-linked manner by revising and insolvency. Notwithstanding the uncertainties, the directive is a positive start towards preventing abuse in the current economic climate. The country will be able to resolve issues that may develop for Indian enterprises that have assets overseas and vice versa with the aid of the planned cross-border insolvency framework. However, things like the treatment of corporate groups in bankruptcy proceedings will remain challenging.