Context: Recently, the Ministry of Corporate Affairs (MCA) has published a draft framework for cross border insolvency proceedings based on the UNCITRAL (United Nations Commission on International Trade Law) model under the Insolvency and Bankruptcy Code (IBC).

• It is proposed to be made applicable for both corporate debtors as well as personal guarantors to such debtors.
• Note: A personal guarantor is a person or an entity that promises the payment of another person’s debt, in case the latter fails to pay it off.

About Insolvency and Bankruptcy Code (IBC)

• The IBC, 2016 is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
• It is a one-stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement.
• The code aims to protect the interests of small investors and make the process of doing business less cumbersome.

Cross border insolvency proceedings

• Cross-border insolvency proceedings are relevant for the resolution of distressed companies with assets and liabilities across multiple jurisdictions.
• A framework for cross-border insolvency proceedings allows for the location of such a company’s foreign assets, the identification of creditors and their claims.
• This helps establishing payment towards claims as well as a process for coordination between courts in different countries.

Current status of foreign stakeholders and courts in other jurisdictions under IBC

• 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.
• Current provisions under the IBC do not allow Indian courts to address the issue of foreign assets of a company being subjected to parallel insolvency proceedings in other jurisdictions.

The UNCITRAL model

• This model is the most widely accepted legal framework to deal with cross-border insolvency issues.
• It has been adopted by 49 countries, including the UK, the US, South Africa, South Korea and Singapore.
• The law allows automatic recognition of foreign proceedings and rulings given by courts in cases where the foreign jurisdiction is adjudged.
• Recognition of foreign proceedings and reliefs is left to the discretion of domestic courts when foreign proceedings are non-main proceedings.

Issues with Indian framework

• The framework for cross-border insolvency adopted in India may require reciprocity from any country which seeks to have its insolvency proceedings recognized by Indian courts.
• This would allow Indian proceedings for foreign corporate debtors to be recognized in foreign jurisdictions.

About UNCITRAL

• It is the core legal body of the United Nations system in the field of international trade law.
• UNCITRAL was established in 1966 with a recognition that international trade cooperation among States is an important factor in the promotion of friendly relations and, consequently, in the maintenance of peace and security.

Since its inception, India is only one of eight countries that has been a member of UNCITRAL.

• Through its several model laws, conventions, legislative guides and robust debates in working groups, UNCITRAL has provided a valuable platform for countries to compare, examine, debate and adopt principles of international commercial and trade law appropriate to their circumstances.
• Perhaps most notably, UNCITRAL promulgated the Convention on International Sale of Goods (CISG).
• The CISG is a model law commonly used as the governing provisions in contracts between parties from different nations.

Why it is considered a step in the right direction?

• As of now, India enters into bilateral arrangements with countries for recognizing our insolvency proceedings on a reciprocal basis. This is not a permanent solution.
• Entering into separate agreements with countries is time-consuming and involves multiple negotiations.
• Moreover, as businesses expand beyond national borders, it is critical for countries to adhere to a common set of principles governing cross-border trade.
• For example, take the case of the United Nations Convention on Recognition and Enforcement of Foreign Awards, popularly known as the New York Convention.
• It has been signed by 167 countries. Thereby, an arbitral award passed in any of the signatory countries will be readily enforceable in the other signatory country without having to initiate separate proceedings.

Key provisions in the draft framework for cross-border insolvency

• Firstly, it enables the assistance of foreign courts or representatives during insolvency proceedings pending in India and vice versa.
• Secondly, it enables the central government to exclude a certain class of entities, such as those providing critical financial services (banks, insurance companies, etc.) from being subjected to cross-border scrutiny.

Thirdly, NCLT is vested with the power to recognize a foreign proceeding as either a “main proceeding” or a “non-main proceeding”.

• Main proceeding – a country where the debtor company has its center of interest
• Non-main proceeding – a country where the debtor merely has an establishment.

Further, the NCLT has been vested with the power to impose moratoriums to preserve the assets of the foreign entity in India.

Key concerns in the draft framework for cross-border insolvency

• First, there is no provision for enforcement of insolvency-related judgments.
• Second, the term public policy that has been included as one of the major grounds to resist the recognition of foreign proceedings has not been defined.

Road Ahead

• First, need to include the provisions for the enforcement of insolvency-related judgments and orders as per the CBIRC’s recommendation.
• Second, considering the wide ambit of the term “public policy”, the lawmakers should streamline its scope to lend clarity to the process.

By: Shubham Tiwari