The Insolvency and Bankruptcy Code of 2016 is considered historic legislation. The law has evolved with each step and continues to achieve the goals set out for it. The IBC, through frequent amendments, has responded well to the challenges posed by the Indian situation. The most recent and most welcome initiative has been the launch of pre-defined insolvency proceedings for the benefit of MSMEs.
The five-year-old law is now ready for another amendment, the second for this year, to expand the Code’s scope to include cross-border insolvency matters. The proposed framework is new. He refined the Model Law to adapt it to the context and requirements of India. It provides a general legislative framework at the level of principles in the draft Part Z, submitted by the government for public comment.
The economic imperative of introducing a cross-border framework is compelling. Economic growth since the 1990s has been driven by liberalization, modernization and globalization, ensuring overall efficiency in the allocation of economic activities. The increased interdependence of economies has resulted in high levels of cross-border investment, foreign borrowing, and movement of people between countries.
In the midst of all the gains is the real risk of failure which is no longer limited to a single economy. Financial risks are transmitted through global markets and the lack of a comprehensive framework to deal with cross-border risks hampers potential businesses and investments. Cross-border resolution issues are further complicated when an insolvent debtor has assets and / or creditors in more than one territorial jurisdiction that have conflicting national bankruptcy and insolvency regimes, governed by the principles of territorialism.
There is also the problem of the lack of cooperation between foreign courts and statutory agencies. It is important to have common legal principles to deal with such issues in a holistic and coordinated manner in today’s globally connected world.
The Code of Civil Procedure (CPC) supports the recognition and enforcement of foreign judgments. The provisions of the CPC are used despite the great differences in interpretation given by Indian courts in the treatment of foreign judgments. Using these provisions involves going through already busy Indian courts. For insolvency matters which need to be dealt with in a timely manner, this would be time consuming and costly.
The IBC plans to enter into bilateral agreements and issue letters rogatory to foreign courts by contracting authorities. This would provide an operational framework for resolving insolvency with countries once a bilateral agreement is in place, but negotiating such agreements with countries takes time, effort and cost.
While India’s experience with trade agreements and bilateral investment treaties clearly shows that bilateral economic agreements are not easy to conclude and have not always yielded the desired results.
It will also be difficult to arrive at a cross-border insolvency agreement template applicable to several countries, as there are several types of insolvency frameworks in all countries. Uniform procedural laws will not be possible either. Both the CPC and the way of bilateral agreements allow the application of decrees of reciprocal and non-reciprocal countries, however, there will inevitably be delays in this latter group of countries.
Settlement of insolvency cases with non-reciprocal countries requires the filing of new lawsuits; faces capacity constraints in terms of coordination between insolvency practitioners from different jurisdictions; greater delays in understanding, interpreting and expanding the scope of laws; and increased transaction costs.
Lessons from the past
The country has witnessed a large number of cross-border insolvency issues, the lessons of which highlight the need for a comprehensive cross-border insolvency framework. A precedent was set in the case of Jet Airways cooperation between the Dutch and Indian courts, made possible by a “protocol” which led to coordinated proceedings. Such cooperation facilitated the realization in the Netherlands, was transferred to India from this sale. This was possible because the Appeals Tribunal used its inherent powers, as a provision was missing in the Code.
In the case of SEL Manufacturing, a debtor company in the process of resolution in India, access to assets in the United States has been granted through the cooperation of the resolution professional and the United States bankruptcy courts. The professional has been granted the rights, powers, protections, privileges and immunities of a trustee in bankruptcy in the United States. These are only the beginning of the possible advantages to be exploited if a formal cross-border framework is available under the Code. Such a framework would also help resolve issues of access to assets held abroad in foreign affiliates, information sharing and cooperation of foreign agencies, and reduce disputes between jurisdictions.
The Joint Parliamentary Committee, when examining the IBC Bill in April 2016, underlined the need for a cross-border resolution framework in order to “have a comprehensive and lasting insolvency law”.. Well, the question that needs to be asked is, how will India benefit from a new formal framework for cross-border insolvency?
The benefits of the cross-border insolvency framework go beyond dispute resolution. Such a framework will encompass appropriate timelines, skilled professional capacities and coordination requirements. It will indicate clear support measures available for foreign jurisdictions in India. Indian creditors and investors lending / investing overseas will also benefit from a clearly defined resolution mechanism.
India has on numerous occasions broadened the scope of its existing laws to take into account developments in the settlement of cross-border disputes. Broadening the horizon of insolvency law would also be beneficial. The Insolvency Law Committee recommended the adoption of the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (Model Law), with some modifications. The Government, on the basis of the recommendation, proposed to incorporate the provisions of the Model Law into the Code.
The Model Law, adopted by 49 countries (53 jurisdictions) is a widely accepted legal framework for cross-border insolvency. The increase in cross-border trade flows to developing countries has prompted several Asian jurisdictions (Myanmar, Philippines, Republic of Korea and many others) to adopt the Model Law over the past decade. Many countries have started to revise their national insolvency laws to adequately address cross-border insolvency issues. The adoption of the Model Law by economies such as Brazil (2020) serves as a strong signal to India. Its adoption may communicate India’s intention to strengthen cooperation on economic law and a modern, mature insolvency framework.
The framework proposed in the Part Z draft is intended to be the cross-border framework of the IBC, which will govern all requests for recognition of foreign insolvency proceedings as well as requests from foreign jurisdictions seeking to cooperate in Indian proceedings. Notable features include its applicability to corporate debtors and personal guarantors. It is also noted that financial service providers and the prepackaged process may be outside the proposed framework. It is hoped that the gains from such a new framework will go a long way in redefining India’s relations with the rest of the world.
Kokila is Deputy Managing Director and Namrata is Associate Researcher at the Insolvency and Bankruptcy Council of India. Opinions expressed are personal