Cross-Border Insolvency Challenges

Companies operate across multiple companies, with assets and stakeholders in countries other than India. When these companies face financial issues they are forced to present their better before national and international laws. Therefore, their Cross-Border Insolvency Challenges operations become complex regarding the jurisdiction, how to handle the stakeholders properly, and other financial and legal intricacies. 

Understanding Cross-Border Insolvency Challenges

To address the complexities due to companies facing financial distress requires a coordinated approach to managing insolvency proceedings across different jurisdictions. To understand to cross-border insolvency, it is important to know:

What is Cross-Border Insolvency?

Cross-border insolvency is a situation where n insolvent entity’s assets or creditors are located in multiple jurisdictions. In these cases, it is crucial to analyse each country’s laws to establish how to handle the debtor’s assets, and its creditors, and how to distribute the assets among creditors based on priority. This involves insolvency laws of several countries as well as adhering to international legislation. Therefore, there is a structured legal framework to manage Cross-Border Insolvency Challenges cases effectively. 

Existing Global Frameworks for Cross-Border Insolvency Challenges

The UNCITRAL Model Law on Cross-Border Insolvency Challenges provides a standarised legal framework for countries to address cross-border insolvency cases, enabling more efficient and coordinated proceedings. It promotes fairness and predictability for all stakeholders involved in complex international insolvency situations. This Model Law essentially harmonises insolvency laws across different countries by having a common set of rules regarding the recognition of foreign insolvency proceedings, access to assets, and cooperation in different jurisdictions. This has been adopted by the United States (US), the United Kingdom (UK), and Singapore. It has facilitated cross-border cooperation and recognition of foreign proceedings, helping to reduce costs, creditor disputes, and the risk of inconsistent judgments. Having a standardised framework for cross-border insolvency cases, the UK has been able to facilitate recognition of foreign insolvency proceedings, ensuring a more fair and efficient resolution process for complex matters. The Model Law has also helped Singapore by providing a clear and predictable legal framework for managing cross-border insolvency cases.

Key Challenges in Cross-Border Insolvency

The primary challenge in implementing a legal framework on Cross-Border Insolvency Challenges is jurisdictional issues. Other key challenges include a lack of harmonised framework, asset tracing and recovery, and the rights of creditors:

Jurisdictional Conflicts and Legal Uncertainty:

When there are stakeholders spread across different countries and business operations in multiple countries, there are jurisdictional issues when a company is declared insolvent. These jurisdictional conflicts arise when multiple courts claim authority over insolvency proceedings. For instance, legal uncertainty complicates the resolution process, especially in countries without uniform insolvency laws.

Lack of a Harmonized Framework:

Even though the legal and financial issues of an insolvent company are the same in each country, differing legal systems, cultural approaches, and insolvency laws across jurisdictions create barriers to efficient resolutions. The International Monetary Fund (IMF) has resources and publications that address insolvency cases and global insolvency systems. It has the main aim to promote effective insolvency systems to help countries manage debt risks and resolve financial issues.

Recognition of Foreign Judgments:

In most countries, there is no recognition of foreign insolvency proceedings. This remains an issue in countries that have not adopted the UNCITRAL Model Law. This lack of recognition adversely impacts debtors and creditors, such as foreign creditors are not authorised to prove their debts in cross-border insolvency proceedings.

Asset Tracing and Recovery:

Assets located in multiple jurisdictions lead to complexities in tracing and recovery of such assets. This is a challenge in Cross-Border Insolvency Challenges cases, in particular, if the cases involve fraudulent transactions. 

Creditors’ Rights and Priority Issues:

Conflicts over creditors’ rights and priority of claims are exacerbated in cross-border insolvency cases due to the differing insolvency laws across jurisdictions, leading to situations where creditors from different countries may have competing claims on the same assets. This creates legal uncertainties regarding which claims should be prioritised and how to fairly distribute them.

India’s Journey Toward a Cross-Border Insolvency Framework

The cross-border insolvency framework in India is similar to the approach taken in the UK, adopting certain provisions of the UNCITRAL Model law. This can be summarised as under:

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Current Legal Framework in India:

The Insolvency and Bankruptcy Code, 2016 (IBC) has only two provisions on cross-border insolvency, namely sections 234 and 235. Section 234 allows the Central Government to enter into bilateral agreements with other countries and ensures that insolvency orders and decisions made by foreign courts are enforceable in India. Section 235 allows the National Company Law Tribunal (NCLT) to issue letters of request to foreign courts, and request evidence or action on assets of corporate debtors and personal guarantors. Hence, there are limitations in the current insolvency framework on cross-border insolvency cases. It lacks comprehensive provisions to handle international insolvency matters, often relying on ad hoc measures and judicial discretion.

 Adoption of the UNCITRAL Model Law:

Sections 234 and 235 of the IBC reflect the principles of the UNCITRAL Model Law on Cross Border Insolvency. This adoption aims to provide a more streamlined and efficient process for managing cross-border insolvency cases. Adopting the recognition of foreign judgments will positively affect the IBC, such as making cross-border insolvency cases in India managed with uniformity and clarity. However, the Model Law has not been completely adopted and there are challenges in integrating it with existing laws and ensuring sectoral compatibility.

Recent Developments and Case Studies:

In the Jet Airways case, insolvency proceedings were initiated in India and the Netherlands. This prompted Indian courts to utilise existing IBC provisions to manage the cross-border aspects, effectively applying principles from the UNCITRAL Model Law, without formal bilateral agreements. It highlighted the need for a comprehensive legal framework framework for cross-border insolvency cases. The Insolvency Law Committee proposed Draft Part Z in India is based on the UNCITRAL Model Law. This is a set of draft guidelines that addresses cross-border insolvency in India and facilitates the involvement of foreign creditors in domestic insolvency proceedings.

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Key Recommendations for India

India needs to address the challenges in implementing more detailed cross-border insolvency matters to address the complexities of these matters:

Adopt the UNCITRAL Model Law on Cross-Border Insolvency to establish a standardised framework for recognising foreign insolvency proceedings.

There needs to be legal reforms to notice foreign creditors. The IBC does not offer foreign creditors many options, making many individuals or companies hesitant to invest in Indian companies.

The current insolvency framework needs to include procedures to handle insolvency situations involving complex corporate structures with subsidiaries in multiple jurisdictions.

Establishment of specialised benches for cross-border insolvency under the NCLT.

The IBBI is advised to train insolvency professionals to handle cross-border insolvency cases.

Conclusion

In India, the current framework for cross-border insolvency cases is governed by sections 234 and 235 of IBC. But, these provisions are largely ineffective due to the lack of operationalised reciprocal arrangements with any foreign jurisdiction, making them impractical to enforce in practice. Without active participation from other countries, it becomes difficult to manage cross-border insolvency cases. Therefore, cross-border insolvency cases have unique obstacles, requiring innovative solutions and international cooperation to address effectively. India should adopt the UNCITRAL Model Law on Cross-Border Insolvency in its entirety to establish a standarised framework for cross-border insolvency proceedings.