A cross-border insolvency involves a situation where an insolvent debtor has assets or creditors in more than one country. Thereby, it transcends the confines of a single legal system. In order to devise a mechanism to handle such cases involving cross-border insolvency, the United Nations Commission on International Trade Law proposed the UNCITRAL Model Law on Cross Border Insolvency. The proposal was adopted on May 30, 1997 at the 13th session of UNCITRAL held in Vienna. The model law has since emerged as the most widely accepted legal framework to deal with cross-border insolvency issues and can be adopted by countries with modifications, which suit their domestic context. It has provisions allowing foreign insolvency courts, and officials access to domestic courts (and vice versa) and also provides for recognition of orders and judgments passed by insolvency courts located in foreign jurisdictions. The Model Law has till date been adopted by 49 countries.
On November 24, the Ministry of Corporate Affairs released a notice inviting comments on India’s proposed version of the model law. The draft rules were first released in October 2018 by the Insolvency Law Committee (ILC). In January 2020, the MCA constituted a Cross-Border Insolvency Rules and Regulations Committee (CBIRC) to make recommendations to the draft rules. The extended insolvency proceedings of Jet Airways and the Videocon Group — two companies which had assets and claims from outside India — highlighted the need for enacting a law, harmonious with the international best practices.
The draft legal framework proposed by the MCA is a step in the right direction. Our code, as it currently stands, provides that we enter into bilateral arrangements with countries for recognising our insolvency proceedings on a reciprocal basis. This was not a permanent solution. Entering into separate agreements with countries is incongruous, time-consuming and involves multiple negotiations. When business interface transcends national borders, it is critical for countries to adhere to a common set of principles governing cross-border trade. Take for instance, the growth of international commercial arbitration as a means of settling cross-border disputes. Its success can be attributed to 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, meaning thereby, that 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 for the same. If a uniform set of guidelines can work for arbitration, then there is no reason to believe that it cannot work for insolvency.
The draft framework does have its heart in the right place. It enables the assistance of foreign courts or representatives during insolvency proceedings pending in India and vice versa. It also 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. Under the proposed law, the Indian adjudicating authority (NCLT) shall be vested with the power to recognise a foreign proceeding as either a “main proceeding” (which emanates from a country where the debtor company has its centre of interest) or a “non-main proceeding” (a country where the debtor merely has an establishment). Upon recognising foreign proceedings in India, the NCLT has been vested with the power to impose moratoriums to preserve the assets of the foreign entity in India.
However, the proposed rules are very much a work in progress. There is no provision for enforcement of insolvency related judgments. The CBIRC has in their report recommended the inclusion of provisions enabling enforcement of insolvency-related orders and judgements. Moreover, the term public policy which has been included as one of the major grounds to resist the recognition of foreign proceedings has not been defined. Considering the wide ambit of the term, lawmakers should streamline its scope so as to lend clarity to the process.
This column first appeared in the print edition on December 17, 2021 under the title ‘Borders and red lines’. The writer, a lawyer, is partner at Numen Law Offices