Recently, the Ministry of Corporate Affairs (MCA) has put forward a draft framework for cross-border insolvency proceedings. The new development comes as a part of the Insolvency and Bankruptcy Code (IBC) which is based on the UNCITRAL (United Nations Commission on International Trade Law) model. It is a crucial initiative, projected to include both corporate debtors as well as personal guarantors to such debtors.
Understanding Cross Border Insolvency Proceedings
Cross-border insolvency proceedings are specifically relevant for settling distressed companies with assets and liabilities across various jurisdictions. To put it simply, this process is related to those debtors who have their assets and creditors overseas. A comprehensive framework like the one proposed allows locating a company’s foreign assets, identifying creditors and their claims, and establishing payment protocols for these claims. A significant aspect of this framework is the coordination between courts across different countries. There has been an increased requirement for robust institutional arrangements to deal with cross-border insolvency issues, particularly under UNCITRAL Model Law, over the last few decades.
Current Status in IBC
At present, the IBC framework permits foreign creditors to make claims against domestic companies, without automatic recognition of similar insolvency proceedings in other countries.
Significance of Cross-Border Insolvency Chapter in IBC
The introduction of a cross-border insolvency chapter to the IBC represents a significant advancement. It would align Indian law with that of matured jurisdictions, empowering Indian firms to claim their dues from foreign enterprises while making it possible for foreign creditors to recover loans from Indian companies. This step will not only aid the foreign branches of Indian banks in recovering their outstanding dues but also expedite the resolution of stressed assets by considering the overseas assets of a domestic corporate debtor.
About UNCITRAL Model Law
The UNCITRAL model is an internationally recognized legal framework designed to address cross-border insolvency issues. Adopted by 49 countries, the model outlines four key principles of cross-border insolvency, including direct access for foreign insolvency professionals and creditors, recognition of foreign proceedings and provision of remedies, cooperation between domestic and foreign courts, and coordination between concurrent insolvency proceedings in various countries. The model is based on the concept of Centre of Main Interest (COMI) to determine where a company conducts its regular business.
Difference Between Indian Framework and Model Law
Like many countries, India also plans to modify the UNCITRAL model law to suit domestic requirements. For instance, the Indian framework exempts financial service providers and companies undergoing the Pre-packaged Insolvency Resolution Process (PRIP) from being subjected to cross border insolvency proceedings.
About UNCITRAL
UNCITRAL, established in 1966, serves as the main legal body of the United Nations system in the sphere of international trade law. Through its various model laws, conventions, and legislative guides, UNCITRAL provides a platform for countries to adopt principles of international commercial and trade law suitable for their circumstances.
About the Insolvency and Bankruptcy Code
The Insolvency and Bankruptcy Code, enacted in 2016, consolidates various laws related to insolvency resolution for business establishments. The code offers clearly defined and faster insolvency procedures that assist creditors in recovering dues and prevent the accumulation of bad loans, thereby bolstering the economy.