GLOBAL CONTEXT OF INSOVENCY: Technological advancements and evolving commercial practices have significantly increased the number of multinational corporations. These corporations often have seamless connections between nations and businesses, operating without regard to geographical boundaries. As trading expands beyond individual jurisdictions, the complexities of insolvency procedures increase due to the interplay of multiple laws and actions.
LEGAL FRAMEWORK IN INDIA
Insolvency and Bankruptcy Code (IBC) 2016: The Insolvency and Bankruptcy Code (IBC) 2016 was introduced to provide a comprehensive framework for resolving insolvency in India. While the initial draft was silent on cross-border insolvency, subsequent recommendations included provisions addressing this aspect.
- Empowering the Central Government to enter into bilateral agreements with other countries
- Allowing the adjudicating authority to issue letters of request to foreign courts
- Providing a mechanism for dealing with assets situated in foreign countries
- Sections 234 and 235: Provisions for cross-border insolvency
- Section 234 of the IBC empowers the Central Government to enter into bilateral agreements with other countries to enforce the Code in cross-border insolvency cases. This provision allows for implementing the Code’s provisions in foreign jurisdictions.
- Section 235 grants the adjudicating authority under the Code the power to issue letters of request to courts in countries with agreements entered under Section 234. These letters of request can specify how to deal with the corporate debtor’s assets in a foreign country.
ADHOC MECHANISMS USED BY INDIA:
- Free Trade Agreements (FTAs): These agreements focus primarily on reducing or eliminating tariff and non-tariff barriers to substantial trade between countries. They generally have a more limited scope compared to CECAs and CEPAs and mainly cover trade in goods.
- Comprehensive Economic Cooperation Agreements (CECAs): More comprehensive than FTAs. Typically cover negotiation on trade tariffs and Tariff Rate Quota (TRQ) rates. They may include some aspects of services and investment, but not as extensively as CEPAs. India has signed CECAs with countries like Malaysia and Singapore.
- Comprehensive Economic Partnership Agreements (CEPAs): These are the most extensive of the three types of agreements. They cover a more comprehensive range of economic partnership areas beyond just trade in goods. They include trade in services, investment, and other areas of economic cooperation. India has signed CEPAs with countries like Japan and South Korea.
INTERNATIONAL STANDARDS
- UNCITRAL Model Law on Cross-Border Insolvency: The UNCITRAL Model Law on Cross-Border Insolvency (MLCBI), adopted in 1997, is designed to assist states in developing a modern, harmonized, and fair insolvency framework to address cross-border proceedings more effectively. The Model Law focuses on four key elements:
- Access: Empowering foreign creditors and insolvency officials to access domestic courts directly.
- Recognition: Allowing domestic courts to recognize foreign court proceedings.
- Relief (assistance): Enabling courts to grant relief based on foreign proceedings.
- Cooperation: Encouraging cooperation and coordination between jurisdictions.
GLOBAL ADOPTION STATUS
- Sixty nations or territories have adopted the Model Law.
- Well-known nations such as the United Kingdom, United States, Singapore, Australia, South Africa, Korea, Canada, and Japan have incorporated the Model Law into their local insolvency legislations.
- The United States adopted the Model Law in 2005 as Chapter 15 of the Bankruptcy Code.
- The United Kingdom implemented it in 2007 as the Cross-Border Insolvency Regulations (CBIR).
CHALLENGES IN CROSS-BORDER INSOLVENCY
- Jurisdictional Issues: One of the main challenges in cross-border insolvency is determining the appropriate jurisdiction for the main insolvency proceedings. The Model Law introduces the concept of the “center of main interests” (COMI) to address this. However, determining COMI can be complex, especially when a debtor’s registered office doesn’t coincide with its central administration.
- Recognition of Foreign Proceedings: Recognizing foreign proceedings is crucial to cross-border insolvency. Differences in national laws and procedures may raise challenges. Foreign proceedings must be classified as “main” or “non-main.” Public policy exceptions may prevent recognition in some cases.
- Coordination Between Courts: Effective coordination between courts in different jurisdictions is essential for successful cross-border insolvency proceedings. Challenges include ensuring direct communication between courts and foreign representatives, coordinating relief when concurrent proceedings are in multiple jurisdictions, and balancing the need for cooperation with respect for each jurisdiction’s legal system and sovereignty.
APPROACHES TO CROSS-BORDER INSOLVENCY
- Universalist Approach: The universalist approach advocates for a single, unified bankruptcy proceeding for multinational companies. Under this approach, Only the bankrupt’s “home jurisdiction” courts have control over and may administer the bankrupt debtor’s assets. There should be only one governing law for the entire insolvency process. This approach aims to bring efficiency, fairness, and predictability to cross-border insolvency cases.
- Territoriality Approach: The territoriality approach supports opening multiple proceedings in different jurisdictions. Each jurisdiction where the company holds assets handles the insolvency process separately. Local courts maintain control over local assets and legal relationships. This approach is favored by those concerned about protecting local creditors and maintaining sovereignty over local assets.
- Modified Universalism: Modified universalism compromises the universalist and territorialist approaches. It is the principle adopted by the UNCITRAL Model Law on Cross-Border Insolvency. It allows for opening more than one set of insolvency proceedings, particularly in states where the debtor has a business presence. It strives for maximum cooperation and coordination among various proceedings. Designates a primary jurisdiction responsible for administering the case, with its laws applying to most insolvency issues. It allows courts to determine whether cooperation infringes on local interests.
THE WAY FORWARD:
- Need for Harmonization: There is a growing recognition of the need for harmonized cross-border insolvency laws to facilitate international trade and investment. Harmonization aims to provide greater legal certainty, fairness, and efficiency in managing cross-border insolvencies. The UNCITRAL Model Law is a framework for achieving this harmonization, though its implementation varies across jurisdictions.
- Potential Reforms in Indian Law: India is considering adopting a modified version of the UNCITRAL Model Law to strengthen its cross-border insolvency framework. The Insolvency Law Committee has proposed Draft Part Z to incorporate Model Law principles into the Insolvency and Bankruptcy Code (IBC).
POTENTIAL REFORMS:
- Expanding the scope of Sections 234 and 235 of the IBC to provide a more comprehensive framework for cross-border insolvency.
- Implementing mechanisms for direct cooperation between Indian courts and foreign courts/insolvency professionals.
- Develop clear guidelines for determining the Center of Main Interest (COMI) in cross-border cases.
- Establishing protocols for coordination between concurrent proceedings in multiple jurisdictions.
- Enhancing capacity building for judges and insolvency professionals in handling international cases.
THE CONCLUSION:
Adopting a robust cross-border insolvency framework is crucial for India to strengthen its position in global trade and attract foreign investment. While challenges exist in implementing such a framework, the benefits of a harmonized approach far outweigh the complexities, making it imperative for India to move forward with comprehensive reforms in this area.
UPSC PAST YEAR QUESTIONS:
Q.1 Has the Indian governmental system responded adequately to the demands of Liberalization, Privatization, and Globalization started in 1991? What can the government do to be responsive to this important change? 2016
Q.2 The aim of Information Technology Agreements (ITAs) is to lower all taxes and tariffs on information technology products by signatories to zero. What impact should such agreements have on India’s interests? 2014
MAINS PRACTICE QUESTION:
Q.1 Examine the key features of the UNCITRAL Model Law on Cross-Border Insolvency. How can its adoption benefit India’s insolvency resolution process?
SOURCE:
https://www.thehindu.com/opinion/op-ed/navigating-cross-border-insolvency/article68678051.ece
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