Cross Border Insolvency and India’s Approach: Insights from Recent NCLT Rulings

27th November, 2024 - 7:25 am Categories: IBC 0 Comments

Cross-border insolvency is an important area of concern for the new world order where a multi-jurisdictional economic transaction by corporate entities is common place. Issues arising from such cross-border insolvency are very complex, requiring an effective and efficient legal mechanism in balancing the interests of all stakeholders, namely, debtors, creditors, and other parties. Though emerging in India, cross-border insolvency law is still in its development stage and recent cases both highlight its weaknesses and underline the need to reform it. This article discusses how cross-border insolvency has been dealt with in India by drawing lessons from recent NCLT decisions and finally touches upon the need for a more structured policy in an era of growing international business relations for this jurisdiction.

Cross-Border Insolvency Conceptualization

Cross-border insolvency is the situation whereby an insolvent entity performs business across several jurisdictions, holds assets, creditors, or conducting business across borders. The issues arising in the context of these cases are based on a lack of uniformity in the insolvency proceeding carried out across different jurisdictions and, in fact, creates conflicts, inefficiencies, and suboptimal outcomes. The efficient cross-border insolvency resolution requires strong mechanisms of international cooperation, which recognize the foreign insolvency proceedings and then distribute their assets fairly among creditors. It requires the presence of a law that will help coordinate actions between courts, insolvency practitioners, and other jurisdictions with mechanisms that provide that no process of insolvency strips assets or gives unbalanced treatment in favor of certain creditors.

India’s Existing Legal Framework for Cross-Border Insolvency

India’s legal regime on insolvency, as captured in the Insolvency and Bankruptcy Code (IBC), was a pioneering reform aimed at tackling corporate financial stress with speed and efficiency. However, the IBC is very much concerned with domestic insolvency procedures and has made little provision for cross-border insolvency.

Sections 234 of the IBC: It provides for limited cross-border cooperation by allowing the Indian government to sign bilateral agreements with foreign countries and facilitating cooperation between authorities of India and foreign courts.

Section 235 of IBC- in order to handle the fate of corporate debtors’ assets located outside of India, Section 235 gives the Adjudicating Authority the authority to send letters of request to the courts of the nation with which the bilateral agreement was signed under Section 234.

Though considered promising, these provisions have been used very seldom and India has entered no significant bilateral agreements dedicated to the recognition and enforcement of cross-border insolvency proceedings.

Under the current laws of India, it has been found that the cross-border insolvency issues are still quite simplistic and may not fully address the complex aspects as identified in a series of recent judgments passed by the NCLT. The judgments brought into sharp focus the need for proper structuring of cross-border insolvency proceedings.

International Legal Standards: The UNCITRAL Model Law

The UNCITRAL Model Law on Cross-Border Insolvency, adopted in 1997, provides a worldwide standard for dealing with insolvency cases possessing international characteristics. The Model Law promotes cross-border cooperation by establishing the procedure for the recognition of foreign insolvency proceedings and coordinates them across jurisdictions. It introduces concepts such as “foreign main proceedings” and “foreign non-main proceedings,” which help in determining the scope of recognition based on the primary location of a debtor’s operations.

Countries such as the United States of America, the United Kingdom, and Singapore have also been advocating for this Model Law. So far, this law has proven useful for the mentioned countries as it provides for a standardized framework in complex international operations that could be encountered in insolvency cases. Although the benefits of the Model Law appear apparent, India still has not adopted it. Such a decision has increasingly become one of significant concern given India’s rapidly expanding global economic footprint.

Case for Adoption of the UNCITRAL Model Law

It has been a concern of the cross-border insolvency community that it has not been adopted as widely as expected. The Model Law hastens the recognition across national borders and completes speedy recovery of assets along with ratification of equal treatment of foreign creditors during the processes of insolvency.

Its provisions for reciprocity stipulate that India would recognize foreign insolvency proceedings only if the foreign jurisdiction offers similar recognition to Indian proceedings. Reciprocal obligations safeguard domestic interests. Such strict requirements for reciprocity, however, may discourage India from cooperating with countries that do not have well-developed insolvency systems. The limitation that this could place on the effectiveness with which India will be able to participate in international insolvency proceedings and may be

discouraging foreign investment means that a balanced approach to reciprocity is needed in order to position India as a good competitor in the global marketplace.

Key Takeaways from Recent NCLT Developments

Recent cases before the NCLT demonstrate the challenges India faces while handling cross-border insolvencies and therefore calls for a more effective legal framework.

1. The Jet Airways Insolvency Case

The airline, Jet Airways, undergoing insolvency in 2019, is one of the high-profile cross-border insolvency cases. Jet Airways operates in various countries; it has its registration in the Netherlands. The bankruptcy in the Netherlands ensued parallelly with the insolvency proceedings in India, which caused a situation of parallel proceedings that involve two jurisdictions. This led to coordinating between the Indian court and the Dutch court.

In the absence of a legally established framework to recognize foreign insolvency proceedings by India, no legal basis existed for the NCLT to acknowledge or coordinate with the bankruptcy proceedings in the Netherlands. This brought inefficiencies and potential dissipation of assets, creating a case for constituting a structured cross-border insolvency regime in India.

2. The Essar steel case

The Essar Steel insolvency case is another example of a large Indian corporation with significant international creditor claims, including foreign banks and financial institutions. On one hand, the NCLT ensured the participation of foreign creditors in the Indian insolvency process; on the other hand, it created uncertainty and total lack of formal recognition of foreign insolvency proceedings, which affects the enforcement of foreign claims and makes asset distribution difficult. It made it obligatory for foreign creditors to seek recourse to the Indian domestic procedures, an issue of inequality and delay in the adjudication of claims.

It refers to an international regime meant to ensure that rights and protection granted to foreign creditors as compared to domestic creditors are uniform. In fact, a cross-border insolvency framework can do just this by recognizing and coordinating with foreign insolvency procedures.

3. Videocon case

The Videocon Group insolvency was a complex case of international assets, especially in Brazil, where the group held considerable oil and gas assets. The group operated in various countries; however, the Indian forum focused its attention mainly on Indian entities with little formal cooperation with foreign jurisdictions. In the absence of a defined framework for cross-border insolvency, the international assets were not effectively managed by the resolution professionals of India; instead, it results in probable losses for the creditors.

The Videocon case bore the brunt of the difficulty in the handling of cross-border assets and liabilities as there is no formal mechanism available related to cross-border cooperation and recognition of foreign insolvency proceedings.

The Urgent Requirement for India to Institutionalize Cross-Border Insolvency Reform

Given the rising economic relations that India is having with the other markets of the world, there is an imperative need for a more holistic and structured legal regime on cross-border insolvency. Even with the coming into force of some tools to be used in confronting cross-border insolvency through the IBC provisions, much more is left to be done in the face of the complexities that modern international business operations have created. These will institutionalize cross-border insolvency for several benefits to be accrued to India.

1. Encourage Foreign Investment: A cross-border insolvency framework would reassure international investors that their claims would be treated fairly, and so increase foreign investment in India.
2. Enhance legal certainty: Adopting the UNCITRAL Model Law would connect India’s legal structure with international standards, providing clarity and predictability to both domestic and foreign parties.
3. Speedy Resolution of Insolvency Issues: The recognition procedure and coordinating mechanism would speed up the resolution process and would reduce delay and asset degradation.
4. Equal Treatment of Creditors: Recognition of foreign insolvency proceeding would ensure that foreign creditors who are entitled to enforcement of rights in India under foreign insolvency proceeding will be assured protection entitlements available to domestic creditors, ensuring an equitable and transparent debt resolution environment.

Conclusion

Cross-border insolvency treatment by India is thus an evolving issue where recent judgments by NCLTs have shown the shortfall in the existing legal framework and the need to change it. The adoption of the UNCITRAL Model Law will imply recognition for India of a worldwide standard in cross-border insolvency management toward greater certainty in law, international cooperation, and fair treatment of creditors.

With India increasingly integrating into the global economy, adoption of a comprehensive framework for cross-border insolvency is no longer merely beneficial-it is an essential step to foster a competitive, transparent, and efficient business environment. In conclusion it is important to establish a proper insolvency regime in India to promote s direct foreign investment in India.

Author: Astha Sharma, in case of any queries please contact/write back to us via email to chhavi@khuranaandkhurana.com or at Khurana & Khurana, Advocates and IP Attorney.

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