Cross Border Insolvency Based on the UNCITRAL

In News

• The Ministry of Corporate Affairs (MCA) has published a draft framework for cross border insolvency proceedings based on the UNCITRAL (United Nations Commission on International Trade Law) model under the Insolvency and Bankruptcy Code.

About

• Cross border insolvency proceedings are relevant for the resolution of distressed companies with assets and liabilities across multiple jurisdictions.
• A framework for cross border insolvency proceedings allows for the location of such a company’s foreign assets, the identification of creditors and their claims and establishing payment towards claims as well as a process for coordination between courts in different countries.
• While foreign creditors can make claims against a domestic company, the IBC currently does not allow for automatic recognition of any insolvency proceedings in other countries.
  • In the case of Jet Airways, when one of the company’s aircraft was grounded in Amsterdam over non-payment of dues to a European cargo firm, the National Company Law Tribunal had declined to “take on record” any orders of a foreign court regarding domestic insolvency proceedings in the absence of enabling provision in the IBC.
• Current provisions under the IBC do not allow Indian courts to address the issue of foreign assets of a company being subjected to parallel insolvency proceedings in other jurisdictions.

UNCITRAL Model

• At the Congress on International Trade Law in 1992 New York countries proposed that the UNCITRAL (Commission) consider undertaking work on international aspects of bankruptcy.
• Work initiated in 1992 then led to the adoption of the Model Law on Cross-Border Insolvency in 1997.
• The Model Law is based on four main principles: Access, Recognition, Cooperation and Coordination.
• It is the most widely accepted legal framework to deal with cross-border insolvency issues.
• It has been adopted by 49 countries, including the UK, the US, South Africa, South Korea and Singapore.
• The COMI for a company is determined based on where the company conducts its business on a regular basis and the location of its registered office.
• The framework for cross border insolvency adopted in India may, like in the case of some other countries, require reciprocity from any country which seeks to have its insolvency proceedings recognised by Indian courts.
• This would allow Indian proceedings for foreign corporate debtors to be recognised in foreign jurisdictions.
• Significance of the law
  • It allows foreign professionals and creditors direct access to domestic courts and enables them to participate in and commence domestic insolvency proceedings against a debtor.
  • It allows recognition of foreign proceedings and enables courts to determine relief accordingly.
  • It provides a framework for cooperation between insolvency professionals and courts of countries and for coordination in the conduct of concurrent proceedings in different jurisdictions.
  • It appears to be a comprehensive instrument as it builds upon the prevailing bilateral frameworks and extends the flexibility for deviations as per the requirement of any particular jurisdiction.

Indian Framework’s difference with the Model Law

• Many countries that adopt the UNCITRAL model law do make certain changes to suit their domestic requirements.
• A report by the MCA has recommended that the Indian cross border insolvency framework exclude financial service providers from being subjected to cross border insolvency proceedings.
• The report has also recommended that companies undergoing the Pre-packaged Insolvency Resolution Process be exempted from cross border insolvency proceedings as the provisions for PIRP have been introduced recently.
  • The PIRP was introduced earlier this year under the IBC to permit speedy resolution of Micro, Small and Medium Enterprises.

About Insolvency and Bankruptcy Code

• It is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy and was implemented through an act of Parliament.
  • The law was necessitated due to a huge pile-up of non-performing loans of banks and a delay in debt resolution.
  • Insolvency: Situation where individuals or companies are unable to repay their outstanding debt.
  • Bankruptcy: Situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. 
• Aim: To protect the interests of small investors and make the process of doing the business less cumbersome.
• IBC applies to companies, partnerships and individuals and provides a time-bound process to resolve insolvency. 
  • When a default in repayment occurs, creditors gain control over the debtor’s assets and must make decisions to resolve insolvency.
  • Under IBC, debtor and creditor both can start ‘recovery’ proceedings against each other.

Source: IE