Draft Framework for Cross Border Insolvency

• 29 Nov 2021

Why in News

Recently, 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 (IBC).

• It is proposed to be made applicable for both corporate debtors as well as personal guarantors to such debtors.
• A personal guarantor is a person or an entity that promises the payment of another person’s debt, in case the latter fails to pay it off.

Key Points

• About:
  
  • Cross Border Insolvency Proceedings:
    
    • It is relevant for the resolution of distressed companies with assets and liabilities across multiple jurisdictions.
    • Broadly, the cross-border insolvency process pertains to those debtors having assets and creditors overseas.
    • 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.
    • The need for having robust institutional arrangements to deal with cross-border insolvency issues has gained momentum in various jurisdictions, particularly under the aegis of UNCITRAL Model Law, during the last few decades.
  • Current Status in IBC:
    
    • 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.
• Significance:
  
  • The inclusion of a cross-border insolvency chapter in the IBC would be a major step forward and would bring the law on par with that of matured jurisdictions.
  • It would enable Indian firms to claim their dues from foreign companies, while allowing foreign creditors to recover loans from Indian companies.
  • It will help foreign branches of Indian banks to recover their dues in India.
  • It will also bring overseas assets of a domestic corporate debtor into consideration of insolvency resolution in India and will avoid delays in resolution of stressed assets.
• UNCITRAL Model Law:
  
  • The UNCITRAL model 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 model law deals with four major principles of cross-border insolvency:
    
    • Direct access to foreign insolvency professionals and foreign creditors to participate in or commence domestic insolvency proceedings against a defaulting debtor.
    • Recognition of foreign proceedings & provision of remedies.
    • Cooperation between domestic and foreign courts & domestic and foreign insolvency practitioners.
    • Coordination between two or more concurrent insolvency proceedings in different countries. The main proceeding is determined by the concept of Centre of Main Interest (COMI).
      
      • 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.
  • It is designed to assist States in reforming and modernizing their laws on arbitral procedure so as to take into account the particular features and needs of international commercial arbitration.
• Difference between Indian framework’s and Model Law:
  
  • Many countries that adopt the UNCITRAL model law do make certain changes to suit their domestic requirements.
  • Indian cross border insolvency framework excludes financial service providers from being subjected to cross border insolvency proceedings, noting that many countries “ exempt businesses providing critical financial services, such as banks and insurance companies, from the provisions of cross- border insolvency frameworks.”
  • The companies undergoing the Pre-packaged Insolvency Resolution Process (PRIP) be exempted from cross border insolvency proceedings as the provisions for PIRP have been introduced recently, and the “jurisprudence and practice under the pre-pack mechanism are at a nascent stage”.
    
    • The PIRP was introduced earlier this year under the IBC to permit speedy resolution of Micro, Small and Medium Enterprises.

UNCITRAL

• It is the core legal body of the United Nations system in the field of international trade law.
• UNCITRAL was established in 1966 with a recognition that international trade cooperation among States is an important factor in the promotion of friendly relations and, consequently, in the maintenance of peace and security.
• Through its several model laws, conventions, legislative guides and robust debates in working groups, UNCITRAL has provided a valuable platform for countries to compare, examine, debate and adopt principles of international commercial and trade law appropriate to their circumstances.
• Since its inception, India is only one of eight countries that has been a member of UNCITRAL.

Insolvency and Bankruptcy Code

• It is a reform enacted in 2016. It amalgamates various laws relating to the insolvency resolution of business firms.
  
  • Insolvency: It is a situation where individuals or companies are unable to repay their outstanding debt.
  • Bankruptcy: It is a 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. It is a legal declaration of one’s inability to pay off debts.
• It lays down clear-cut and faster insolvency proceedings to help creditors, such as banks, recover dues and prevent bad loans, a key drag on the economy.

Source: IE