In the Union Budget 2022, Finance minister Nirmala Sitharaman announced crucial amendments to the Insolvency and Bankruptcy Code (IBC) to enable seamless cross-border insolvency as well as quicker dispute resolution. "Necessary amendments will be made in the IBC for more efficient dispute resolution and enable cross-border insolvency resolution," Sitharaman said.
Why this change is critical
As the Economic Survey 2022 says, cross-border insolvency signifies circumstances in which an insolvent debtor has assets in more than one country. Typically, domestic laws prescribe procedures for identifying and locating the debtors’ assets and converting them and later distribute to creditors. However, there are various insolvency cases in which corporations owes assets and liabilities in more than one country.
At present, Insolvency and Bankruptcy Code, 2016 (IBC) provides for the domestic laws for the handling of an insolvent enterprise. IBC at present has no standard instrument to restructure the firms involving cross border jurisdictions. The problem of not having a cross border framework problem was also expressed by the National Company Law Tribunal (NCLT) in Mumbai in a cross-border insolvency case involving an Indian entity.
NCLT stated that while insolvency proceedings against the corporate debtor have already been initiated before a District Court in Netherlands, “there is no provision and mechanism in the IBC, at this moment, to recognize the judgment of an insolvency court of any Foreign Nation. Thus, even if the judgment of Foreign Court is verified and found to be true, still, sans the relevant provision in the IBC, we cannot take this order on record.”
In this context, the Budget announcement is significant, legal experts said.
“A framework for cross-border insolvency will be prepared with amendments in the provisions of Section 234 and 235 of Insolvency and Bankruptcy Code, 2016 for the recovery of the assets of the Corporate Debtor available outside the country,” said Raj Bhalla, Partner at law firm MV Kini.
“These sections which presently deal with the Cross Border Insolvency, are not adequate to bring back the foreign assets of a corporate debtor and a strong framework is required. This will be a good step towards successful resolution plans and will mean more recovery for the lender banks,” Kini said.
Why was it a problem?
The absence of standardized cross border insolvency framework created complexities and raised various issues. This included the extent to which an insolvency administrator could obtain access to assets held in a foreign country, recognition of the claims of local creditors in a foreign administration, recognition and enforcement of local securities and taxation system over local assets where a foreign administrator is appointed etc.
Presently, 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.
What does the law says?
Cross border insolvency is regulated by Section 234 and 235 of IBC. Section 234 empowers the Central Government to enter into bilateral agreements with other countries to resolve situations about cross-border insolvency. Further, the Adjudicating Authority can issue a letter of request to a court or an authority (under Section 235) competent to deal with a request for evidence or action in connection with insolvency proceedings under the Code in countries with the agreement.
“The current provisions under IBC are ad-hoc in nature and are susceptible to delay. Entering into mutual (reciprocal) agreements require individual long-drawn-out negotiations with each country. This leads to uncertainty of outcomes of claims for creditors, debtors and other stakeholders as well,” the Economic Survey had noted.
Back in 2016, the Government had held off on adopting a comprehensive framework to deal with cross-border insolvency as there was not enough experience even with domestic insolvency, said Misha, Partner, Shardul Amarchand Mangaldas.
“With large parts of the domestic insolvency framework having settled and matured, this is the right time for the Government to introduce a comprehensive cross-border framework,” said Misha.
“The Government has also spoken about legislative amendments to enhance efficiency of resolution. Legislative amendments will only yield results if they are accompanied by requisite capacity building measures, particularly for the NCLT,” Misha added.
Ajay Shaw, Partner, DSK Legal said whilst the IBC contains an enabling provision to address cross border insolvency on bilateral basis, the need of the hour is to adopt a consolidated framework.
“We can start by adopting the UNCITRAL Model Law on Cross Border Insolvency, 1997,” said Shaw. Explaining further, Shaw said the need for this framework has recently been felt in the cases of Reliance Communications, Jet Airways Ltd. and Videocon Ltd.“If this framework is adopted, it will enable holistic resolution of corporate debtors located in India who have substantial overseas assets without which no composite resolution would be feasible, likewise, if there are any assets in India of a company which is insolvency overseas, the same benefit would be extended,” Shaw added.