Cross-Border Insolvency and India’s Reluctance to Change

Tushar Baid*

Insolvency law is concerned with situations in which a debtor is unable to repay his or her debts to his or her creditors. When a corporation or an individual becomes insolvent, the parties are almost always forced to resort to litigation.” During insolvency proceedings, the courts divide the debtor’s property in accordance with the creditors’ claims against the debtor, which is known as equitable distribution. When a debtor, a creditor, and their assets are all discovered within the confines of a single jurisdiction, the law of that jurisdiction applies. Nonetheless, as a result of the advent of globalisation, bankruptcy has grown intrinsically more complicated, since distinct parties are often situated in foreign countries regulated by divergent legislative frameworks and legal procedures.

As a consequence, the scope of cross-border bankruptcy processes and rules has grown significantly. “Cross-border insolvency is defined as “a situation in which a single debtor company has entered formal insolvency proceedings in more than one jurisdiction and there is, at the very least, the possibility of a conflict of laws affecting the conduct of the debtor’s affairs. “ Insolvency laws that apply across borders are most frequently encountered in three situations: when a dispute arises between a debtor and a foreign creditor, when the debtor’s assets are located in another jurisdiction, and when multiple concurrent proceedings against a debtor are being brought against the debtor in different jurisdictions. The choice of law, the choice of forum, and the manner and location in which the judgement will be enforced are all important considerations in such proceedings, and they can have a significant impact on the outcome. Because of the intricacies and complexities of cross-border insolvency, various approaches to resolving insolvency issues have been developed.

Approaches to Cross-Border Insolvency

Territorialism and universalism are the two most popular approaches to cross-border insolvency.  Other alternatives have emerged over the years to attempt to address the shortcomings of the aforementioned theories.

According to the territorial approach, the procedure will take place in the jurisdiction where the assets are situated, and the laws of that jurisdiction will control the proceedings. In other words, the procedures would be limited to the assets that were situated in that particular jurisdiction. The territorialist approach has been favoured by numerous governments throughout history because it encourages respect for “local interests” and “sovereignty.” Jurisdictions have complete authority over their assets, actions, and results, and they are not subject to the laws of any other nation. There are certain disadvantages to using a territorialist strategy. Individual processes are undertaken in each country where the debtor owns assets, increasing the expense and needlessly prolonging a process that might have been completed in a single court. As a result, territorialism often results in a lengthy, more costly, and more unpredictable legal process.

Under universalism, on the other hand, the action takes place in the jurisdiction where the debtor is situated, regardless of the location of the creditors or the location of the debtor’s assets. As a result, just one court and one set of laws oversee the whole process against the debtor. Furthermore, the judgement that is obtained as a consequence of such processes is perfect since it is recognised and enforced in all of the countries where the assets and creditors are situated. This method results in a more efficient, more cost-effective, and more consistent procedure for all parties involved. Although universalism presents a more solid and coherent approach, it is legally impracticable since it requires that every nation would relinquish its judicial sovereignty and submit itself to the laws and legal judgments of another country.

UNCITRAL Model Law on Cross-Border Insolvency

The United Nations Commission on International Trade Law (UN Commission on International Trade Law) is a division of the United Nations with the purpose of promoting trade and investment worldwide. It accomplishes its objective by establishing model legislation that serves as a reference for nations engaged in international commerce. The United Nations Commission on International Commerce Law (UNCITRAL) Model Law on Cross-Border Insolvency was created in the 1990s in reaction to the advancement of technology and globalisation, which, in turn, led to the expansion of international trade. The Model Law was prepared and enacted in May 1997 in order to offer an effective framework for the facilitation of cross-border insolvency processes involving many countries in a single case. A major focus of the legislation is on four major components of cross-border insolvency proceedings: “access of foreign representatives and creditors to the courts in this state,” “recognition of certain orders issued by foreign courts,” “relief to assist with foreign proceedings,” “cooperation and coordination with international courts and international representatives.”

India’s Insolvency And Bankruptcy Code 2016

Before 2016, India lacked a suitable legal framework to execute a bankruptcy case that was both efficient and unified in nature. It would take about three times as long to complete a bankruptcy-type case in India as it would complete a bankruptcy-type procedure in the United States. Neither debtors nor creditors were being adequately served by the existing legislation; consequently, it was long past time for reform to take place. When India updated its insolvency and bankruptcy rules in 2016, it consolidated them all into a single piece of legislation known as the Insolvency and Bankruptcy Code 2016. (IBC).” The Code applies to corporations, partnerships, and individuals that are involved in or contemplating bankruptcy or insolvency procedures.

The IBC represents a significant improvement over the previous system in that the judge now plays a crucial role in insolvency and bankruptcy proceedings.’” The judge presiding over the bankruptcy case has the authority to question parties, acquire evidence, and regulate which witnesses testify in the proceeding. As part of this change, the “debtor in possession” structure has been replaced with a “creditor in control” framework, which allows creditors to have a greater voice over the course of the action. Creditors will benefit from this modification since it makes the process more equal.

India’s Hesitation Of The Adoption Of the UNCITRAL Model Law On Cross-Border Insolvency

When it comes to cross-border bankruptcy, India has basically embraced a territorial approach. Indian law, despite several possibilities to embrace the modified universalism approach represented in the UNCITRAL Model Law on Cross-Border Insolvency, chose to enact two sections addressing cross-border insolvency procedures instead. “ There are doubts and worries regarding the present regulations since there is a lack of consistency.” When a framework, such as the Model Law, is not accepted, such as in the case of Jet Airways, the complexity of a cross-border bankruptcy case are magnified tenfold. As a result, bankruptcy procedures have been initiated in both India and the Netherlands on behalf of Jet Airways, which has assets and creditors in both countries. While the Indian court was hesitant to acknowledge the Netherlands’ bankruptcy action and refused to send information to the Dutch court, the Dutch court was unwilling to recognise the Indian court’s refusal. Both nations eventually enacted “A Cross Border Insolvency Protocol” based on the United Nations Commission on International Trade Law’s Model Law for Cross-Border Insolvency. A “primary proceeding” in India is recognised by the protocol, while a “secondary proceeding” in the Netherlands is recognised by the protocol. This allows for a more streamlined procedure that safeguards the interests of the parties and the laws of each country while keeping costs down. Even though neither nation has accepted the Model Law, the inability to come up with a coherent framework to decide on these procedures has practically pushed the countries to adopt a framework comparable to the Model Law for the reasons of uniformity in this specific situation. India’s reluctance to acknowledge the Netherlands’ court ruling at first may demonstrate the country’s apprehension about sharing legal power with foreign countries. In general, Jet Airways highlights the intricacies and problems of cross-border bankruptcy procedures when nations do not embrace the Model Law of the International Organization for Standardization.

While there is strong support for India to adopt the UNCITRAL Model Law on cross-border insolvency, it is unclear if and when India will follow the lead of the other countries in establishing consistent processes for insolvent debtors. Although there has been an increase in foreign direct investment as well as the Committee’s UNCITRAL recommendations,” among other considerations, it is extremely probable that the UNCITRAL Model Law of Cross-Border Insolvency will be adopted, rather than if it will be implemented.

*The author is 3rd year Law Student at National Law University, Visakhapatnam.