News: The Economic Survey 2021-22 has called for a standardized framework for cross-border insolvency as the Insolvency and Bankruptcy Code (IBC) at present does not have an instrument to restructure firms involving cross-border jurisdictions.
What is the Insolvency and Bankruptcy Code (IBC)?
- The IBC, 2016 is the bankruptcy law of India that seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. It is a one-stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and make the process of doing business less cumbersome.
Cross-border insolvency proceedings
- 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:
- Location of such a company’s foreign assets
- Identification of creditors and their claims
- Establishing payment towards claims and
- Process for coordination between courts in different countries
- Foreign creditors can make claims against a domestic company. However, the IBC currently does not allow for automatic recognition of any insolvency proceedings in other countries.
- Current provisions do not allow Indian courts to address the issue of foreign assets of a company being subjected to parallel insolvency proceedings in other jurisdictions.
- It is an affiliate organization to the UN made up of business and legal professionals. This group develops model standards and procedures for dealing with issues affecting international business.
- Perhaps most notably, UNCITRAL promulgated the Convention on International Sale of Goods (CISG).
- The CISG is a model law commonly used as the governing provisions in contracts between parties from different nations.
- 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.
- 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.
- This law works on four main principles: access, recognition, cooperation and coordination:
- 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 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.
- Many countries that adopt the UNCITRAL model law do make certain changes to suit their domestic requirements. The Indian cross border insolvency framework exclude financial service providers from being subjected to cross border insolvency proceedings.
- This is because many countries exempt businesses providing critical financial services, such as banks and insurance companies, from the provisions of cross- border insolvency frameworks.