IBC Laws BlogCross-Border Insolvency: A domain to be strengthened by The Indian Legal System Abstract

Cross-Border Insolvency: A domain to be strengthened by The Indian Legal System Abstract

Anurag Yadav

4^th year, B.Com. LL.B.(Hons.), Institute of Law, Nirma University, Ahmedabad

The Insolvency and Bankruptcy Code (IBC) of 2016 marked a significant step in India’s corporate insolvency regime. However, resolving insolvency cases with cross-border elements remains a complex challenge. This article examines the current state of cross-border insolvency under the IBC, highlighting the limitations and difficulties faced by the existing framework.

The research delves into the challenges arising from multiple jurisdictions with conflicting laws, the lack of a robust framework for international cooperation, and the vulnerability to asset stripping. It analyzes the enabling provisions within the IBC (Section 234 and section 235) and explores their limitations, particularly the scarcity of bilateral agreements and the non-adoption of the UNCITRAL Model Law on Cross-Border Insolvency.

The article then explores potential solutions to strengthen India’s cross-border insolvency mechanism. It examines the possibilities of expanding bilateral agreements and the potential benefits of adopting the UNCITRAL Model Law. Additionally, it explores how to enhance cooperation between courts and insolvency professionals across borders to ensure efficient asset recovery and maximize value for creditors.

By critically evaluating the current landscape and proposing solutions, this article aims to contribute to the ongoing discourse on refining India’s approach to cross-border insolvency. This will ultimately lead to a more efficient and effective system for resolving complex international insolvency cases.

Introduction

The rapid growth of globalization has led to a significant increase in international trade. However, the complex network of interconnected economies also brings unique challenges in the area of corporate insolvency. When a debtor[1] with assets and creditors[2] spread across multiple jurisdictions faces financial distress, a legal challenge known as cross-border insolvency arises. The Insolvency and Bankruptcy Code (IBC) of 2016, a landmark reform in India’s insolvency regime, aimed to address this complex domain. However, managing cross-border insolvency under the IBC remains a task filled with complexities and gaps.

This research article explores the current state of cross-border insolvency under the IBC, carefully examining the challenges and limitations that hinder its effectiveness. We will embark on a journey to reveal the inherent complexities arising from the interaction of different legal systems in various jurisdictions. Furthermore, we will highlight the vulnerabilities of the current framework to issues such as the lack of strong international cooperation mechanisms and the potential for asset stripping by distressed debtors.

By carefully analyzing the enabling provisions contained within Sections 234 and 235 of the IBC, we will expose the limitations of the existing framework, particularly the lack of bilateral agreements with other nations. Additionally, we will explore the implications of India’s non- adoption of the UNCITRAL[3] Model Law on Cross-Border Insolvency, a standardized framework for international cooperation in insolvency cases.

The Complexities of Cross-border Insolvency

The relentless advance of globalization has created a network of interconnected economies, leading to a significant increase in cross-border transactions. However, this interconnectedness becomes a complex challenge when a company operating across borders faces financial distress. This situation, known as cross-border insolvency, plunges stakeholders—debtors, creditors, and insolvency professionals—into a maze of complexities.

Consider a company with assets and creditors spread across different continents. When insolvency occurs, the challenge lies in navigating the diverse legal systems of each jurisdiction involved. This includes conflicting definitions of financial distress, varying creditor priorities based on location, and cumbersome procedures for recovering assets across borders. These discrepancies create a tangled web. For example, determining the appropriate court for the case, ensuring fair treatment for creditors from different countries, and efficiently recovering assets become major hurdles.

The Insolvency and Bankruptcy Code (IBC), introduced in 2016, marked a significant step forward for India’s insolvency regime. While it streamlines domestic insolvency cases, its provisions for cross-border situations remain an evolving area. Understanding the complex nature of cross-border insolvency is crucial to identifying the challenges faced under the IBC framework and exploring potential solutions for navigating this intricate terrain[4].

The Interconnected Web of Globalization: Trade, Corporations, and Finance
- The 21st century has seen a significant erosion of geographical boundaries in the economic realm. Globalization, driven by technological advancements, trade liberalization, and strategic corporate decisions, has created a complex network of interconnected economies and cross-border transactions. This section explores three key aspects of this network:
- Globalization has created a complex web of interconnected economies. Trade barriers have diminished, driven by international agreements and advancements in communication and This free flow of goods and services enables countries to specialize and expand trade.
- Multinational corporations (MNCs) have become major players, establishing a global presence for production, distribution, and sales. For example, Apple’s designs in California are brought to life in Chinese factories, illustrating the interconnectedness of production and consumption across borders.
- The world of finance has also become intricate. New instruments such as derivatives and foreign direct investments (FDI) allow companies to manage risk and investors to diversify their portfolios across borders. Consider airlines hedging fuel costs with derivatives or Chinese companies investing in Indian solar projects—both examples of this financial interconnectedness.
The Challenge: Navigating Insolvency Across Jurisdictions

- Cross-border insolvency occurs when a company with assets and creditors spread across multiple countries faces financial Consider a clothing company with manufacturing facilities in the U.S., headquarters in India, and creditors in both locations[5]. If this company encounters financial difficulties, resolving its insolvency becomes a complex challenge due to several factors:
- Clash of Legal Systems: Unlike domestic insolvency, where a single legal framework applies, cross-border cases involve navigating the complexities of multiple jurisdictions, each with its own set of insolvency laws and procedures. These laws may differ significantly in terms of:
- Triggers for Insolvency: Different countries might have varying definitions of what constitutes financial distress, leading to disagreements about when to initiate insolvency
- Creditor Priorities: The order in which creditors are repaid can differ across For instance, a local bank in the U.S. might have a higher priority claim on assets located there compared to an India-based investor. This can lead to conflicts and complicate the fair treatment of creditors.
- Asset Recovery Mechanisms: Procedures for identifying, locating, and recovering assets in different countries can be cumbersome and time-consuming. Imagine needing court orders in multiple jurisdictions to access company assets.
- Conflicting Priorities for Creditors: As mentioned earlier, the differing legal frameworks can lead to conflicts regarding creditor priorities. Creditors located in different jurisdictions may have competing claims on the debtor’s assets, making it difficult to determine a fair and efficient resolution that satisfies Negotiations can become protracted, delaying the insolvency process and potentially diminishing the value of the debtor’s estate.
- Challenges of International Cooperation: Effective cross-border insolvency resolution often requires cooperation between courts and insolvency professionals in different countries. However, this can be hampered by issues like a lack of standardized procedures for communication and coordination, as well as jurisdictional resistance from courts unwilling to cede control over domestic assets[6].
The IBC: A Guiding Light in Challenging Times

In 2016, India embarked on a significant reform with the introduction of the Insolvency and Bankruptcy Code (IBC). Prior to the IBC, resolving insolvency cases was a notoriously sluggish and complex process. The new code sought to transform India’s insolvency regime by introducing a time-bound and efficient framework. The IBC’s primary focus is on accelerating the resolution of stressed assets, which can hinder economic growth. By setting clear timelines for various stages of the insolvency process, the code aims to achieve quicker settlements and maximize the value of distressed companies. This time-bound approach offers greater certainty to creditors and investors, promoting a more robust business environment.

While the IBC has demonstrably improved domestic insolvency resolution, its provisions for cross-border insolvency situations remain an evolving area. The code acknowledges the complexities of cross-border cases through Sections 234 and 235.

Section 234[7]: Empowers the Indian government to enter into bilateral agreements with other countries. These agreements would facilitate cooperation between courts and insolvency professionals, allowing for a more streamlined cross-border resolution process.
Section 235[8]: Enables India to recognize and assist in foreign insolvency proceedings initiated in other countries. This fosters international collaboration and ensures a more coordinated approach to resolving insolvency cases with a global footprint.

Enabling Provisions within the IBC for Cross-border Insolvency

The Insolvency and Bankruptcy Code (IBC) acknowledges the complexities of cross-border insolvency and includes specific provisions to facilitate cooperation and address these challenges. Here, we delve deeper into the two key sections that empower the IBC to handle cross-border situations:

Section 234 [9]: Bilateral Agreements for Enforcement and Cooperation

This section empowers the Indian government to enter into bilateral agreements with other countries specifically for cross-border insolvency cases. These agreements can address various aspects, aiming to:

Facilitate Communication and Cooperation: The agreements can establish channels for communication and information exchange between courts, insolvency professionals, and other relevant authorities in both countries. This allows for a more coordinated approach to identifying assets, managing the insolvency process, and ensuring fair treatment of creditors across jurisdictions.
Recognize and Enforce Judgments: Bilateral agreements can provide a framework for recognizing and enforcing insolvency judgments passed by courts in one country within the other. This helps streamline the process of recovering assets located abroad and ensures that the insolvency resolution has effect across borders.
Coordinate Administration: The agreements can establish mechanisms for coordinating the administration of insolvency proceedings in both countries. This might involve procedures for deciding which jurisdiction will be the primary forum for the case and how insolvency professionals from different countries can collaborate effectively.

Section 235: Recognition and Assistance in Foreign Proceedings

Section 235 [10] goes beyond bilateral agreements, allowing India to recognize and assist in foreign insolvency proceedings initiated in other countries. This section is crucial for situations where an insolvent company has assets or creditors located in India, but the main insolvency proceedings are taking place elsewhere. Here’s how Section 235 contributes to cross-border insolvency resolution:

Recognition of Foreign Insolvency Orders: Indian courts can recognize foreign insolvency orders issued by courts in other countries under this This recognition allows Indian courts to cooperate with the foreign proceedings and assist in asset recovery or other measures required by the foreign court[11].

Providing Assistance: The IBC empowers Indian courts to provide various forms of assistance to foreign insolvency proceedings. This might include assisting with the identification and recovery of assets located in India, enforcing foreign insolvency orders, or facilitating communication between foreign insolvency professionals and Indian authorities.

Vulnerability to Asset Stripping by Debtors

Cross-border insolvency creates a vulnerability to asset stripping by debtors[12]. This occurs when a financially distressed company facing insolvency proceedings in one jurisdiction attempts to move assets to another country. Imagine a company with a factory in India and a bank account in Singapore. If insolvency proceedings begin in India, the company might try to transfer funds from Singapore to a different account outside the reach of the Indian courts.

This vulnerability arises due to several factors:

Time Disparities: The legal systems in different countries might operate at varying speeds. Debtors can exploit these disparities by quickly transferring assets before insolvency proceedings are initiated or recognized in the other jurisdiction.
Challenges of Tracing and Recovering Assets: Locating and recovering assets hidden across borders can be a complex and time-consuming process. Difficulties in obtaining information from foreign authorities and navigating different legal frameworks further complicate matters.
Limited Enforcement Mechanisms: Even if assets are located abroad, enforcing Indian insolvency orders and recovering them can be challenging. Bilateral agreements and international cooperation mechanisms might not be well-established or may have limitations.

Limitations of the Current Framework

The IBC’s provisions for cross-border insolvency, while a positive step, are hampered by two key limitations:

Scarcity of Bilateral Agreements: A crucial constraint is the lack of a robust network of bilateral agreements with other countries. Though Section 234 empowers the Indian government to establish such agreements, the current number is limited. This restricts the reach of the IBC’s international cooperation mechanisms and leaves many cross-border cases without a clear framework for coordinated action. Further hindering smooth resolution is the time-consuming nature of negotiating and finalizing these agreements, creating uncertainty for companies operating across borders[13].
Non-adoption of the UNCITRAL Model Law[14]: India’s decision not to adopt the UNCITRAL Model Law on Cross-Border Insolvency means it lacks a standardized framework for cooperation between courts and insolvency professionals in different countries. This absence of a common framework creates challenges in international coordination, leading to inconsistencies, delays, and difficulties in enforcing insolvency judgments and recovering assets located abroad.

Potential Solutions for Strengthening the Mechanism

The limitations of the current framework highlight the need for improvements. India can strengthen the IBC’s approach to cross-border insolvency by prioritizing bilateral agreements with key trading partners and countries with significant Indian company presence[15]. Additionally, streamlining the negotiation process for these agreements, potentially through standardized templates or utilizing existing regional agreements as a foundation, can expedite their implementation.

Furthermore, adopting the UNCITRAL Model Law would provide a much-needed standardized framework for cross-border insolvency proceedings. This would enhance predictability and consistency in how courts across different countries handle such cases, fostering smoother international cooperation. The Model Law itself promotes cooperation between courts and insolvency professionals, facilitating communication, information exchange, and coordinated action in resolving these complex matters.[16]

Beyond legal frameworks, India can further strengthen the system by promoting training and collaboration programs for judges and insolvency professionals from various countries. This would foster a better understanding of each other’s legal systems and best practices, leading to more effective communication and cooperation in managing cross- border insolvency cases. Finally, leveraging technology like video conferencing and secure online platforms can bridge the gap between courts and professionals across borders, expediting the resolution process and reducing costs[17].

By implementing these solutions – expanding bilateral agreements, adopting the UNCITRAL Model Law, and enhancing cooperation through training and technology – India can propel the IBC towards a more efficient, predictable, and fair system for resolving cross-border insolvency cases in today’s globalized economic landscape.

India’s Insolvency Crossroads: The Landmark Jet Airways case

The Jet Airways case of 2019 highlights the complexities of cross-border insolvency proceedings. In 2019, Jet Airways, an Indian airline faced a financial crisis with a massive debt[18] burden. Two European creditors filed a petition in Netherlands court, seeking bankruptcy proceedings against Jet Airways for unpaid dues.

Subsequently, the Dutch court declared Jet Airways bankrupt in May 2019 and ordered the seizure of one of its aircrafts parked in Amsterdam. Meanwhile in June 2019, Indian lenders filed an application with the National Company Law Tribunal in India, Initiating the

Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code (IBC).

The central issue revolved around jurisdiction: which court, Indian or Dutch, had the authority to handle the Jet Airways’ insolvency proceedings?

The NCLT argued that Jet Airways was registered Indian company with its primary assets in India. The IBC provided a comprehensive framework for insolvency resolution. Also argued that concurrent proceedings in the Netherlands would cause delays and complexities.

The Dutch court, however considered that the presence of assets is within their jurisdiction (seized aircraft). Also, the potential for a faster resolution under Dutch bankruptcy laws.

Initially, the NCLT disregarded the Dutch court’s order, asserting its own jurisdiction. However, Jet Airways appealed to the National Company Law Appellate Tribunal (NCLAT). The NCLAT recognised the challenges of cross-border insolvency. It acknowledged the applicability of the UNCITRAL Model Law on Cross-Border Insolvency.

The NCLAT ultimately for parallel proceedings in India (under IBC) and the Netherlands, with a mechanism for coordination and information sharing. This marked a Significant development in Indian insolvency jurisprudence[19].

The Jet Airways case opened doors for a more collaborative approach to cross-border insolvency in India. It highlighted the need for international cooperation and recognition of foreign insolvency proceedings, while considering the location of a company’s core assets and interests of creditors.[20]

Other cases which developed cross border insolvency in India

The Indian Insolvency and Bankruptcy Code (IBC) of 2016 includes provisions related to cross-border insolvency issues; however, the Central Government has yet to enforce these provisions. Sections 234 and 235 grant the Government the authority to establish bilateral agreements aimed at enforcing the IBC in cross-border situations. Nevertheless, India has not yet established any reciprocal arrangements, highlighting the necessity for judicial interpretation due to the absence of guidelines. The lack of a comprehensive framework addressing cross-border issues is evident, as exemplified by notable cases such as Amtek Auto Ltd. (CoC) v. Dinkar T. Venkatasubramanian [21], SBI v. Videocon Industries Ltd.[22], and the Jet Airways case. Sections 234 and 235, in isolation, do not adequately encompass the intricacies encountered in cases involving diverse manufacturing jurisdictions and multinational corporations.

The Jet Airways case, which is the first to raise cross-border insolvency concerns in India, underscores the need for a more sophisticated approach. The judiciary has played a crucial role in shaping the legal landscape by acknowledging the limitations of the current legal framework. India implemented the IBC in 2016; however, due to the dynamic nature of cross-border transactions, there is a need for further measures. The incorporation of the UNCITRAL Model Law, customized to address India-specific concerns, has the potential to improve recognition and alignment, thereby providing advantages to both Indian companies operating internationally and foreign-based Indian subsidiaries.

The recognition of substantial consolidation by the National Company Law Tribunal (NCLT) in the Videocon Industries case represents a significant development. This decision has enabled the initiation of group insolvency proceedings, showcasing the judiciary’s ability to adapt in the absence of dedicated legislative provisions. The inclusion of foreign-based companies in group insolvency proceedings highlights the complexities and uncertainties surrounding the extraterritorial implementation of the IBC. Countries that have not adopted the UNCITRAL Model for cross-border insolvency either lack specific legislation or adhere to treaties in this matter. The incorporation of model law provisions into domestic insolvency

laws is advocated by judicial decisions to enhance the effectiveness of legal systems in addressing the complexities arising from cross-border transactions. The dynamic nature of India’s IBC necessitates a persistent effort to adapt and effectively tackle the intricacies of contemporary business transactions.

Conclusions

The labyrinthine challenges of cross-border insolvency under the IBC necessitate a multi- pronged approach for improvement. As we have explored, limitations like the scarcity of bilateral agreements and the non-adoption of the UNCITRAL Model Law hinder the effectiveness of the current framework.

The limited network of bilateral agreements can be addressed by prioritizing agreements with key trading partners and streamlining the negotiation process. Standardized templates or existing regional frameworks could serve as a foundation for these agreements. Additionally, adopting the UNCITRAL Model Law would provide a much-needed framework for harmonized and predictable cross-border insolvency proceedings, fostering greater international cooperation. Finally, challenges in cooperation can be overcome by investing in training and collaboration programs for judges and insolvency professionals from different countries. This will bridge the knowledge gap and facilitate communication, leading to more effective case management. Technological advancements like video conferencing and secure online platforms can further enhance collaboration across borders.

Beyond the proposed solutions, India can explore further avenues for refining its approach. A robust domestic insolvency regime is crucial. Continuously improving the efficiency and effectiveness of domestic insolvency proceedings will have a positive spill over effect on cross-border cases. Investing in specialized training programs for judges and insolvency professionals specifically focused on cross-border insolvency can create a pool of skilled individuals to handle these complex matters. Finally, India can actively engage in international discussions and collaborate with other countries and regional bodies to develop best practices and harmonize insolvency frameworks for a truly globalized approach.

Recommendations

To strengthen the IBC framework, the Indian government should prioritize entering into bilateral agreements with key trading partners and countries with a significant presence of Indian companies. Streamlining the negotiation process through standardized templates or leveraging existing regional agreements can expedite this endeavour. Additionally, adopting the UNCITRAL Model Law on Cross-Border Insolvency would provide a standardized framework for cross-border cases. This would promote predictability, facilitate international cooperation between courts and insolvency professionals, and ultimately lead to more efficient and effective resolutions.

Investing in training and collaboration programs for judges and insolvency professionals from various countries is crucial. This fosters a deeper understanding of different legal systems and best practices, enabling more effective communication and cooperation in managing cross-border insolvency matters. Finally, embracing technological advancements like video conferencing and secure online platforms can bridge geographical distances between courts and professionals. This facilitates communication, information exchange, and expedites the resolution process, ultimately reducing costs.

References:

[1] Insolvency and Bankruptcy Code, 2016, S. 3(8)

[2] Insolvency and Bankruptcy Code, 2016, S. 5(7)

[3] Insolvency and Bankruptcy Code, 2016, S. 3(11)

[4] S. Chandra Mohan, “Cross-Border Insolvency Problems: Is the UNCITRAL Model Law the Answer?”, International Insolvency Review, (2012) 21(3), 199-223

[5] Westbrook, J.L., “Chapter 15 at Last” (2005) 79 American Bankruptcy Law Journal 713

[6] Samuel Bufford, “Global Venue Controls Are Coming: A Reply to Professor LoPucki”, (2005) 79 Am. Bankr. LJ 105

[7] Insolvency and Bankruptcy Code, 2016, S. 234

[8] Insolvency and Bankruptcy Code, 2016, S. 235

[9] Ibbi. (n.d.).

[10] Ibbi. (n.d.).

[11] Kumar, V. (2020, January 6). Cross border insolvency regime in India A critical analysis

[12] Lexology. (n.d.).

[13] Archit Bhadani, “Cross-Border Insolvency with Reference to the ‘Centre of Main Interest’” (2022)

[14] taxguru_in. (2019, October 17). Cross border insolvency: Challenges and opportunities.

[15] Mevorach, Irit, The Future of Cross-Border Insolvency: Overcoming Biases and Closing Gaps (Oxford, 2018; online edn, Oxford Academic, 19 Apr. 2018)

[16] Desai, V. (n.d.). Introduction to cross-border Insolvency.

[17] Varsha. (2023, August 12). Challenges and solutions in cross border insolvency cases.

[18] Insolvency and Bankruptcy Code, 2016, S. 3(11)

[19] 2019 SCC OnLine NCLT 23875

[20] Memon, Z., & Gupta, A. (2021, October 31). Cross border insolvency regime in India.

[21] (2021) ibclaw.in 170 SC

[22] (2018) ibclaw.in 291 NCLT

[23] https://blog.ipleaders.in/cross-border-insolvency-analysis/

[24] https://www.lexology.com/library/detail.aspx?g=83c36e66-e1e2-4804-a2ca- 329ddb9d8fc1

[25] https://ibbi.gov.in/uploads/whatsnew/2021-11-23-215206-0clh9- 6e353aefb83dd0138211640994127c27.pdf

[26] https://www.lawaudience.com/cross-border-insolvency-regime-in-india-a-critical- analysis/#google_vignette

[27] https://www.lakshmisri.com/insights/articles/cross-border-insolvency-the-ever- evolving-framework/

[28] https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency

[29] Mevorach, Irit, The Future of Cross-Border Insolvency: Overcoming Biases and Closing Gaps (Oxford, 2018; online edn, Oxford Academic, 19 Apr. 2018)

[30] https://taxguru.in/corporate-law/cross-border-insolvency-challenges-laws- solutions.html

[31] https://bnblegal.com/article/challenges-and-solutions-in-cross-border-insolvency- cases/