The Indian Insolvency and Bankruptcy Code, 2016 (Code), which came into effect on May 28 2016 provides a consolidated framework for the insolvency of companies, limited and unlimited liability partnerships, and individuals. The Code provides a mechanism for time-bound recovery of dues from insolvent debtors in India and for contributing to the ease of doing business in India. However, the efficiency of the Code relating to cross border insolvency is disputable.

CROSS BORDER INSOLVENCY

Cross border insolvency is not defined in the Code, but in general it may be understood as insolvency of borrowers who have assets or creditors in different jurisdictions, or are subject to insolvency proceedings in multiple jurisdictions. Therefore, cross border insolvency majorly includes three aspects:

  • The insolvent company may have several foreign creditors who want their claim to be protected even if they are not in the country where the insolvency proceedings take place;
  • An insolvent company may have assets located in another jurisdiction which the creditor may access as part of the insolvency proceedings;
  • Insolvency proceedings with respect to the same debtor may be commenced and ongoing in more than one country.

The first scenario is catered by the Insolvency and Bankruptcy Code, 2016 as it does not discriminate between domestic and foreign creditors. By including "persons not resident in India" in the definition of persons under Section 3(23) of the Code and resultantly in the definition of creditors, the new legislation permits foreign creditors to commence and participate in the proceedings under the Code. Foreign creditors have been given the same rights as of the domestic creditors regarding distribution of assets on the liquidation of an insolvent company. However, the second and third aspects mentioned above are not dealt with in the Code as it currently lacks any mechanism for reciprocity, cooperation and coordination between jurisdictions of an Indian court or tribunal to seek the assistance of a foreign courts or insolvency authorities when an insolvency proceeding may have implications across national borders. Subsequently, to fill up the lacuna, the Joint Parliamentary Committee's Report introduced two new provisions, namely Sections 234 and 235 to address these situations. Section 2341 states that the Central Government may enter into bilateral agreements with other countries for purposes of enforcing the Code. Section 2352 provides the relevant court or tribunal in India to issue a letter of request to a foreign court or tribunal seeking its assistance in situations where a debtor's assets may be located  abroad.

BILATERAL AGREEMENT: WAY FORWARD

Bilateral agreements can and have in the past been used to deal with cross border insolvency concerns. In fact, even before introducing procedural framework in form of treaties, the provisions for bilateral agreements should be embedded in the domestic law of the country. The Code provides for this primal requirement.

DRAWBACKS IN CROSS BORDER INSOLVENCY PROCEDURE

Even if entering into Bilateral Agreement with different countries may be a way for dealing with cross border insolvency provided by the Code, there are various problems to it:

  • Materializing a bilateral agreement requires time;
  • Insolvency regimes of different countries may vary widely;
  • Countries may have different rules regarding assistance and recognition of judgment in different countries.

CONCLUSION

India has become a destination for foreign investors. Hence, it is important to ensure that the rights and interests of foreign investors are secured to collect their dues just like domestic investors. It is important that proper insolvency regime is established if India wants to promote foreign direct investment. A cross border insolvency law helps in providing effective mechanisms for dealing with cross border insolvency. It is done by increasing cooperation and reciprocity amongst different courts and competent authorities.

Footnotes

1 "Agreement with foreign countries"

2 "Letter of request to a country outside India in certain cases"

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