Issue of Cross-Border Insolvency and Need for Legal Reforms

Context: The growth of India’s external trade necessitates an effective cross-border insolvency framework. India's current framework being inadequate, experts recommend adopting the UNCITRAL Model Law and enhancing National Company Law Tribunal’s (NCLT) powers for efficient insolvency management.

What is Cross-Border Insolvency?

• Cross-border insolvency is a complicated phenomenon that occurs when a business that has assets and liabilities dispersed across several jurisdictions goes bankrupt. 
• Such cases present special issues since they require coordinated action between courts and insolvency professionals in many nations.

Evolution of Insolvency Framework in India

• Under British Raj:

• Post-Independence:

Cross-Border Insolvency Challenges in India:

• Absence of Reciprocal Arrangements: E.g., In the case of State Bank of India vs Jet Airways (India) Limited 2019, the absence of reciprocal arrangement b/w India and Netherlands for cross-border insolvency resolution, delayed the resolution. 
• Unenforceable Legal Provisions: Sections 234 and 235 of the Insolvency and Bankruptcy Code (IBC) are not notified, rendering them as ‘dead-letters’ or legally unenforceable. 
• Limitations of NCLT: National Company Law Tribunal lacks the power to enforce foreign judgments, limiting its effectiveness in managing cross-border insolvency matters.

Regulatory Interventions to address Cross-border Insolvency:

• Expert Committees: 
  • The Ministry of Corporate Affairs constituted two expert committees: Insolvency Law Committee (2018) and Cross-Border Insolvency Rules/Regulation Committee (2020). 
  • Both committees recommended adopting UNCITRAL Model Law on Cross-Border Insolvency. 
• Parliamentary Recommendations: 
  • These recommendations were later endorsed by the Parliamentary Standing Committee on Finance in its Thirty-Second Report, “Implementation of IBC – Pitfalls and Solutions” (2021), and reiterated in its Sixty-Seventh Report (2024).
• Ad-hoc Solutions: 
  • In State Bank of India vs Jet Airways (India) Limited 2019, National Company Law Appellate Tribunal (NCLAT) adopted a “cross-border insolvency protocol”.
  • Cross-border insolvency protocol is an internationally recognised approach used as an ad hoc solution (temporary solution) for regulating cross-border insolvencies.

UNCITRAL Model Law:

• UNCITRAL Model Law provides a structural approach to cross-border insolvency. The model law deals with four major principles of cross-border insolvency:
  • 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, by identifying the centre of main interest (COMI).

About UN Commission on International Trade Law (UNCITRAL)

• It is a subsidiary body of the UN General Assembly established in 1966.
• Mandate: To further the progressive harmonization and unification of the law of international trade. 
• Membership:
  • The Commission is composed of 60 member States elected by the General Assembly.
  • The 60 member States include:
    • 14 African States
    • 14 Asian States
    • 8 Eastern European States
    • 10  Latin  American and Caribbean States 
    • 14 Western European and other States. 
• The General Assembly elects members for terms of six years; every three years the terms of half of the members expire. 
• India is a founding member of this organisation.

Reforms needed in Cross-border Insolvency:

• Adopting a Structured Framework:
  • Protocols are only an ad hoc/temporary solution. 
  • Need for court approvals increases judicial burden, transaction costs, and delays resolutions, reducing the debtor’s asset value.
  • A structured framework modelled on lines of UNCITRAL Model Law is the need of the hour.
• Modernise Judicial Coordination:
  • Reforming the outdated communication methods between Indian and foreign courts is crucial, especially for cross-border insolvency cases. 
  • Adoption of Judicial Insolvency Network (JIN) Guidelines (2016) and its Modalities of Court-to-Court Communication (2018) is recommended to:
    • modernise judicial coordination
    • enhance transparency
    • improve efficiency in handling cross-border insolvency matters.
• Empowering NCLT:
  • Section 60(5) of the IBC restricts Civil Courts from exercising jurisdiction over insolvency matters, including cross-border cases. This leaves NCLT as the sole adjudicating authority. 
  • However, NCLT lacks the power to enforce foreign judgments, limiting its effectiveness in managing cross-border insolvency matters. Thus, it is imperative to expand the powers of the NCLT to recognise and enforce foreign judgments. 

Conclusion: Adopting the UNCITRAL Model Law on Cross-Border Insolvency is in line with international standards and provides a structured framework for recognition, cooperation and coordination in cross-border insolvency cases. Along with it, empowering NCLT will strengthen the insolvency framework in India.