Cross-border insolvency: Cabinet likely to take up new provisions soon

The ministry of corporate affairs is learnt to have prepared a Cabinet note on cross-border insolvency that talks of bringing in a separate chapter in the Insolvency and Bankruptcy Code (IBC) against the current provisions under Sections 234 and 235 of the Code. Rules under the current provisions have not been notified and, hence, cross-border insolvency has not yet become effective.

The note is expected to be taken to the Cabinet soon. The proposed cross-border provision will empower foreign creditors to claim assets on insolvent Indian companies and vice versa.

The chapter is being added to the Code because under the present sections cross-border insolvency can be enforced only if India enters bilateral treaties with foreign governments, which will be a prolonged process.

Finalising these treaties lends uncertainty among foreign investors. This also creates ambiguity for Indian courts and the National Company Law Tribunal (NCLT) that has to treat each case separately.

Since the chapter is being added, it would require Parliament's nod to amend IBC.

The United Nations Commission on International Trade Law (UNCITRAL) model has been zeroed-in on by the government for this purpose. According to the UNCITRAL model, India will have reciprocal arrangements with jurisdictions that have a cross-border insolvency law. This would reduce time for exchanging information between two countries.

Officials said this would send a signal to foreign investors and multi-lateral agencies, such as the World Bank, about the robustness of the country’s financial sector reforms.

India was ranked 77 among 190 countries in the Ease of Doing Business ranking by the World Bank in 2018, against 100 in 2017.

A panel, headed by Corporate Affairs Secretary Injeti Srinivas, has recommended using the UNCITRAL model law. The model law deals with four major principles of cross-border insolvency — direct access to foreign insolvency professionals and foreign creditors to participate in domestic insolvency proceedings against a defaulting debtor, recognition of foreign proceedings and provision of remedies, cooperation between domestic and foreign courts and domestic and foreign insolvency practitioners, and coordination between two or more concurrent insolvency proceedings in different countries.

The model law has been adopted by 44 countries, including the US, the UK, and Singapore. In the past, the IBC has been amended to include Section 29(A) that bars errant promoters from bidding for companies undergoing resolution. This also granted homebuyers the status of financial creditors. In a second amendment to the Code, the government also allowed the withdrawal of application after a case was admitted in the NCLT if 90 per cent of lenders approved it.