Indian, foreign creditors to be equal under new insolvency provisions

Foreign and Indian creditors will get a fair portion of the assets of a firm going for insolvency

With the government recently notifying the cross-border insolvency provisions under the insolvency and bankruptcy law, claims of foreign creditors, as well as those of Indian creditors on foreign assets of the company going insolvent, could be satisfied by courts.

However, experts believe that notifying the rules is not enough and New Delhi will have to sign agreements with governments of other countries in this regard.

Before this, creditors, particularly foreign ones, had been raising this issue. In line with the model cross-border insolvency law approved by the United Nations General Assembly in 1997, India’s code allows unhindered access to foreign assets and allows foreign creditors to be part of the insolvency proceedings.

However, Misha, partner at law firm Shardul Amarchand Mangaldas, is of the opinion that this provision will only be useful if governments enter into meaningful agreements with other governments. She says, "Only notifying the provisions regarding cross-border insolvency by itself is not enough. It is necessary for the central government to enter into reciprocal arrangements with other countries. Some of the obvious sectors that can benefit once such agreements are in place would be aviation, shipping, and infrastructure, amongst others. These reciprocal arrangements would also be useful in all those cases where the creditors are pursuing remedies abroad or the company has overseas assets.”

The provisions are such that foreign creditors and Indian creditors will get a fair portion of the assets if the company goes for liquidation. Nilesh Sharma, an Insolvency Professional with Dhir and Dhir Associates, explains: "If assets in India are worth Rs 100 crore but the company owes Indian creditors Rs 200 crore and foreign creditors are owed Rs 200 crore against assets worth Rs 200 crore overseas, foreign creditors would have benefited. However, with the notification of the cross-border insolvency provisions, all creditors, whether foreign or Indian, will get the same portion of the total assets liquidated. The sum total of the assets will be considered for distribution rather than calculating it as two separate entities.

Along with this, the government also notified the rules for entry of information utility (IU) firms. IU firms store sensitive data about companies that go in for insolvency. This will include amount of debt, name of creditors etc. They allow insolvency professionals to get unhindered access to assets and liabilities of a company going in for insolvency. Since the inception of the insolvency code, there have been cases where the insolvency professional has found it difficult to obtain the present condition of the liabilities of the company.