Cross-Border Insolvency in India and Legal Reform

What is Cross-Border Insolvency?

• When an insolvent debtor has credit and/or debtors in more than one jurisdiction i.e. in different countries.
• In domestic insolvency proceedings, the Insolvency Professional performs several key tasks.
  • First, they identify the assets owned by the debtor.
  • Next, they determine which creditors are owed money and how much each one is owed.
  • After this information is gathered, the claims are settled based on a priority rule.
• This settlement requires approval from the Adjudicatory Authority.

Insolvency Laws in India

Under British Rule

• Indian Insolvency Act (1848): The first insolvency law addressing domestic insolvencies.
• Presidency-Towns Insolvency Act (1909): Applied to Calcutta, Bombay, and Madras.
• Provincial Insolvency Act (1920): Governed insolvencies in mofussil regions.
• Limitations: These laws did not address cross-border insolvencies.

Post-Independence Period

• Laws remained unchanged despite the Third Law Commission’s recommendation in its 26th Report (1964) for modernisation.
• Cross-border insolvency discussions gained prominence during the 1990s with economic liberalisation.
• Multiple committees recommended adopting the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (1997):
  • Eradi Committee (2000).
  • Mitra Committee (2001).
  • Irani Committee (2005).
  • The Insolvency Law Committee recommended the adoption of the UNCITRAL Model Law in 2018.
  • Parliamentary Standing Committee on Finance (2021 and 2024): Highlighted the need for immediate adoption of the Model Law to address the regulatory gap
• The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced as the primary legislation governing insolvency and bankruptcy in India.
  • Section 234 empowers the Indian government to enter into bilateral agreements with other countries to manage insolvency cases that cross borders.
  • Section 235 permits Indian courts to seek assistance from foreign courts in handling the assets and affairs of a corporate debtor.
  • Section 60(5): Restricts civil courts from exercising jurisdiction over insolvency matters, including cross-border cases.
    • This section leaves the NCLT as the sole adjudicating authority.

Challenges in Cross-Border Insolvency in India

The provisions in sections 234 & 235 of IBC remain unenforceable due to a lack of reciprocal arrangements and non-notification by the government.

• Absence of a structured framework for cross-border insolvency.
• Reliance on ad hoc protocols increases judicial burden and delays.

Challenges in Implementing the Model Law in India

• Jurisdictional Limitations: NCLT’s (National Company Law Tribunal’s) restricted powers in recognizing and enforcing foreign judgments could hinder implementation.
• Lack of Reciprocal Agreements: India needs bilateral agreements to operationalize cross-border insolvency provisions effectively.
• Judicial Expertise: Requires capacity-building for judges and insolvency professionals to handle complex cross-border cases.
  • The NCLT faces resource constraints, with judges often handling multiple cases simultaneously. This situation contributes to significant delays in processing insolvency applications.
• Conflict with Domestic Laws: Harmonizing the Model Law with existing IBC provisions and other domestic laws is critical.

Reform Recommendations

• Adopting the UNCITRAL Model Law: Provides a structured framework for cross-border insolvencies.
  • Reduces delays, transaction costs, and judicial burden.
• Modernising Communication Between Courts:
  • Judicial Insolvency Network (JIN) Guidelines (2016) and Modalities of Court-to-Court Communication (2018): Enhance transparency and efficiency.
  • Expanding NCLT’s Powers: Strengthening its jurisdiction will enable effective cross-border insolvency management.

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