Cross-Border Insolvency- Meaning and Risks Involved

Cross border insolvency is not defined in the Code, but, in general, it is a term used to describe circumstances in which an insolvent debtor has assets and/or creditors in more than one country. 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 jurisdiction where the insolvency proceedings take place;
• An insolvent company may have assets located in other such jurisdiction(s) which the creditor may access as part of the insolvency proceedings; and/or
• Insolvency proceedings with regards to the same debtor may be initiated or ongoing in more than one country.

With a boom in commercial technology, cross-border trades have no longer been restricted to only large MNCs. The growing size of economies has lured companies to stretch their business beyond their home locations, and organize their activities across the globe. Due to increasing globalization in every sector of business activities, businesses tend to encounter a wide array of frequent legal issues. Therefore, when such multinationals become insolvent, it comes as no surprise that these insolvencies have cross-border consequences.

In the absence of a framework for cross-border and uniform insolvency resolution, several questions remain unanswered and vague. A possible solution to confront the problems arising from these uncertainties may be to synchronize the insolvency laws of multiple jurisdictions to a certain degree. Since there are various and ubiquitous differences between the legal systems of countries, the goal of harmonisation of such statutes must be pursued.

Some complexities and risks that all businesses involved in cross-border trade may face may include:

• the extent to which an insolvency administrator may be able to gain access to assets held in a foreign country;
• the priority of payments, i.e., whether local creditors obtain access to local assets before the concerned funds go to the foreign administration, or whether they are to stand in line with the foreign creditors;
• whether local priority rules (such as employee claims) are subject to similar treatment under a foreign administration;
• application of transaction avoidance provisions.

These complexities necessarily result in uncertainty, risk and ultimately losses to businesses. It would be beneficial to businesses across the globe to have adequate mechanisms in place to deal with cross-border insolvencies efficiently and effectively.

The UNCITRAL Model of Law on Cross-Border Insolvency

To devise an effective method to handle cases involving cross-border insolvency, the United Nations Commission on International Trade Law proposed the UNCITRAL Model Law on Cross Border Insolvency, 1997 (“Model Law”). It was adopted on May 30, 1997, by the UNCITRAL at its 13th session held in Vienna. This model law was formulated due to the varied and non-uniform Cross Border Insolvency and bankruptcy laws that each nation uses in its specific manner for managing issues related to the same.

Also, it was passed as a model law and not as a convention so that nations could make necessary changes in their domestic laws regarding cross-border insolvency as per the model. Till now 46 countries have adopted this model law. It focuses on authorizing, encouraging cooperation and coordination between jurisdictions, rather than attempting to unify multiple substantive insolvency laws. It respects the differences among national procedural laws.

In India, the existing provisions for cross-border insolvency i.e. Section 234 & 235 of IBC are insufficient and time taking. This model law, if absorbed, will strengthen the framework of insolvency resolution.

With the enactment of this model law, India will become an attractive destination for foreign creditors for investment. The three main economic benefits achievable by the UNCITRAL Model Law are :

• reduction in time for exchanging necessary information between countries
• increase in credit recovery efficiency and
• cooperation and assistance help in preserving the company’s assets from dissipating, resulting in successful reorganization.

This law is much clearer than the IBC in terms of remedies and procedures to be followed for foreign entities. It's more flexible in the sense that a State can make changes in the model law as per their corresponding laws. For example, American law provides remedies only after foreign proceedings are recognized. Through this Model Law coordination between courts and insolvency professionals will exist in domestic as well as foreign jurisdictions.

Conclusion

When we look into the aspect of cross-border insolvency, many complex issues in several areas of law in different jurisdictions arise. Without proper legal provisions, there would be a threat for foreign investors to invest in India. Looking at the current situation, India is inviting many foreign nations to invest in the country and to even set up their manufacturing units in the country. So, to save not only there but also our interest, and motivate them to invest in the country, the adaptation and formulation of an insolvency law based on the UNICTRAL Model Law are of great importance.