Insolvency and Bankruptcy Code

India, cross-border insolvency and legal reform

Explained | Security Issues | Mains Paper 3: External State & Non-State Actors: Challenges To Internal Security.
Note4Students

From UPSC perspective, the following things are important :

Mains level: Issues related to insolvency;

Why in the News?

The current state of cross-border insolvency laws is poor, with rules that cannot be enforced and slow progress in making necessary changes. This situation needs to be fixed.

How did the evolution of the cross-border insolvency framework in India?

  • Post-Independence Legal Framework: After Independence, India’s insolvency laws focused on domestic cases and did not address cross-border insolvency, leaving a significant gap in the legal framework.
  • Committee Recommendations and IBC Drafting: In the 2000s, committees like the Eradi, Mitra, and Irani Committees recommended adopting the UNCITRAL Model Law, leading to the drafting of the Insolvency and Bankruptcy Code (IBC) in 2015, which initially focused on domestic insolvencies.
  • Incorporation of Cross-Border Provisions: Sections 234 and 235 were introduced in 2016 to facilitate cross-border insolvency, allowing reciprocal agreements and assistance from foreign courts, though their effectiveness was limited by the lack of implementation and reciprocal arrangements.

What are the key challenges in adopting a cross-border insolvency framework in India?

  • Outdated Framework: Current legal provisions, such as Sections 234 and 235 of the Insolvency and Bankruptcy Code (IBC), remain non-notified and unenforceable, rendering them ineffective. Reliance on ad hoc protocols like in the Jet Airways case increases judicial burden, delays resolutions, and reduces asset value.
  • Jurisdictional Issues: Section 60(5) of the IBC limits the jurisdiction of civil courts over insolvency matters, leaving the National Company Law Tribunal (NCLT) as the sole authority. However, the NCLT lacks the power to recognize or enforce foreign judgments.
  • Lack of Reciprocal Arrangements: The absence of reciprocal agreements between India and other nations for cross-border insolvency resolution creates barriers to effective cooperation.
  • Inefficient Court Communication: Outdated communication methods between Indian and foreign courts hinder transparency and efficiency in handling cross-border insolvency matters.
  • Legislative Gaps: The delay in adopting structured frameworks, such as the UNCITRAL Model Law, highlights a critical regulatory gap in managing cross-border insolvencies.

How does India’s proposed legislation align with international standards, such as the UNCITRAL Model Law?

  • India’s proposed amendments to the IBC aim to incorporate elements of the UNCITRAL Model Law on Cross-Border Insolvency, which provides a structured framework for international cooperation and coordination in insolvency matters.
    • By adopting this model, India seeks to enhance its legal framework to better manage cross-border insolvencies and align with global best practices.
  • The recommendations from various expert committees, including the Insolvency Law Committee and the Parliamentary Standing Committee, emphasize the need for a comprehensive approach that includes provisions for recognizing foreign insolvency proceedings and facilitating smoother communication between jurisdictions.

What implications do these reforms have for foreign investment and economic growth in India?

  • Attracting Foreign Investment: A robust cross-border insolvency framework will enhance investor confidence by ensuring that their rights are protected in case of insolvency. This predictability is crucial for attracting foreign direct investment (FDI) into India, as investors seek assurance that their interests will be managed effectively across borders.
  • Facilitating Corporate Restructuring: Improved legal mechanisms for cross-border insolvency will enable Indian companies operating internationally to restructure more efficiently when faced with financial difficulties. This can lead to better asset recovery and preservation of business value, ultimately contributing to economic stability and growth.
  • Strengthening Economic Ties: By aligning its insolvency laws with international standards, India can foster stronger economic relationships with other nations, facilitating smoother trade and investment flows. This alignment is essential as India’s economic integration with global markets continues to grow.

Way forward: 

  • Adopt UNCITRAL Model Law: Expedite the implementation of the UNCITRAL Model Law on Cross-Border Insolvency to establish a predictable, structured framework for managing international insolvency cases, fostering investor confidence and global integration.
  • Enhance NCLT Capacity: Strengthen the National Company Law Tribunal (NCLT) with expanded jurisdiction and training to effectively handle cross-border insolvency cases, alongside modernizing judicial coordination mechanisms through international guidelines like JIN.

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