India, Cross-Border Insolvency and Legal Reform (GS Paper 3, Security)
Context
- India's cross-border insolvency framework is in a dismal state, with unenforceable governing sections and slow progress on amendments.
- These issues need urgent attention to effectively manage cross-border insolvency challenges.
Introduction
- The growth of international trade has highlighted the increasing challenges of cross-border insolvency.
- A robust and predictable insolvency framework is crucial for economic stability, foreign investment attraction, and smooth corporate restructuring.
- Historically, India struggled with managing financial failures and cross-border commerce under British rule.
- Initially, the Indian Insolvency Act of 1848 and later the Presidency-Towns Insolvency Act 1909 and the Provincial Insolvency Act 1920 handled domestic insolvencies but left a legal gap in addressing cross-border insolvency cases.
An Evolution in India’s Insolvency Laws
- Historical Context: Post-independence, India’s insolvency laws remained stagnant, despite calls for modernization, including the Third Law Commission's 26th Report (1964).
- 1990s Economic Liberalization: As India’s economy globalized, the need for a modern insolvency law that could handle cross-border insolvencies gained attention. Several committees, including the Eradi Committee (2000), Mitra Committee (2001), and Irani Committee (2005), suggested adopting the UNCITRAL Model Law on Cross-Border Insolvency, 1997.
Drafting of the Insolvency and Bankruptcy Code (IBC)
In 2015, the Bankruptcy Law Reform Committee drafted the Insolvency and Bankruptcy Code (IBC), focusing on domestic insolvencies. However, after concerns raised by the Joint Parliamentary Committee regarding the absence of provisions for cross-border insolvency, Sections 234 and 235 were added.
- Section 234: Enables India to enforce IBC provisions in foreign jurisdictions through reciprocal agreements.
- Section 235: Outlines the process for requesting assistance from foreign courts.
Cross-Border Insolvency Challenges in India
- State Bank of India vs Jet Airways (2019): This case highlighted two major issues with Sections 234 and 235:
- Lack of reciprocal arrangements with countries like the Netherlands for cross-border insolvency.
- Non-notification of these sections, rendering them legally unenforceable.
This case exposed that these provisions were "dead letters", meaning they were theoretically in place but practically not applicable.
Addressing the Regulatory Gap
To bridge the regulatory gap, India formed expert committees:
- Insolvency Law Committee (2018)
- Cross-Border Insolvency Rules/Regulation Committee (2020)
These committees suggested adopting the UNCITRAL Model Law on Cross-Border Insolvency, a recommendation endorsed by the Parliamentary Standing Committee on Finance in its reports.
Urgency for a Cross-Border Insolvency Framework
- Both the Thirty-Second Report (2021) and Sixty-Seventh Report (2024) emphasized the urgent need for a structured cross-border insolvency framework to strengthen the IBC, 2016.
- However, the current state of cross-border insolvency regulation remains poor, with unenforceable sections and slow progress on necessary amendments.
Jet Airways vs State Bank of India (2019)
- In this case, the National Company Law Appellate Tribunal (NCLAT) considered a "cross-border insolvency protocol", an internationally recognized solution.
- However, ad hoc protocols have only provided temporary solutions.
- Experts suggest that a more structured approach, such as adopting the UNCITRAL Model Law, is needed for long-term resolution.
Reforming Communication Between Indian and Foreign Courts
To improve cross-border insolvency cases, India must modernize communication methods between Indian and foreign courts. Adopting the Judicial Insolvency Network (JIN) Guidelines (2016) and Court-to-Court Communication Modalities (2018) will help:
- Enhance transparency.
- Improve efficiency and coordination in handling cross-border insolvency matters.
Conclusion
- The IBC currently restricts civil courts from handling insolvency cases, including cross-border ones, with the NCLT being the sole adjudicating authority.
- However, the NCLT lacks the authority to recognize or enforce foreign judgments, which hampers its ability to address cross-border insolvency effectively.
- The failure to implement Rule 11 of the NCLAT Rules, 2016 for IBC cases further limits the NCLT’s jurisdiction, making it less effective in managing cross-border insolvency cases.
- To resolve these issues, expanding the powers of the NCLT is crucial for ensuring efficient and comprehensive management of cross-border insolvency matters.
