Syllabus
GS Paper 3 – Indian Economy and issues relating to planning, mobilization, of resources, growth, development and employment. Effects of liberalization on the economy, changes in industrial policy and their effects on industrial growth.
What does this article provide?
The article on “Cross-Border Insolvency Reform” discusses the urgent need to reform the Insolvency and Bankruptcy Code (IBC) framework in India to effectively address cross-border insolvencies, highlighting its significance for economic stability and investment. Students should understand the historical context, current challenges, and proposed reforms to strengthen the cross-border insolvency framework.
Potential Topics for Prelims
Features of the Indian Insolvency Act, 1848; Presidency-Towns Insolvency Act, 1909; Provincial Insolvency Act, 1920; Basic concepts of Insolvency and Bankruptcy Code (IBC), Cross-border insolvency basics
Potential Topics for Mains
Challenges of cross-border insolvency, Proposed reforms in the IBC for cross-border insolvency, Impact of cross-border insolvency on foreign investments, Case studies of cross-border insolvency in India and other countries
Source
The Hindu
Cross-Border Insolvency Reforms
Introduction
The growth in international trade has intensified cross-border insolvency challenges, underscoring the necessity for effective regulation. A dependable and predictable insolvency framework is crucial for economic stability, attracting foreign investments, and facilitating corporate restructuring. During the British Raj, India grappled with financial failures and cross-border commerce, leading to the introduction of the Indian Insolvency Act of 1848 as the first insolvency law. This was succeeded by the Presidency-Towns Insolvency Act of 1909, covering Calcutta, Bombay, and Madras, and the Provincial Insolvency Act of 1920, governing mofussil regions. Although these laws addressed domestic insolvencies, they overlooked the intricacies of cross-border insolvencies, creating a significant gap in the legal system.
Cross-Border Insolvency Framework in India
- Definition of cross-border insolvency: When a debtor facing insolvency has creditors and/or liabilities in multiple jurisdictions.
- British era insolvency laws: The Indian Insolvency Act of 1848 was the first legislation to address domestic insolvency.
- Early 20th-century laws: The Presidency-Towns Insolvency Act of 1909 covered Calcutta, Bombay, and Madras, while the Provincial Insolvency Act of 1920 applied to other regions.
- UNCITRAL Model Law: The United Nations Commission on International Trade Law (UNCITRAL) introduced the Model Law on International Commercial Arbitration in 1985.
- Committee recommendations: The Eradi Committee (2000), Mitra Committee (2001), and Irani Committee (2005) advocated for adopting the UNCITRAL Model Law.
- Liberalization era: In the 1990s, economic liberalisation and globalization emphasized the necessity for a comprehensive insolvency framework.
- IBC Code 2016: The Insolvency and Bankruptcy Code (IBC) of 2016 established a unified framework for insolvency and bankruptcy procedures for companies, partnerships, and individuals.
- Provisions for cross-border insolvency:
- Section 234: Enables the Indian government to apply IBC provisions in foreign nations through reciprocal arrangements.
- Section 235: Describes the process for requesting assistance from foreign courts via a letter of request.
- Provisions for cross-border insolvency:
Need for Cross-Border Insolvency Framework
- Growth in international trade and investment: Cross-border investments surged in the 1970s and 1980s due to:
- Creation of the Euromarkets.
- Relaxation of capital market restrictions.
- Expansion of institutional investors like mutual funds and pension funds.
- Economic stability: A robust insolvency framework can mitigate the economic impacts of cross-border insolvencies by ensuring a smooth resolution process.
- Attracting foreign investments: A structured insolvency framework provides legal certainty and protection for businesses, boosting investor confidence.
- Facilitating corporate restructuring: Offers a structured and predictable process for handling insolvent entities operating in multiple jurisdictions.
Issues with the Current Cross-Border Insolvency Framework
- Absence of Reciprocal Agreements: India has yet to establish significant bilateral agreements for the recognition and enforcement of cross-border insolvency proceedings with other nations.
- Inactive Provisions: Sections 234 and 235 of the IBC remain legally unenforceable due to the central government’s non-notification of related by-laws.
- Slow Progress on Amendments: Despite recommendations from various technical and joint parliamentary committees, reform amendments have not been enacted.
- Committee Recommendations: The Insolvency Law Committee (2018) and the Cross-Border Insolvency Rules/Regulation Committee (2020) have both advocated for adopting the UNCITRAL Model Law on Cross-Border Insolvency.
- Judicial Burden: The requirement for court approvals increases the judicial workload, raises transaction costs, and delays resolutions, thereby reducing the debtor’s asset value.
- Limited Authority of NCLT: The National Company Law Tribunal (NCLT) cannot effectively address cross-border insolvency issues due to the failure to implement Rule 11 of the NCLAT Rules, 2016, for IBC matters.
The Need for Cross-Border Insolvency Reform
- Temporary Solutions:
- Protocols address individual cases effectively but remain ad hoc and temporary.
- Court approvals increase judicial workload, transaction costs, and delay resolutions, reducing debtor’s asset value.
- Experts recommend adopting the UNCITRAL Model Law for a structured framework.
- Modernising Communication:
- Reform outdated communication methods between Indian and foreign courts.
- Adopting the Judicial Insolvency Network (JIN) Guidelines (2016) and its Modalities of Court-to-Court Communication (2018) would:
- Modernise judicial coordination.
- Enhance transparency.
- Improve efficiency.
- Expanding NCLT Powers:
- Section 60(5) of the IBC restricts civil courts from insolvency jurisdiction, leaving the NCLT as the sole authority.
- NCLT lacks the power to recognise or enforce foreign judgments, limiting its effectiveness.
- Non-implementation of Rule 11 of the NCLAT Rules, 2016, prevents the NCLT from exercising jurisdiction over cross-border insolvency.
- Expanding NCLT powers is crucial for effective management of cross-border insolvency cases.
Conclusion
In conclusion, reforming the cross-border insolvency framework in India is imperative for ensuring economic stability, enhancing investor confidence, and enabling efficient corporate restructuring. By adopting a structured framework like the UNCITRAL Model Law, modernising judicial communication through the Judicial Insolvency Network Guidelines, and expanding the powers of the NCLT, India can effectively manage cross-border insolvency cases. These reforms will address the existing limitations, streamline processes, and strengthen the overall insolvency regime, making it more resilient and conducive to the demands of a globalised economy.
Related PYQ
How globalization has led to the reduction of employment in the formal sector of the Indian economy? Is increased informalization detrimental to the development of the country? [UPSC CSE – 2017 Mains]
Practice Question
Discuss the need for reforming the cross-border insolvency framework in India. What are the challenges faced by the current system, and how can these be addressed? [150 words]
Guidelines to Answer the Question
- Introduction:
- Briefly introduce the concept of cross-border insolvency.
- Mention the growth in international trade and the importance of an effective cross-border insolvency framework.
- Need for Reform:
- Explain why there is a need for reform, emphasizing economic stability, attracting foreign investments, and facilitating corporate restructuring.
- Challenges with the Current Framework:
- Lack of reciprocal agreements.
- Inactive provisions of Sections 234 and 235.
- Slow progress on amendments despite recommendations.
- Judicial burden due to the need for court approvals.
- Limited authority of NCLT in recognizing and enforcing foreign judgments.
- Proposed Solutions:
- Adoption of the UNCITRAL Model Law.
- Modernizing communication methods between Indian and foreign courts.
- Expanding the powers of the NCLT to recognize and enforce foreign judgments.
- Conclusion:
- Summarize the importance of these reforms.
- Highlight the potential benefits of a robust cross-border insolvency framework for India’s economy and global trade relations.