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Navigating Cross-Border Insolvency
Context:
Adopting cross-border insolvency laws is crucial for international trade. Incorporating these laws into a country’s legal system is a key sign of effective insolvency laws.
About the UNCITRAL’s Model Law on Insolvency:
- Since the late 1990s, the UN Commission on International Trade Law (UNCITRAL) has been advocating for its Model Law.
- Four Key Principles:This Model Law is founded on four essential principles: access, recognition, cooperation, and coordination.
- Global Adoption: Only 60 countries have adopted the Model Law, with variations in implementation due to its non-binding nature.
- India’s Acknowledgement: In India, the Bankruptcy Law Reform Committee referenced the Model Law while formulating the Insolvency and Bankruptcy Code (IBC) in 2016.
- Acknowledgment of Importance:The Indian government recognized the significance of cross-border insolvency in the Economic Survey of 2022.
- Current Status of India’s Adoption:Despite recommendations, India has yet to adopt the UNCITRAL Model Law on Cross-Border Insolvency, relying instead on limited bilateral agreements that are deemed inadequate.
- Bilateral Agreements under the IBC:The Central government can enter into bilateral agreements under Section 234 of the IBC to manage cross-border insolvency (CB insolvency), enabling adjudicating authorities to communicate with foreign courts regarding corporate debtors’ assets abroad.
- Challenges Highlighted by Recent Cases:Recent cases, such as Jet Airways and Stanbic Bank Ghana, illustrate the challenges faced, with the National Company Law Appellate Tribunal (NCLAT) emphasising the need for a coordinated approach and collaboration between Indian and foreign authorities.
Need for involving Cross-Border Insolvency in FTA:
- India’s FTA Landscape: India has signed agreements with over 54 countries, aiming to reduce trade barriers.
- Inadequate Coverage: Current FTAs do not address insolvency, despite their significance to international trade.
- Inadequate Insolvency Provisions: Most FTAs and Comprehensive Economic Partnership Agreements (CEPAs) lack detailed cross-border insolvency provisions, focusing mainly on disputes and trade remedies.
- Lack of Specific Insolvency Provisions: Most FTAs contain broad dispute resolution clauses but fail to provide detailed provisions on cross-border insolvency, leading to uncertainty for trading entities.
- Inadequate Mutual Recognition of Insolvency Proceedings which can result in jurisdictional conflicts and hinder effective cross-border resolution.
- Risk of Trade Disruption due to supply chain disruptions .
- Insufficient Coverage of Investor Protections.
Case study for successful implementation of insolvency law:
Case Study 1: EnergyCo Ltd.
- EnergyCo Ltd., a multinational energy corporation, faced financial distress due to falling oil prices and rising debts. After seeking Chapter 11 protection under the U.S. Bankruptcy Code and initiating parallel proceedings globally, the UNCITRAL Model Law in Chapter 15 cases facilitated coordination and efficient asset administration.
- By recognizing the foreign main proceeding and providing necessary relief, the Model Law helped preserve assets and maintain operations, resulting in successful reorganisation.
Case Study 2: PharmaCorp Inc.
- PharmaCorp Inc., a UK-based pharmaceutical company, required operational restructuring after filing for insolvency under the UK’s regime. Seeking recognition in other jurisdictions with significant assets, the company utilised the UNCITRAL Model Law in Chapter 15 cases to obtain recognition of its foreign main proceeding.
- This safeguarded its global assets and enabled seamless administration, ensuring fair treatment of creditors and enhancing the likelihood of successful restructuring.
Challenges in integrating insolvency laws in FTA’s:
Variability in National Laws and Resistance to Change:
- Political and Economic Considerations:Governments often prioritise short-term economic concerns over legal reforms, and may view international insolvency norms as a challenge to their legal sovereignty.
- Bilateral and Multilateral Negotiation :Reaching consensus among countries involves complex, time-consuming negotiations, often complicated by conflicting national priorities.
- Implementation Costs and Resource Constraints:Adopting the Model Law requires substantial investments in legal infrastructure and training, and many developing countries face resource limitations that hinder effective implementation.
Recommendations
- Broaden FTA Scope: FTAs should include mechanisms to address the insolvency of trading entities.
- Government Agenda: Addressing insolvency in trade agreements could be part of the government’s standard operating procedures (SOPs) for FTAs.
- The Insolvency Law Committee (ILC) acknowledged that the IBC lacks a comprehensive framework for CB insolvency. It recommended aligning Indian laws with the UNCITRAL Model Law on Cross-Border Insolvency.
Conclusion:
Significance for Trade: Acknowledging the role of sound insolvency laws is crucial for strengthening India’s trade agreements. Timely integration of these laws will yield significant benefits for India’s international trade landscape.
