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In India Cross Border Insolvency is a term that is highly unregulated. The Government of India has looked to fill the glaring gaps and in the process they have released draft guidelines in furtherance of the same. In this article we shall look at Cross Border Insolvency & Bankruptcy.
Our Indian legal system on insolvency and bankruptcy has been criticized for being outdated and creditor unfriendly. The Indian Insolvency and Bankruptcy Code came into effect on May 28, 2016, which provides a consolidated framework for the insolvency of companies, limited and unlimited liability partnerships, and individuals.
The Indian Insolvency and Bankruptcy Code is being framed for the time-bound recovery of dues from insolvent debtors in India and for contributing to the ease of doing business in India.
This code helps in filling the gaps which are required to be filled to make cross-border insolvency provisions more effective.
Cross-border insolvency is also referred to as international insolvency. Bankruptcy Code regulates the treatment of financially distressed debtors where such debtors have assets or creditors in more than one country across the world.
When the Bankruptcy Code was first introduced in India, it was completely silent on the issue of cross-border Insolvency. However, a mechanism for dealing with cross-border insolvency was introduced into the Bankruptcy Code on the basis of recommendations from the Report of the Joint Committee on the Insolvency and Bankruptcy Code 2015. Every day, Indian businesses are having more and more international transactions which create a requirement for a strong mechanism to resolve the international creditor-debtor relationships.
Issues related to cross-border insolvency arise when operations of a company are in financial distress. It can be classified as:
There has been a growth in cross-border investment activity, with increasing globalization. With the effective system of cross-border insolvency laws, it will strengthen global trade and investment.
Recognition of foreign insolvency proceedings is the main objective of a legal system that seeks to address cross-border insolvency.
Following situations can arise under cross border insolvency cases:
In our country, the enforcement of decrees is governed by the Code of Civil Procedure 1908, which is the applicable procedural law for civil cases.
The decision taken by an executive body or a quasi-judicial body shall not be treated as a foreign judgment. During insolvency proceedings, orders passed by a foreign tribunal are not enforceable by Indian courts.
The Insolvency and Bankruptcy Code stipulates following solutions regarding cross-border insolvency:
United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency has not been adopted by India yet. In the case of bilateral agreements, it will be a difficult and lengthy process to negotiate an agreement with each country.
Some provisions have been made under the Bankruptcy Code to address the issue of cross border insolvency. Under this foreign & domestic creditors are not discriminated against. Under the new legislation, foreign creditors can participate in cross border insolvency proceedings because “person not resident in India” has been included in the definition of persons and under the definition of creditors. On the liquidation of an Insolvent company, foreign creditors shall have the same right as domestic creditors regarding the distribution of assets.
It is very important to ensure that foreign entities have full rights to collect their dues like Indian entities.
Bankruptcy code helps in following ways for promoting FDI in India and standardize regulations on par with foreign countries:
Due to the incipient corporate stress it is critical for India to adopt a cross border framework. If it’s not implemented at the earliest then it may have bad consequences for corporates and for creditors in India.
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