As the government prepares amendments to the Insolvency and Bankruptcy Code (IBC) to introduce a cross-border resolution framework that would be tailored around a model law of the United Nations, it is set to retain powers to intervene under exceptional circumstances, sources told FE.
The cross-border insolvency law aims to ensure lenders have easier access to overseas assets of stressed companies. It will enable India to seek cooperation from foreign countries to bring defaulters’ assets there under consideration for insolvency proceedings.
“The government will have the power to intervene if it’s convinced that its insolvency framework based on the United Nations Commission on International Trade Law (UNCITRAL) isn’t adequately protecting the public interest in a particular case. It can then take a decision as it deems fit,” said one of the sources. However, it will be done only under exceptional circumstances and in all other cases, the framework modelled after the UNCITRAL would be adopted, sources familiar with the matter said.
Should the government choose to intervene, it can do so by issuing only an executive notification. It won’t need to go through the rigour of amending the cross-border insolvency framework of the IBC through Parliamentary clearances, they added. However, to introduce the cross-border framework in the IBC, the government needs to amend the law.
“This is an important requirement that will leave some scope for the government to act. Many nations that have adopted the UNCITRAL framework, too, have built in such provisions,” said one of the sources.
Cross-border insolvency framework was expected to be a part of the Insolvency and Bankruptcy (Second Amendment) Bill, 2021, that the government wanted to introduce in the winter session of Parliament to further strengthen the Code, cut delay in resolution of toxic assets to prevent value erosion. However, it didn’t introduce the Bill, as it wanted wider consultations on a raft of issues.
The cross-border insolvency law recognises that one country has to proceed with the main insolvency case and others with supplementary case, depending on the location of defaulters’ assets. Similarly, if a foreign country has already initiated insolvency proceedings against a particular defaulter to recover stressed assets some of which are located here, India, too, will also have to cooperate with that nation.
In November 2021, the ministry of corporate affairs (MCA) put out a draft proposing that such a framework be applied to not just corporate debtors but even personal guarantors to them, in sync with the extant corporate insolvency resolution norms for stressed assets located within the country.
The MCA also recommended that financial service providers such as banks and insurance firms be excluded from the purview of cross-border insolvency, in step with the provisions in many countries. This is also because such financial service providers are already subject to a special insolvency process notified under the Section 227 of the IBC. The RBI, for instance, has a prominent role to play in the insolvency resolution of banks.
Analysts have been highlighting the need for a cross-border insolvency law during the bankruptcy proceedings against Amtek Auto, Videocon Industries, Essar Steel and even Jet Airways, citing the many obstructions these cases witnessed due to issues that traverse borders — in the form of the location of assets, complex procedures, etc.
According to Anoop Rawat, partner (insolvency & bankruptcy) at Shardul Amarchand Mangaldas & Co, the IBC currently envisages the resolution of cross-border insolvency through bilateral agreements and letters of request in terms of sections 233 and 234 of the IBC. “Since no such bilateral agreement has been executed yet, the current regime remains hollow and inadequate. To effectively remedy this situation, the government has proposed the current framework in line with the UNCITRAL model law on cross-border insolvency,” Rawat said.
Late last year, the Parliamentary standing committee on finance stated that the IBC might have strayed from its original goals, thanks to inordinate delay in resolution and low recovery rates. The panel’s strong observations prompted the government to work towards further bolstering the insolvency framework with a renewed sense of urgency.
