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Cross Border Insolvency and Bankruptcy


Cross Border Insolvency and Bankruptcy

Cross-border insolvency or international insolvency, regulates the treatment of financially distressed debtors where such debtors have assets or creditors in more than one country across the globe. When the Bankruptcy Code was first unveiled in India, it was completely silent as an abrupt on the issue of cross border Insolvency. However, based on recommendations from the Report of the Joint Committee on the Insolvency and Bankruptcy Code, 2015 (Joint Committee) a mechanism for dealing with cross-border insolvency was later incorporated into the Bankruptcy Code, India has emerged as a global business hub, and Indian businesses have more and more international transactions every day, creating a requirement for a strong mechanism to resolve international creditor-debtor relationship. 

Cross Border Insolvency

Cross border insolvency issues arise when a company in financial distress has assets, business operations or creditors in more than one country.  This can be classified into major areas like:

  • Foreign creditors have rights/claims over a debtor’s assets in another jurisdiction where insolvency proceedings are underway;
  • The debtor has branches/assets in several jurisdictions, including a jurisdiction other than where the insolvency proceedings are underway; and,
  • Debtor entity is subject to insolvency proceedings simultaneously in one or more jurisdictions.

Cross border insolvency cases typically involve a combination of situations like:

  • An insolvent company have several foreign creditors who ensure their rights are protected even though they may not be based in the country where the insolvency resolution is taking place.
  • An insolvent company may have assets located in another jurisdiction of any other country, which its creditors may want to access as part of the insolvency proceedings.
  • An insolvent company could have insolvency proceedings for the same debtor commenced and ongoing in more than one country.
  • A corporate group could face financial difficulties and proceedings against different legal entities within the group which commence different jurisdictions.

Cross Border Insolvency under Bankruptcy Code

To address the above areas of cross border insolvency, enabling provisions have been made in Bankruptcy Code, 2016.  Under the new law, foreign and domestic creditors are not discriminated. By including “persons not resident in India” in the definition of persons and, as a consequence, in the definition of creditors, the new legislation permits foreign creditors to commence and participate in the proceedings under the Indian Bankruptcy Code. Further, foreign creditors also have the same rights as similarly situated domestic creditors regarding the distribution of assets on the liquidation of an insolvent company.

India is becoming a sought after destination for foreign investors. Hence, it is important to ensure that foreign entities have full rights to collect their dues, just like Indian entities. Thus, to promote FDI in India and standardize regulations on par with foreign countries, the new Bankruptcy helps in the following ways:

  • A cross-border insolvency law helps in providing effective mechanisms for dealing with cases of cross-border insolvency, and it is by promoting cooperation between the courts and other competent authorities of different countries.
  • Greater legal certainty for trade and investment, fair and efficient administration of cross-border insolvencies that protects the interests of all stakeholders.
  • Protection and maximization of the value of the debtor’s assets.
  • Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.