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Cross-Border Insolvency

GS Paper 3

 Syllabus: Indian Economy

 

Source: LM

 

Context: The Indian government has decided to halt its plan to adopt a cross-border insolvency regime that would have allowed foreign lenders to initiate bankruptcy proceedings against defaulting Indian businesses in local tribunals.

 

About Cross-border Insolvency:

 Cross-border insolvency typically occurs when a debtor has operations or creditors in multiple countries, and there is a need for coordination and cooperation among different courts and stakeholders to achieve an efficient and fair resolution.

  • United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, 1997, is a widely accepted legal framework to deal with cross-border insolvency issues.

 

Why has India halted its plan?

 India halted the adoption of cross-border insolvency, based on the fact that only around 50 countries have adopted the UN model of cross-border insolvency, and many of them have stringent restrictions in place.

 

Instead, the government’s current priorities include

  • Expanding the informal debt resolution scheme for larger corporations
  • Implementing a new regime for handling the insolvency of group companies
  • Creating a special regime for the real estate sector.
  • Remove lacunas in the operation of the Insolvency and Bankruptcy Code
  • Reduce delays in case admission and approval of rescue plans
  • Prevent inappropriate transactions by the management of defaulting companies.

 

About Insolvency:

TopicDescription
Key Words·        Insolvency: Inability to repay outstanding debt

·        Bankruptcy: Court declaration of insolvency, with appropriate orders to resolve it and protect creditors’ rights.

Insolvency and Bankruptcy CodeEnacted in 2016, it consolidates laws related to the insolvency resolution of business firms.
Insolvency and Bankruptcy Code (Amendment Bill), 2021Introduces Pre-packaged Insolvency Resolution Process (PIRP) for Micro, Small, and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore.
Challenges for the IBCLack of proper resolution with over 50% of cases ending in liquidation; Significant delays in resolution; High haircuts (debt foregone) by creditors; Lack of digitization
AchievementsA successful revival of India’s insolvency regime and addressing non-performing assets (NPAs); Improved credit discipline; India’s rank in resolving insolvency improved significantly
Provision of Cross border InsolvencyCurrently, section 234 (empowers the central government to enter into bilateral agreements) and 235 (adjudicating authorities issuing letters of request to foreign courts) of IBC, 2016 provide a basic framework for cross-border insolvency

 

Conclusion:

The introduction of a cross-border insolvency regime will be considered once the institutional capacity and overall bankruptcy resolution ecosystem are more robust.

 

Insta Links:

Insolvency and Bankruptcy Code: Provisions

 

Mains Links

The introduction of the Insolvency and Bankruptcy Code (IBC) in 2016 was a ‘watershed’ moment in India. Comment (250 Words)