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Government Releases Draft on Cross-Border Insolvency Resolution

Published on June 23, 2018
Banks to get access to overseas assets of firms undergoing resolution
Government Releases Draft on Cross-Border Insolvency Resolution

  • Taking a significant step, the government on Wednesday 21 June 2018, released a draft on cross-border insolvency that would help banks access overseas assets of a company undergoing resolution. 
  • Similarly, the Indian authorities will also be required to cooperate with foreign creditors to a domestic company.
  • This is done with an aim to strengthen the Insolvency and Bankruptcy Code (IBC).

Facts to know about the draft:

  • The draft favours adoption of the UNCITRAL (United Nations Commission on International Trade Laws) model on dealing with cross-border insolvency.
  • As per the draft law, the central government after entering into agreement with other countries, may bring overseas asset of a domestic corporate debtor into consideration of insolvency resolution in India.
  • While initially the cross-border insolvency framework will apply only to corporate debtors, it can be extended to cases of personal insolvency resolution as well.
  • The draft says India will also cooperate with foreign creditors and enable them to initiate insolvency against local corporate debtors.

Why did the need to frame such draft arise?

  • The existing IBC provides for two Sections –234 and 235 — relating to cross-border insolvency but these are not adequate to effectively deal with default cases such as that of Kingfisher Airlines.
  • In many of the ongoing cases under the IBC, several companies have assets and operations outside India, for which a legal framework is required to deal the assets overseas.
  • Existing provisions only allow the Central government to enter into an agreement with a foreign country for enforcing provisions of the Code.
  • Also, the government can issue a letter of request to a country outside India seeking information.
  • The draft norms have now been issued to plug these loopholes and have any effective resolution mechanism in place for cross-border insolvency.

The UNCITRAL Model Law on Cross-Border Insolvency, 1997

  • The UNCITRAL model law envisages a balance between liquidation and reorganisation of global companies going in for resolution.
  • On the global scale, the UNCITRAL Model Law on Cross-Border Insolvency, 1997 (“Model Law”) has emerged as the most widely accepted legal framework to deal with cross-border insolvency issues while ensuring the least intrusion into the country’s domestic insolvency law. 
  • Due to the growing prevalence of multinational insolvencies, the Model Law has been adopted by 44 States till date, including Singapore, UK, and US.
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