Cross-Border Insolvency and Group Insolvency: India’s Path
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Introduction
Cross-border insolvency and group insolvency are of great importance for legal reforms in India. In today's world, corporate distress rarely remains within borders. Cross-border and group insolvencies are urgent issues for a jurisdiction like India, where companies are established in several jurisdictions. Foreign investments and globalization necessitate reliable management of international cross-border insolvencies to ensure an equitable result for stakeholders.
Why cross-border and group insolvency matters
When financial difficulties arise for a company, a potential bias creeps in due to a lack of coordination. Creditors will likely compete in various jurisdictions, there may be lost or wasted assets, and the recovery proceedings can be cumbersome and costly. Group insolvency adds complications to this situation. Group insolvency attempts to circumvent these complexities by facilitating the coordinated resolution of related entities to respect their legal independence while maintaining and preserving value to the group as a whole.
The International Framework: The Model Law
The UNCITRAL Model Law on Cross‑Border Insolvency offers a framework that has been globally adopted for dealing with insolvency across national borders. The overall objective of the Model Law is to encourage cooperation and recognition of foreign proceedings. The primary tools of the Model Law consist of the recognition of foreign insolvency proceedings, the granting of relief (e.g., stay of enforcement), and the promotion of cooperation between courts and insolvency professionals across national borders. There is ongoing work specifically addressing the insolvency of enterprise groups to allow for the simultaneous restructuring of related entities to maximize value across the group.
India’s current scenario and the gaps
The Insolvency and Bankruptcy Code (IBC) was established in 2016 and was an important improvement to the domestic insolvency framework in India. It was the first regulatory framework to set out time-bound, market-determined processes that improve recovery rates and reduce delays. However, the IBC is focused largely on domestic cases. It is limited in its cross-border recognition, which can be problematic when dealing with Indian companies that have foreign assets, foreign creditors, or parallel proceedings abroad.
In addition, there is no statutory framework for group insolvencies within the IBC. Courts and insolvency practitioners have effectively developed creative and unique approaches to address specific group cases in practice, often implementing coordinated workouts or global plans. While these approaches occasionally work, the lack of a statutory framework often reduces certainty, especially for complicated corporate groups that have overlapping guarantees or treasury structures.
Why India should embrace cross-border and group insolvency principles
Having a robust cross-border insolvency regime would provide many benefits for India: it would provide recognition of foreign proceedings, reduce litigation, and reduce duplication of recovery processes. These reforms will also have the potential to instill confidence in foreign investors in a more declaratory system with positive outcomes as events unfold, for all financially distressed situations within their jurisdiction.
In contrast, a group insolvency regime could assist in business value preservation by allowing related parties to work together to pursue coordinated restructuring of their business affairs. Critically important, India would need to adapt any measures that would engage local precepts of law and public policy imperative to a system of value recovery that would permit creditor protection, rather than a semi-hasty introduction of a foreign model.
Steps India can take
- Implement a Modal Law - India must adopt a Modal Law or create equivalent provisions to achieve the same effect.
- Introduce Statutory powers for Group insolvency - Courts should have the authority to sanction group provisions in circumstances where efficiency and fairness can be maintained. Group provisions may include, but are not limited to, group moratoria, group-supported restructuring plans, or statutory rules regarding the fair allocation of residual recoveries.
- Facilitate cross-border rules and court cooperation - Stakeholders must negotiate binding protocols pertaining to their obligations in relation to one another and secure court approval from India and other jurisdictional courts. The protocols will afford a more consistent insolvency regime and limit conflicts between courts.
- Capacity building and professional guidance - Upskilling judges and insolvency professionals in the area of cross-border and group insolvency principles would reduce uncertainty and improve coordination with international colleagues.
- Safeguards for public interest - Safeguards must be present, although potentially legislated elsewhere, regarding the protection of employees, public creditors, and essential services suppliers. Transparency and fairness for minority creditors must also remain a key feature of the statutory rules.
Addressing potential concerns
Concerns have been expressed that the ability to be recognised across borders may permit foreign creditors to sidestep domestic concerns or result in the flight of assets. These risks can be reduced by careful drafting, including public policy exceptions, limiting relief in cases of special circumstances, and requiring notice to statutory stakeholders prior to the commencement of foreign orders. Similarly, group insolvency provisions should be discretionary and only applied where there are tangible benefits to realisations.
Conclusion
India cannot escape cross-border and group insolvency in an increasingly global economy. The provisions in the UNCITRAL Model Law provide a tried-and-tested (reference point) to encourage cross-border cooperation. Group insolvency laws can also help address the intricacies that arise with multi-entities that make corporate "families." The approach in India should be to pursue a way to incorporate global best practices with domestic needs, including adopting most of the fundamental features of the Model Law; introducing statutory provisions to enhance the process of group restructuring; funding for training of the judiciary and practitioners; and adopting safeguards to protect domestic interests. Reforming the process in a manner such as this would position India as a more stable and predictable venue for complex international insolvency issues for the benefit of creditors, employees, investors, and to serve as a benefit to the economy as a whole.
