As the world continues to grow at a fast pace, businesses are required to operate across borders in order to grow. This necessitates an effective legal framework to address cross-border insolvency issues that may arise between countries across national boundaries.
Cross-border insolvency refers to a situation where the debtor’s assets, creditors, and other stakeholders are located in multiple countries. The jurisdictional laws of all such countries need to be considered when addressing a situation in which the company may become insolvent.
With trade between India and the United States steadily increasing, both nations need to establish a seamless and predictable cross-border insolvency process. Let’s take for example, American businesses that are investing in India would want assurance that, should insolvency arise, their claims and assets will be effectively managed according to recognized legal standards for both countries. The current frameworks in India and the United States, however, reveal distinct approaches, creating challenges in aligning insolvency proceedings across these two jurisdictions.
In India, insolvency is governed by the Insolvency and Bankruptcy Code (IBC), 2016, which offers limited provisions for addressing cross-border insolvency disputes. This gap in the law poses several difficulties while addressing insolvency cases involving U.S.-based assets or creditors or for that matter any other countries as well.
In comparison, the United States has adopted Chapter 15 of the U.S. Bankruptcy Code, a comprehensive framework based on the UNCITRAL Model Law, which facilitates international cooperation in insolvency matters. In spite of India’s increasing economic ties with the U.S., the absence of a robust cross-border insolvency framework can pose several legal uncertainties.
Legal Frameworks Governing Cross-Border Insolvency in India and the U.S.
In India, cross-border insolvency is primarily addressed through the Insolvency and Bankruptcy Code (IBC), 2016, particularly under Sections 234 and 235. Section 234 empowers the Indian government to enter into bilateral agreements with other countries to manage insolvency cases that cross borders. Section 235 permits Indian courts to seek assistance from foreign courts in handling the assets and affairs of a corporate debtor.
However, as of now, India has not entered into any formal reciprocal agreements under the IBC with other nations, including the United States. This lack of formalized cooperation leaves Indian courts without a standard mechanism for dealing with international insolvency issues at this point in time.
On the other hand, the United States has a well-established system for cross-border insolvency under Chapter 15 of the U.S. Bankruptcy Code. Adopted in 2005, Chapter 15 is based on the UNCITRAL Model Law on Cross-Border Insolvency, which provides a structured framework for international cooperation. The U.S. system allows for the recognition of foreign insolvency proceedings and facilitates coordination between U.S. courts and foreign jurisdictions.
This framework enhances predictability for international creditors and protects debtors’ assets located across multiple countries by enabling cooperation between courts. When a U.S.-based company with interests in India goes into bankruptcy, Chapter 15 can assist in extending protection to its Indian assets, provided the Indian legal system can cooperate with the same.
This divergence in legal approaches can lead to challenges in cross-border cases, especially in terms of recognizing and enforcing foreign judgements. For example, if a U.S. bankruptcy court issues a moratorium on asset recovery efforts while restructuring, an Indian court may not automatically recognize that order, potentially leading to conflicts and inefficiencies.
In the absence of reciprocal arrangements, Indian courts might apply limited provisions under the Code of Civil Procedure, 1908 (CPC) for the enforcement of foreign judgements. This would require foreign judgements to meet certain conditions to be considered conclusive and enforceable. Yet, this procedure is neither specific to insolvency nor standardized for such cases thus making it inadequate for cross-border insolvency cases.
Challenges in India-U.S. Cross-Border Insolvency Proceedings
The absence of a cross-border insolvency framework in India poses many challenges when addressing cross-border insolvency cases. Especially, since it involves stakeholders from both India and the United States. Due to the lack of a standardized protocol for recognizing foreign insolvency judgements in India, U.S.-based entities find it complex to deal with assets or creditors in India when they file for bankruptcy in the United States or vice versa.
The primary challenge is the lack of a reciprocal enforcement mechanism. India has not yet entered into formal arrangements with the United States. This means Indian courts are not obligated to recognize or enforce U.S. bankruptcy judgements.
This may very well lead to a situation where a U.S. court grants a moratorium on asset recovery for a debtor and an Indian court may not recognize this stay. The Indian Court could permit creditors to initiate asset recovery actions in India. This divergence creates uncertainty for U.S. creditors and investors operating in India.
Another issue is that, while the U.S. has adopted Chapter 15 to facilitate cooperation with foreign courts in insolvency cases, India’s approach under the CPC for enforcing foreign judgements in cross-border insolvency matters has not evolved as yet.
The CPC still requires that foreign judgements must meet the test of conclusiveness under Section 13 to be enforceable in India. This process is tedious and does not specifically address insolvency proceedings which leads to a lengthy litigation process for the parties involved.
The challenge is further complicated by the difference in legal principles. The U.S. approach, rooted in the UNCITRAL Model Law, promotes a unified framework with principles of recognition, access, cooperation and coordination in cross-border insolvency cases. In contrast, India’s reliance on civil procedural remedies and the absence of a dedicated cross-border insolvency statute results in fragmented handling of international cases.
To discuss further, entities with business interests in both India and the U.S. face operational risks due to the potential for parallel insolvency proceedings. Without a clear legal framework to manage these cases, entities may be subject to inconsistent legal obligations across jurisdictions. This can hamper restructuring efforts and reduce the value of assets.
Recent Developments and the Way Forward
India’s Insolvency Law Committee recommended the adoption of the UNCITRAL Model Law in 2018. This was because India needed to align its insolvency framework with global standards to increase legal certainty and investor confidence. The UNCITRAL Model Law, adopted by over 60 countries, has principles of recognition, access, cooperation and coordination which helps in smoother resolution of cross-border cases.
Implementing the Model Law can give Indian courts the tools to recognize foreign insolvency proceedings better. For example, if India adopts the Model Law, a US bankruptcy court’s orders on moratorium or asset recovery would be more easily recognized and enforced by Indian courts, reducing the risk of conflicting judgments and protecting the interest of both Indian and US stakeholders. This would bring India closer to countries with well-established cross-border insolvency regimes and make India a more attractive destination for foreign investment by ensuring cross-border disputes are resolved in a transparent and efficient manner.
Despite the benefits, progress on the adoption of the Model Law in India has been slow. The Economic Survey 2022 has highlighted the need to improve the efficiency of the Insolvency and Bankruptcy Code but the recent Union Budget did not address the adoption of a comprehensive cross-border insolvency regime. Indian courts are currently relying on limited provisions and ad hoc agreements to handle cross border insolvency cases which are not sufficient for the complexities of the global economy today.
Meanwhile, India has been signing Free Trade Agreements (FTAs), Comprehensive Economic Cooperation Agreements (CECAs) and Comprehensive Economic Partnership Agreements (CEPAs with various countries. While these agreements cover issues like intellectual property rights and investment protection, they generally don’t have detailed provisions on insolvency cooperation. Including cross-border insolvency clauses in such agreements can be an interim solution, where some level of cooperation and predictability can be achieved in insolvency matters till the full adoption of the Model Law.
Also, developing bilateral frameworks with specific countries, particularly with the US, can be a practical way forward. By having bilateral agreements on cross-border insolvency, India can ensure more predictable outcomes in insolvency cases involving American entities and assets and create a stable environment for trade and investment between the two countries.
Ultimately adoption of the Model Law or the creation of tailored bilateral agreements would be a big step forward for India to manage cross-border insolvency cases. The way forward would be to balance the interest of local creditors with the needs of international stakeholders and ensure India’s domestic legal system is robust and adaptable.
Conclusion
With the growing trade and investment between India and the US, a cross-border insolvency framework is the need of the hour. Currently, India’s approach to international insolvency is limited ad-hoc and civil in nature and does not provide consistent legal protection in cross-border disputes.
Adopting the UNCITRAL Model Law on Cross-Border Insolvency is the way forward as it is in line with international standards and provides a structured framework for recognition, cooperation and coordination in cross-border insolvency cases. This will enable Indian courts to cooperate better with US courts and provide a stable and predictable environment for the management of assets and liabilities of entities operating across borders.
In the meantime including cross-border insolvency provisions in India’s Free Trade Agreements (FTAs) and other economic agreements can be a partial solution and provide some level of procedural consistency and cooperation with major trading partners like US.
How MAHESHWARI & CO. Can Help with Cross-Border Insolvency
MAHESHWARI & CO. has expertise in handling cross-border insolvency cases involving India and US jurisdictions. With knowledge of the Insolvency and Bankruptcy Code (IBC) in India and US bankruptcy laws MAHESHWARI & CO. provides end-to-end support to clients navigating cross-border insolvency. Their services include recognition and enforcement of foreign judgments, liaison with international entities, compliance with cross-border protocols, and advising on the protection of assets and interests in both jurisdictions. MAHESHWARI & CO.’s team ensures a smooth and efficient process and helps clients minimize risks and achieve desired outcomes in cross-border insolvency cases.
Frequently Asked Questions (FAQs)
1. What is cross-border insolvency, and why is it important?
Cross-border insolvency means a situation where an insolvent debtor has assets or creditors in more than one country and requires coordination between different jurisdictions to handle the insolvency proceedings effectively. It is necessary because in our globalised economy, many businesses operate across multiple jurisdictions and an effective framework for cross-border insolvency ensures that creditors’ rights are protected, assets are managed fairly and the legal process is predictable and efficient for all stakeholders.
2. How does the absence of reciprocal agreements affect cross-border insolvency between India and the U.S.?
Without reciprocal agreements, Indian courts are not bound to recognize or enforce US bankruptcy judgments and vice versa. This lack of coordination can create legal uncertainties as courts in each country can proceed independently and may lead to conflicting judgments. For instance, a US court may grant a stay on asset recovery but an Indian court may not recognize this stay and may allow creditors to recover assets in India. This absence of mutual recognition can lead to prolonged litigation, increased costs and operational challenges for businesses with interests in both countries.
3. What benefits would adopting the UNCITRAL Model Law on Cross-Border Insolvency bring to India?
By adopting the UNCITRAL Model Law, India’s insolvency framework will be in line with international standards and will facilitate smoother coordination with foreign jurisdictions, especially the US. The Model Law focuses on access, recognition, cooperation and coordination and allows courts to recognize and work with foreign insolvency proceedings. This will reduce legal uncertainty, protect international creditors and streamline the insolvency process. For businesses, it will mean a more stable investment environment in India and assurance that cross-border insolvency issues will be handled predictably.
4. How can businesses prepare for cross-border insolvency risks in India and the U.S.?
To prepare for cross-border insolvency risks businesses should have clear dispute resolution and jurisdiction clauses in their contracts and consider reciprocal territories for enforceability. They should stay updated on the insolvency laws in the jurisdictions where they operate and seek legal advice from professionals who have experience in cross-border cases. Engaging a law firm who is experienced in both Indian and US insolvency law can help businesses navigate the complexities, mitigate risks and protect their assets if insolvency proceedings arise.
5. What role does MAHESHWARI & CO. play in cross-border insolvency cases?
MAHESHWARI & CO. provides legal assistance for cross-border insolvency matters involving India and the US, helping clients navigate the challenges posed by different legal frameworks. Their services include advising on compliance with Indian and US insolvency regulations, recognition and enforcement of foreign judgments, coordination with international legal entities and strategy to protect client interests. With their expertise in cross-border insolvency, MAHESHWARI & CO. helps clients manage risks, streamline proceedings and achieve the best outcomes in complex international insolvency cases.
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