Govt halts plan to adopt cross-border insolvency rules

New Delhi: Foreign lenders of Indian businesses may have to wait longer before initiating bankruptcy proceedings against defaulting Indian businesses in local tribunals.

The government has shelved its plan to introduce a cross-border insolvency regime that would have integrated India with several other markets that have adopted a harmonized debt resolution regime for companies with assets spread across multiple markets.

“Only around 50 countries have adopted the UN model of cross-border insolvency, and many of them have stringent restrictions in place. Adopting this model is not on top of the agenda now,” a person briefed about discussions in the government said.

The priorities now include making larger corporations eligible for an informal debt resolution scheme currently available only to small businesses, a new regime for handling insolvency of group companies as a whole, and a special carve-out for the real estate sector, the person said on the condition of anonymity. These amendments to the Insolvency and Bankruptcy Code (IBC) are expected in the monsoon session of the Parliament.

A cross-border insolvency regime has several benefits, but it also needs several issues to be addressed, including the readiness of the overall bankruptcy ecosystem. Besides letting foreign creditors initiate or take part in bankruptcy action in local tribunals, it would also enable creditors in India to pursue overseas assets of Indian debtors as part of the debt resolution process. Such a regime would also result in any moratorium granted by an overseas court on recovery of dues applicable in India as well in certain scenarios.

Experts said the time may not be ripe to introduce such far-reaching measures. “It may be ideal to roll out a cross-border insolvency regime once we have made the institutional capacity and the overall ecosystem of bankruptcy resolution more robust to deal with such a demanding system,” said Anoop Rawat, partner (insolvency and bankruptcy) at law firm Shardul Amarchand Mangaldas & Co.

“We need to first have a robust debt resolution infrastructure that takes up cases and clears resolution plans without delays, and also build the knowledge base for practising and adjudicating on cross-border cases before rolling out a scheme for that. Given the amount of work needed in that direction, it makes sense not to rush into introducing a cross-border insolvency regime at this juncture,” said Rawat.

The government’s current priority is to address key concerns around the operation of the bankruptcy code, especially in reducing delays in the admission of cases and in approving rescue plans. It also wants to focus on checking inappropriate transactions by the management of a defaulting company during its period of distress leading up to the admission of cases in tribunals. The proposed amendments, currently being reviewed by top government officials, will have specific measures in this regard. Also, the conduct of resolution professionals will be a key area of focus in the proposed Bill. The Insolvency and Bankruptcy Board of India (IBBI), the rule maker, is taking stringent action in the case of erring resolution professionals, as the government feels that professional discipline and transparent decision-making are key in resolving industrial sickness.

An email sent to the spokesperson for the ministry of corporate affairs on Friday seeking comments remained unanswered.

In the absence of a tailored regime for dealing with ailing businesses with assets in multiple markets, judicial authorities establish a protocol to handle parallel bankruptcy proceedings in different countries. Jet Airways (India) Ltd is an example of parallel bankruptcy proceedings in India and the Netherlands.

The parties, in such cases, coordinate efforts to minimize costs and maximize the value of assets while respecting the independence of local authorities. The UN Model law on cross-border insolvency provides a template to handle such situations, recognize foreign proceedings by a local court, and give foreign professionals and creditors access to local courts.