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Business News/ Opinion / India needs a framework to resolve cross-border bankruptcies
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India needs a framework to resolve cross-border bankruptcies

Enactment of a law for cross-border insolvency will enable India to meet the demands of globalization and deal with international insolvency on the world forum

Photo: ReutersPremium
Photo: Reuters

The filing of Chapter 11 proceedings by US solar power firm SunEdison has once again highlighted the need for a cross-border insolvency law in India. The company has sizeable investment in India’s solar capacity. It faces about two dozen legal claims, mainly by shareholders who accuse it of misleading them about its financial position. Its publicly traded subsidiaries are also embroiled in lawsuits. In the event the noose around the company and its subsidiaries tightens, creditors and investors of the Indian projects will have to prepare for a long struggle to deal with SunEdison’s assets in India, in the absence of a law to deal with cross-border insolvency.

The rapid growth of international trade, commerce, investment and industries has led to widespread growth of multinationals, operating through several organs such as branches, agencies, franchises, subsidiaries and other forms of collaboration in more than one country. Many global companies have investments in India through subsidiaries or branches based in the country.

In renewable energy, foreign direct investment up to 74% is allowed automatically, and 100% by approval. Many foreign companies, which have access to low-cost funds, are setting up subsidiaries in India to develop solar power projects. Foreign banks and creditors have financed Indian assets. Similarly, Indian companies have set up business entities overseas and Indian banks have exposures to them.

Expansion in international trade has brought with it the increasing possibility of cross-border insolvency proceedings. Companies are usually connected to more than one jurisdiction by foreign creditors that may have interest in their assets located in different countries. Decrees may be passed in different legal jurisdictions resulting in further complexities in enforcement and recognition. A cross-border insolvency law helps in providing effective mechanisms for dealing with cases of cross-border insolvency by promoting cooperation between the courts and other competent authorities of different countries; greater legal certainty for trade and investment; fair and efficient administration of cross-border insolvencies that protects the interests of all stakeholders; protection and maximization of the value of the debtor’s assets; and facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

Many countries have adopted the United Nations Commission on International Trade Law’s Model Law of Cross Border Insolvency. Others have provided for a similar framework to efficiently deal with cross-border insolvencies. But there is no effective mechanism for cooperation by Indian courts with courts of other countries, or for administration of cross-border insolvencies and treatment of stakeholders, in the event insolvency proceedings start in any foreign jurisdiction involving assets or creditors in India.

The Indian common law regime is ill-equipped to deal with the cases of cross-border insolvency. In case of recognition of foreign judgements and proceedings, Sections 13 and 44A of the Code of Civil Procedure provide for the treatment of foreign judgements in reciprocating countries as conclusive barring certain exceptions, such as fraud, judgements not based on merits of the case, no competent jurisdiction, etc. Many tests have to be satisfied for obtaining recognition and enforcing orders passed by foreign courts.

Judicial involvement and devotion in regulating the economic aspects is nothing but a natural corollary to its economic development. In the absence of a statutory framework for cross-border insolvency, courts in India will always struggle to deal with insolvency issues.

The absence of a cross-border insolvency law poses a serious challenge to India, making the country incomparable to the standard set in international legal requirements.

The Insolvency and Bankruptcy Code passed by Parliament recently does not provide a framework to deal with issues involving cross-border insolvency. Many previous committees on insolvency law reform have recommended that an effective mechanism for dealing with cases of cross-border insolvency should be provided. The position of the government, as I understand is, cross-border cooperation will be achieved by signing bilateral agreements with sovereign countries. This will not only be time-consuming but also run the risk of being different and at times, conflicting rules being framed for different jurisdictions. The absence of a cross-border framework is likely to be of considerable concern to global entities seeking to do business with India. This does not align well with the Make in India pitch.

A law is urgently needed to facilitate greater co-operation between courts of various states, fair and efficient administration of cross-border insolvencies that protects the interests of creditors as well as the debtor, and other objectives. Enactment of a law for cross-border insolvency will enable India to meet the demands of the globalization of the economy and to deal with international insolvency on the world forum. This will radically change the orientation of Indian law in the present scenario of insolvency cases and make it suitable for dealing with the challenges arising from globalization and increasing integration of Indian economy with the world economy.

Sumant Batra is chairman, Kesar Dass B. & Associates.

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Published: 06 Jun 2016, 01:56 AM IST
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