Cross Border Insolvency: Why Serious Contemplation Over UNCITRAL Framework Is A Better Approach Than A Hasty Decision

The proposal to adopt a framework like the UNCITRAL framework had been initially set forth by the NL Mitra committee that proposed a comprehensive bankruptcy code. The Eradi committee in May 2000 too recommended the need for a cross-border insolvency mechanism given the rise in global trade. The Indian Law commission (ILC) chaired by Corporate Affairs Secretary Injeti Srinivas had recommended the adoption of the Model Law in 2018. However, an interpretation of recent events indicates that either the plan may be put on the backburner or take more time to materialize.

DOES INDIA NEED A GLOBAL FRAMEWORK?

An analysis of recent bankruptcy cases indicates the anomaly. In June 2018, Videocon pressed for bankruptcy with the total claims estimated at Rs 72,078.5 crores. However the business had sizable interests around the world – for example, several oil assets in Brazil which the CIRP and officials could not focus on, leaving a loss in the recovery phase.

Similarly, in the cases of Jet Airways and Essar Steel, insolvency proceedings were not straight forward. In the Jet Airways' insolvency multiple international lessors, suppliers, investors and financial institutions were exposed to the gaps in India's cross-border insolvency framework. A Dutch Foreign aircraft lessor struggled owing to legal complexities such as delayed repossession of a leased plane.

Essar Steel appeared to head nowhere with foreign creditors getting apprehensive over prolonged litigation. ArcelorMittal's successful acquisition with a Rs 42,000 crore brought some relief. The case set a precedent for treating financial creditors and operational creditors differently, aligning with global best practices. Nonetheless, all three cases highlight the need for a structured cross-border insolvency framework which could ensure better predictability and protection for international investors.

For an emerging country like India, adopting the international Model Law could unlock several avenues and help emulate a global standard. The Model Law has been a global standard in nearly 60 countries. In fact, the law is considered robust and has been modelled over US Chapter 15 Bankruptcy Code providing an approach to recognizing foreign proceedings and facilitating international cooperation. Such an approach could be considered the need of the hour given the uncertainties for international creditors dealing with an Indian context.

MERITS OF THE MODEL LAW

The Model Law on Cross-Border Insolvency offers several key advantages that enhance the efficiency and fairness of international bankruptcy proceedings. By centralizing proceedings, it minimizes parallel insolvency cases across jurisdictions, leading to streamlined asset management and better creditor recoveries. Its predictable framework, based on concepts like the "centre of main interests" (COMI) and standardized relief mechanisms, boosts investor confidence by ensuring transparency and consistency.

COMI is usually the country where the debtor has its principal place of business or main operations. Once identified, that jurisdiction is considered the "main proceeding," and other countries are expected to recognize and cooperate with it. This avoids conflicts where multiple jurisdictions claim authority over the same case. Additionally, the Model Law includes standardized relief mechanisms, meaning it outlines clear rules for how courts should assist foreign insolvency cases—such as granting recognition to foreign proceedings, freezing assets, or allowing creditors to participate in hearings. The law's public policy safeguards ensure that foreign proceedings do not undermine India's national interests, giving courts the power to reject cases conflicting with domestic laws.

Since these rules are fairly predictable and globally accepted, foreign investors have a certain degree confidence that insolvencies will be tackled transparently, fairly, and consistently, reducing risks and uncertainties. Additionally, creditor protection is strengthened as foreign creditors gain direct access to domestic courts, allowing for fair participation in insolvency resolutions.

For India, adopting the Model Law would significantly enhance its insolvency regime by making it more efficient and globally aligned. It would support restructuring efforts by allowing distressed companies to implement global rescue plans, attracting more foreign investment into the insolvency resolution process.

ISSUES THAT NEED INTROSPECTION

Despite the benefits, the Model Law has its own share of shortcomings. A major issue has been the abuse of the public policy exception where countries can block foreign insolvency proceedings by claiming that such applications are "manifestly contrary" to domestic policy. Such a standard may be applied inconsistently, leading to unpredictability. Additionally, the Model Law suffers from incomplete coverage, as it does not address the enforcement of insolvency-related judgments. This gap has led to the development of supplementary frameworks like the Model Law on the Recognition and Enforcement of Insolvency-Related Judgments (MLIRJ), but without widespread adoption, enforcement remains uncertain.

Another key challenge is judicial reluctance, particularly in jurisdictions such as the US, where courts may hesitate to enforce foreign insolvency rulings or relinquish control over local assets without parallel domestic proceedings. The law also may not fully resolve conflicts of law, leaving interpretation to domestic courts, which may result in inconsistent rulings.

Furthermore, flexibility allows adopting states to modify provisions, such as adding reciprocity requirements or broadening public policy exceptions, which undermines global harmonization. For example, if India adopts the Model Law with a reciprocity requirement, it may choose to recognize foreign insolvency proceedings only from countries that have also adopted the Model Law and recognize Indian proceedings in return. This ideally limits the effectiveness of CBI because it prevents cooperation with countries that have not implemented the Model Law, even if such cooperation would otherwise be beneficial.

In India's case, there are two major impediments – limited adoption by its trading partners. Major economies like India, China, and Indonesia are yet to implement it and so are India's neighbors such as Nepal, Bangladesh, or Sri-Lanka. Secondly, the model law does not have conventions about bank, inter-bank, or financial intermediaries

The question is not whether India needs to adopt Model Law in order to attain globalization. We are already a global nation and India has been signing up several economic treaties which can offer some solution to tackling insolvencies. The global mandate is to embrace Universalism as opposed to territorialism. India certainly wants to protect investors, but also understands that promoting cross-border insolvencies need not be done through a model law – it can be done using bilateral or multilateral agreements as well as other legal or diplomatic avenues.

Author: Akshat Khetan is a corporate and legal advisor (Twitter @akshat_khetan). Views are personal.