Context

• The growth of international trade has underscored the importance of effective regulation to address the complex challenges of cross-border insolvency.
• A predictable insolvency framework is essential for developing economic stability, attracting foreign investments, and enabling corporate restructuring.
• However, India’s historical and current approaches to insolvency law have struggled to address cross-border complexities 

Historical Evolution of Insolvency Laws in India

• Colonial Era
  • The Indian Insolvency Act of 1848 was the country’s first insolvency law, followed by the Presidency-Towns Insolvency Act, 1909, and the Provincial Insolvency Act, 1920.
  • While these laws provided a structure for managing domestic insolvencies, they were ill-equipped to handle cross-border cases, leaving a critical gap in the legal system.
• Post-Independence
  • Post-independence, these laws remained largely unchanged despite recommendations from the Third Law Commission in 1964 for modernisation.
  • It was only in the 1990s, driven by economic liberalization and globalisation, that the need for a comprehensive insolvency law, including provisions for cross-border cases, gained national attention.
  • Committees like the Eradi Committee (2000), Mitra Committee (2001), and Irani Committee (2005) advocated for the adoption of the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, 1997.
• Introduction of the Insolvency and Bankruptcy Code (IBC)
  • The Insolvency and Bankruptcy Code (IBC), introduced in 2016, marked a significant step forward, focusing on domestic insolvency.
  • However, despite the inclusion of Sections 234 and 235 to address cross-border insolvency, these provisions remain dormant due to the lack of reciprocal agreements and government notification, rendering them legally unenforceable.

Challenges in India's Existing Cross-Border Insolvency Framework

• Dormant Provisions in the IBC
  • Sections 234 and 235 of the IBC, introduced to manage cross-border insolvency cases, have been rendered ineffective due to their dormant status.
  • Section 234 allows the Indian government to enter into reciprocal agreements with foreign countries to enforce insolvency resolutions, while Section 235 outlines the procedure for seeking cooperation from foreign courts through letters of request.
  • However, these provisions are yet to be operationalised because of two primary issues:
    • India has not established reciprocal arrangements with any foreign jurisdiction. These agreements are vital for enabling mutual recognition and enforcement of insolvency proceedings.
    • Without such agreements, the implementation of Section 234 remains impractical.
  • Sections 234 and 235 have not been notified by the government, rendering them legally unenforceable.
  • This inaction has left a critical gap in India's insolvency framework, forcing courts and stakeholders to rely on ad hoc solutions.
• Judicial Challenges
  • Limited Powers of the NCLT
    • The National Company Law Tribunal (NCLT) is the primary adjudicating authority for insolvency matters under the IBC.
    • However, it lacks the power to recognise or enforce foreign insolvency judgments. This limitation hampers its ability to address cross-border insolvency comprehensively.
    • Additionally, Rule 11 of the NCLAT Rules, 2016, which could allow the NCLT to exercise inherent jurisdiction and facilitate comity with foreign courts, has not been implemented for IBC matters.
  • Dependence on Ad Hoc Protocols
    • In the absence of a formal framework, Indian courts have resorted to ad hoc cross-border insolvency protocols.
    • While these have been helpful in individual cases, such as Jet Airways (India) Limited vs. State Bank of India (2019), they are temporary solutions.
    • These protocols increase the judicial burden, elevate transaction costs, and delay resolutions, often reducing the value of a debtor’s assets.
  • Outdated Communication Mechanisms
    • Communication between Indian and foreign courts in insolvency matters is inefficient and outdated.
    • Traditional methods of issuing letters of request lack the transparency and speed required for resolving complex cross-border cases.
    • This creates additional delays, increasing uncertainty for stakeholders.
• Regulatory and Legislative Shortcomings
  • Unclear Framework for Recognition of Foreign Proceedings
    • Unlike countries that have adopted the UNCITRAL Model Law on Cross-Border Insolvency, India does not have a clear mechanism for recognising foreign insolvency proceedings.
    • This results in inconsistent judicial decisions, as courts often rely on discretionary powers or general principles of comity.
  • Inadequate Coordination with Foreign Jurisdictions
    • Cross-border insolvency cases often require seamless coordination between domestic and foreign jurisdictions.
    • However, India's lack of a structured framework for judicial cooperation undermines the efficiency and fairness of insolvency proceedings.

Case Study: State Bank of India vs. Jet Airways (India) Limited (2019)

• The Jet Airways case is a landmark example of the challenges posed by India’s inadequate cross-border insolvency framework. The NCLT highlighted two major issues:
• The absence of a reciprocal agreement between India and the Netherlands made it impossible to enforce insolvency proceedings in the latter jurisdiction.
• Sections 234 and 235, which could have addressed these issues, were deemed “dead letters” due to their non-operational status.
• Although an ad hoc cross-border insolvency protocol was developed to coordinate proceedings between Indian and Dutch administrators, this solution was neither sustainable nor efficient. 

Recommendations for Reform

• Adopting the UNCITRAL Model Law:
  • The model law offers a structured and internationally recognised framework for managing cross-border insolvencies.
  • Its adoption would enhance predictability, improve efficiency, and strengthen investor confidence in India’s insolvency regime.
• Modernising Judicial Communication
  • Outdated communication methods between Indian and foreign courts hinder the resolution of cross-border insolvency cases.
  • Implementing the Judicial Insolvency Network (JIN) Guidelines (2016) and its Modalities of Court-to-Court Communication (2018) would modernise judicial coordination, enhance transparency, and streamline cross-border insolvency proceedings.
• Expanding the Powers of the NCLT
  • Section 60(5) of the IBC restricts civil courts from exercising jurisdiction over insolvency matters, making the NCLT the sole adjudicating authority.
  • However, the NCLT lacks the authority to recognize or enforce foreign judgments, limiting its effectiveness.
  • Expanding the NCLT’s powers and implementing Rule 11 of the NCLAT Rules, 2016, would enable it to address cross-border insolvency issues comprehensively.

Conclusion

• India’s economic integration with the global market necessitates a robust cross-border insolvency framework.
• While the IBC has laid a strong foundation for managing domestic insolvencies, its limitations in addressing cross-border cases remain a significant challenge.
• Adopting the UNCITRAL Model Law, modernising judicial communication, and empowering the NCLT are crucial steps toward bridging this gap.