The Ministry of Corporate Affairs has invited public comments on the proposed legal framework for cross-border insolvency under the Insolvency and Bankruptcy Code, 2016 vide notice dated 24th November 2021.
Key points to be noted are as follows:
- ‘Cross-border insolvency’ signifies circumstances in which an insolvent debtor has assets and/or creditors in more than one country. With the rapid increase in globalisation and the advent of sophisticated communications technology, cross-border trade and investment has increased the dependence of national economies on each other.
- The ministry has proposed to enact provisions on cross-border insolvency in line with Draft Part Z along with the following modifications:
- The Model Law applies to individuals as well as corporate persons. When the ILC contemplated its report in 2018, the provisions of the Code had only been notified with respect to corporate debtors. Since personal insolvency provisions of the Code had not been operationalised at the time, the ILC recommended that Draft Part Z should apply only to corporate debtors.
- A pre-packaged insolvency resolution process was recently introduced in the Code for micro, small and medium corporations. Since provisions related to the pre-pack process were enacted this year, they had not been considered by the ILC at the time of designing Draft Part Z. The pre-pack process is a quicker and simpler resolution process for MSME corporate debtors. It is a voluntary process designed for smaller businesses to effectively resolve their financial distress. It is felt that cross-border issues may sparingly arise in the pre-pack process as it applies to small businesses. Therefore, it is proposed that cross-border insolvency provisions may not apply to the pre-pack process.
- The Model Law suggests that businesses whose resolution is governed by a special law or whose insolvency significantly affects public interests may be exempt from the applicability of the cross-border insolvency law.
- Therefore, it is proposed that financial service providers may be excluded from the applicability of cross-border insolvency provisions under Draft Part Z. Such exclusion is in line with the design of the Code as financial service providers are subject to a special insolvency process that has been notified under Section 227. Further, the Central Government may, if required, notify any other entities that should be excluded from the application of cross-border insolvency provisions by utilising its power under Clause 1(3) of Draft Part Z.
The Ministry has invited public comments/suggestions, if any, along with brief justification, by December 15, 2021.