IBC Insolvency : Business in India and insolvency laws

The Insolvency and Bankruptcy Code, 2016 (IBC), has come into effect in India at a time when overseas companies are seeing increased India business as well as an increasing number of Indian businesses going global. Is the IBC then to be considered an enabler to doing business in India?


For overseas entities doing business in India directly through downstream Indian entities (categorized as “foreign companies”), a cross-border insolvency situation may arise when: firstly, the insolvent company has a number of foreign creditors who want to ensure that their rights are protected; secondly, an insolvent company has assets located in another jurisdiction, which its creditors may want to access as part of the insolvency proceedings; finally, insolvency proceedings with respect to the same debtor are commenced and ongoing in more than one country.


The IBC does not distinguish between foreign and domestic creditors. Thus it permits foreign creditors to commence and participate in proceedings under the code, which takes care of the first situation above. However, the IBC does not substantially engage with the second and third scenarios, even though sections 234 and 235 of the IBC talk about signing bilateral treaties and letter of request respectively.


Section 234 enables the central government to enter into an agreement or a treaty with a country for enforcing the IBC, while under section 235 an Indian court or tribunal can issue a “letter of request” to a foreign court or tribunal seeking its assistance in situations where assets of the debtor are located in its territorial jurisdiction.


The UNCITRAL Model Law sets out a procedural framework for information exchange, cooperation and coordination in cross-border insolvencies. Since the model law’s passage in the UN General Assembly in 1997, 23 countries have ratified and adopted it but India is not one of the parties.


Foreign companies face diverse challenges depending on multiple factors including gaps in the global insolvency ecosystem owing to disconnects between insolvency laws in different jurisdictions where ownership, creditors or assets of an insolvent company are spread.

While the US, China, Canada, Australia and most other countries have insolvency laws, the EU has been struggling to put in place the right regime considering that an increasing number of companies and individuals do business in member countries other than their own country. The recast Insolvency Regulation (EU 2015/848) seeks to clearly provide for multinational enterprise groups and introduces a voluntary group coordination and cooperation scheme to link the different main proceedings that apply to different companies of the same group. EU regulations have created a central public electronic access point which will allow creditors to access easily the insolvency registers of other member states, and the recast has also come up with a standard claims form.


Additionally, predictability and clarity of law has been a major concern of foreign companies with respect to India. While lawmakers have expanded the ambit of the IBC to include flat owners, a recent landmark case before the National Company Law Tribunal (NCLT) has raised concerns that the IBC may be in for review even within two years of coming into effect. The intervention of the Supreme Court of India under the writ jurisdiction on a plea by flat owners has left much to be desired from the free space the NCLT was intended to be afforded to address issues that concern stakeholders.


Having to consider consumers within the definition of operational or financial creditors was not within the ambit of the IBC to start with. Intervention by the Supreme Court during the insolvency process has only added to the need for foreign companies to re-examine their operational contracts concerning business undertaken in India in order to build adequate safeguards in view of the manner in which the IBC is playing out in India.


At present, India ranks 136 out of 189 countries in the World Bank’s index on the ease of resolving insolvency and 130 out of 190 countries in the World Bank’s index on ease of doing business. A foreign company’s right to do business in India is not complete without an effective right to exit such business as well as a right to effectively deal with insolvency challenges from a global perspective.


In the near future the IBC will likely be revisited to improve India’s rankings on the ease of resolving insolvency and the ease of doing business. Indian law firms will continue to advise foreign companies on the challenges from a cross-border business perspective and operating in India while implementation of the IBC attains the desired stability.


(This article was originally published in India Business Law Journal - https://www.vantageasia.com/business-india-insolvency-laws/)

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