The debate on implementing harmonized laws to deal with cross-border insolvency has been active. Since the late 1990s, the United Nations Commission on International Trade Law (UNCITRAL) has been working to implement the Model Law developed on four pillars (access, recognition, cooperation, and coordination) between countries. | Photo Credit: Getty Images / iStockphoto
TThe application of cross-border insolvency law is important for international trade. The integration of cross-border regimes into the national legal ecosystem is considered a hallmark of good insolvency law. Besides providing legal certainty, it also improves the health of trading entities with cross-border operations, thereby benefiting investment and international trade.
Implementation of Model Law
The debate on implementing harmonized laws to deal with cross-border insolvency has been active. Since the late 1990s, the United Nations Commission on International Trade Law (UNCITRAL) has been working to implement the Model Law developed on four pillars (access, recognition, cooperation, and coordination) between countries. The potential benefits have been recognized in several countries, including India, by the Bankruptcy Law Reform Committee when drafting the Insolvency and Bankruptcy Code (IBC), 2016, as well as the Indian government (Economic Survey, 2022).
However, progress in the adoption of the Model Law has been slow. According to UNCITRAL, only 60 countries have adopted it. Furthermore, there are variations in implementation (given its non-binding nature), with countries drafting similar terms by including reciprocal/general policy exclusion clauses.
India has also not implemented the Model Law despite several committee recommendations on the matter. As per reports, the same decision has been postponed again. The Union Budget, while supporting improving the efficiency of the IBC through technological platforms / improving court infrastructure, is also silent on this issue. Currently, India relies on a limited provision, which allows for bilateral agreements on a case-by-case basis for cross-border insolvency. This has been seen as ad hoc and inadequate.
In parallel, in the last few years, India has implemented Free Trade Agreements (FTAs), Comprehensive Economic Corporation Agreements (CECAs), Comprehensive Economic Partnership Agreements (CEPAs) and similar. According to the Ministry of Commerce, India has signed these agreements with more than 54 countries. The Ministry describes the FTA as an arrangement between countries to reduce or eliminate tariff / non-tariff barriers in substantial trade with territorial coverage such as intellectual property rights (IPR) and investment. In addition, CECAs/CEPAs are described as more integrated agreements on goods, services, and investments while covering broader areas such as trade facilitation and cooperation. Therefore, check how this agreement takes insolvency accordingly.
insolvency provisions
However, despite the large number of FTAs/CEPAs and their importance for trade, they lack detailed cross-border insolvency provisions. While FTAs are relatively limited in scope, CEPAs/CECAs are said to be “more ambitious and look at deeper regulatory aspects of trade” (Ministry of Trade). However, in their current form, they generally only contain general dispute or commercial remedy clauses. You can argue that FTAs facilitate trade, which leads to calls for cross-border insolvency laws. However, these laws are an important ingredient in international trade, and relevant clauses require integration in agreements, pending the adoption of a harmonized law.
Regarding the Model Law, although well-recognized, the ground-level verdict is not out on what the optimal solution is, easily implemented in countries with diverse economic/legal regimes. There are alternative perspectives from some scholars, noting that international agreements, frameworks, and protocols can be tailored to address individual cases. This can be effective when complementing existing systems.
After signing four new FTAs (2021-2024), India is working on similar agreements with several countries (Economic Survey, 2024). Therefore, pending the adoption of the Model Law, there is no reason why the FTA cannot cover insolvency. There may be complementary integration of cross-border provisions in FTAs/equivalents. In its current form, the agreement takes into account disputes, IPRs, and even sustainability, but usually ignores insolvency. If CECAs/CEPAs are conceptualized to take deeper regulatory aspects, why can’t they cover the insolvency dimension?
Interestingly, a vacuum is not only found in bilateral/regional agreements but also in some important reports of the World Trade Organization, which omits the explicit discussion of cross-border insolvency when discussing the factors affecting the future of trade. Thus, it is necessary to combine the perspective of the importance of insolvency law with global trade on a multilateral or bilateral route. Specifically, an FTA is incomplete without a cross-border dimension.
Therefore, there needs to be a deeper appreciation of the importance of good insolvency law for international trade. FTAs (and similar) must factor in the appropriate mechanism to weather the consequences of the insolvency of the trading entity. This will only strengthen the building of FTAs signed by India. This may be part of the government’s agenda to create SOPs for FTAs. While the practical feasibility of interlinking insolvency with FTAs is best assessed by the Ministry of Commerce, Insolvency and Bankruptcy Board, and legal experts, considering the reality of insolvency with cross-border ramifications, the sooner this problem is addressed, the greater the benefits for Indian trade.
Amol Baxi is Visiting Fellow in Research and Information Systems for Developing Countries, New Delhi. Views are personal
Published – September 25, 2024 01:47 IST
