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UNCITRAL Model Law on cross-border insolvency

June 15, 2024

This article is written by Jyotika Saroha. It deals with the UNCITRAL Model Law on Cross Border Insolvency. It elaborates on the meaning of Cross Border Insolvency, its evolution, major principles and provisions. It also deals with the laws of India that deal with the matters of insolvency.

Table of Contents

Introduction

India is a developing country and has a vast economic structure. There are various large corporate tycoons and firms that become bankrupt due to many reasons, and it eventually impacts the economic system of the country. Such companies and firms not only affect the members within it, but have a major impact on the economy of the country. Thus, in order to solve the issue of insolvency, the Insolvency and Bankruptcy Code (IBC) was enacted in 2016 with an objective to resolve claims of companies who become insolvent. The Code is an efficient solution for resolving the matters regarding insolvencies, which was earlier a long and hefty procedure. However, the Code is still unable to fulfil the aim to promote fair and efficient resolution of Cross Border Insolvencies that could protect the interest of debtors as well as of the creditors. Whereas, at the International level UNCITRAL Model Law on Cross Border Insolvency, 1997 came into being in order to help the Nations to deal with the Cross Border Insolvency conflicts that arise outside borders of a Nation.

Meaning of cross border insolvency

Insolvency generally means when a company, organisation, or a firm is unable to repay its loan which is due to the lender. Cross Border Insolvency is also termed as “International Insolvency” and it occurs when the creditors of the said company from whom the company took loan are situated in more than one country. For the management and proper resolution of Cross Border Insolvency cases, it takes long procedural methods which are very challenging and difficult. However, with a robust legal mechanism it would not be that difficult to resolve such matters. The key issues in Cross Border Insolvency include the jurisdiction, coordination & cooperation, recognition of foreign proceedings etc.

Evolution of Model Law on cross-border insolvency

The subsidiary body of the General Assembly of the United Nations namely, United Nation Commission on International Trade Law (UNCITRAL) came into being in 1966 in the arena of International Trade Law. It helps in developing and maintaining the cross border legal system for the promotion and facilitation of international trade. UNCITRAL makes new model laws and conventions in order to facilitate the commercial transactions between different countries. Like other conventions, the UNCITRAL Model Law on Cross Border Insolvency came into being, after it got the approval of the United Nations General Assembly through a resolution on 30th May, 1997. The main objective behind the implementation of this Model law was to resolve the issues relating to Cross Border Insolvency or the international insolvency.

The reason for it being a Model law and not a Convention is so that nations can exclude or alter the provisions in their local laws in the way they want, so either they can make changes in the existing framework or they can implement a new legislation regarding Cross Border Insolvency. As of now, around 59 countries have adopted it and implemented it in their legal frameworks which includes the United States of America, United Kingdom, Japan and South Korea etc. India has also adopted the Model law Cross Border Insolvency on May 17, 2022. The UNCITRAL Model Law on Cross Border Insolvency came into being in order to provide for effective measures to deal with the conflicts that arise from it. It helps the Nations to endow fair, new or modern legal framework for their insolvency laws. The World Bank has also acknowledged the implementation of UNCITRAL Model Law on Cross Border Insolvency at an International level and after it, International Monetary Fund (IMF) is another organ which has shown its support for the adoption and implementation of Model Law on Cross Border Insolvency disputes.

Purpose of UNCITRAL Model Law on cross border insolvency

The purpose of the UNCITRAL Model Law on Cross Border Insolvency is provided within its preamble which states that it is the objective of this Model Law to provide for effective mechanisms in order to resolve the Cross Border conflicts and to promote principle of cooperation amongst Courts, competent authorities of the states who are involved in the said conflict, to promote fair and efficient administration of the matters regarding Cross Border Insolvency by protecting the interest of the creditor and debtor as well as of the other interested persons. Further it deals with the protection of the assets of debtors and maximisation of their value and preservation of employment. Apart from the preamble following are some other objectives of the Model Law.

It was implemented with an objective to resolve the issues regarding Cross Border Insolvency, and it was designed in a manner to help the countries so that they can endow and make necessary changes into their existing legislative frameworks the law relating to Cross Border Insolvency.
The UNCITRAL Model Law on Cross Border Insolvency was created in order to provide for an effective mechanism to solve the disputes relating to Cross Border Insolvency. There are various circumstances where an insolvent debtor takes loans or assets from foreign companies and firms from different countries, which makes it difficult to conduct the insolvency proceedings.
The UNCITRAL Model Law on Cross Border Insolvency provides for effective solutions rather than criticising the procedural irregularities of a particular country, it provides modern and fair solutions like acknowledging the rights of the creditor and the debtor as well to take part in proceedings.
It also takes care of the rights of foreign creditors so that they can take part in the proceedings irrespective of the issue of jurisdiction. It provides for a transparent system to the parties, irrespective of the jurisdiction of different countries.
It allows the judicial system of Nations to cooperate with the foreign courts in order to solve the matters regarding insolvency.
With the implementation of UNCITRAL Model Law on Cross Border Insolvency, a guide related to enactment of the Model Law was also released by the Secretariat of the United Nations Commission on International Trade Law with an objective to assist the nations in order to prepare effective laws regarding insolvency.

Principles of UNCITRAL Model law on cross-border insolvency

The UNCITRAL Model Law on Cross Border Insolvency focuses upon four major principles, which are as follows:

Access

Chapter II, Articles 9-14 of UNCITRAL Model Law on Cross Border Insolvency, deals with the ‘Access’ of foreign representatives and creditors to courts in the enacting state. This principle basically provides the access to foreign creditors and the persons who represent the foreign creditors to take part in any domestic Court where the insolvency proceedings are taking place.

Article 9 of UNCITRAL Model Law on Cross Border Insolvency

This Article provides for a right of direct access to a foreign representative to apply in a Court in the enacting state.

Article 10 of UNCITRAL Model Law on Cross Border Insolvency

It deals with the provision for limited jurisdiction wherein the application made to the Court by the foreign representative does not subject the representative to the jurisdiction of the Courts of the enacting state.

Article 11 of UNCITRAL Model Law on Cross Border Insolvency

This Article deals with the application given by a foreign representative in order to commence a proceeding under the laws of the enacting state regarding insolvency if all the conditions for starting or commencing the proceeding are fulfilled.

Article 12 of UNCITRAL Model Law on Cross Border Insolvency

It deals with the participation of a foreign representative in the insolvency proceedings relating with the debtor under the enacting laws of the state.

Article 13 of UNCITRAL Model Law on Cross Border Insolvency

It states that the foreign creditors have the same rights as that of the creditors of an enacting state during the Insolvency proceedings.

Article 14 of UNCITRAL Model Law on Cross Border Insolvency

It deals with the notification of a proceeding to the foreign creditors wherein as per the orders of Court necessary steps may be taken in order to inform the creditor whose address is not known.

Recognition

Chapter III, Articles 15-17 read with Article 6 of UNCITRAL Model Law on Cross Border Insolvency, deals with the provisions regarding recognition of a foreign proceeding. Recognition is a process wherein the court of a country gives acknowledgment to the proceedings regarding insolvency started in another country.

Article 15 of UNCITRAL Model Law on Cross Border Insolvency

It provides that a foreign representative may apply for the purposes of recognition of a foreign proceeding in a court wherein he was appointed. It further provides that it shall contain necessary documents laid down in the clauses of Article 15 like certified copy of the decision, certificate regarding the foreign proceeding and the appointment of foreign representative.

Article 16 of UNCITRAL Model Law on Cross Border Insolvency

It states that the Court shall presume that the documents submitted by the foreign representative and the proceedings that were being held are bonafide.

Article 17 of UNCITRAL Model Law on Cross Border Insolvency

It is to be read with Article 6 which provides that the recognition that is being sought can be refused on the ground if it is contrary to the public policy. Whereas, Article 17 provides for the conditions that are to be met in order to recognize a foreign proceeding. So, in order to get recognized, a foreign proceeding should be a proceeding within the meaning of Article 2(a) which provides for the definition of a Foreign Proceeding. It refers to a collective judicial or administrative proceeding in a foreign state, and it also includes an interim proceeding under the law relating to insolvency in relation to the assets and affairs of the debtor which are under the control and supervision of the foreign Court for the purposes of reorganisation and liquidation. And for a foreign representative, he should be a person within the meaning of the same. It further provides that the foreign proceeding must be decided at an earliest time.

Relief

Article 19 & 22 provides for the provisions for relief. There are two kinds of reliefs given. First is the relief granted upon the application for recognition of a foreign proceeding.

Article 19 of UNCITRAL Model Law on Cross Border Insolvency

This Article of Model Law deals with the urgent relief and on an application of recognition the Court may on its discretion grant such urgent relief. This kind of relief is narrow in nature as compared to the other relief granted during the recognition of a foreign proceeding. After the Court took a decision of granting recognition to a foreign proceeding then in that case Article 19 shall be terminated.

Article 21 of UNCITRAL Model Law on Cross Border Insolvency

Second one is the relief that may be granted upon recognition of a foreign proceeding which is being provided under Article 21. Now the relief granted of a foreign proceeding is recognised can be divided into two further categories i.e. the mandatory relief which immediately applies after a foreign proceeding gets recognition and the discretionary relief which may be provided either to a foreign main proceeding or foreign non-main proceeding after it gets recognition.

Article 22 of UNCITRAL Model Law on Cross Border Insolvency

It states that the Court while granting or refusing to provide relief under Article 19 or 21 must be satisfied that the interests of persons involved are protected. At the request of a foreign representative or a person affected by such relief that is being given under Article 19 or 21, the Court on its own motion may terminate or make modifications in such relief.

Cooperation and coordination

Chapter IV, Article 25-27 deals with the cooperation with foreign Courts and foreign representatives.

Article 25 of UNCITRAL Model Law on Cross Border Insolvency

It states that subject to Article 1, the Court shall work in cooperation with the foreign courts or the foreign representatives whether directly or through any administering body as per the laws of enacting state.

Article 26 of UNCITRAL Model Law on Cross Border Insolvency

This Article states that the Court shall exercise its functions in order to cooperate with the foreign Courts and representatives as it is the mandate of UNCITRAL Model Law on Cross Border Insolvency to harmonise the laws and to follow a fair procedure to deal with the matters regarding insolvency.

Article 27 of UNCITRAL Model Law on Cross Border Insolvency

It deals with the different forms of cooperation that are referred to in Articles 25 & 26. It can be implemented by following means:

Appointing a person or a body that can act as per the directions given by the Court.
There shall be the communication of information by the means as the Court deems fit.
There shall be coordination supervision and administration of the assets of the debtor.
Courts shall approve or implement the agreements concerning coordination.
Coordination regarding the concurrent proceedings of the same debtor which implies that there shall be coordination between the jurisdictions of countries rather than opting for uniform laws of their respective states.
Additional forms of cooperation may be added by the enacting state.

Provision of UNCITRAL Model Law on cross-border insolvency

Applicability

Article 1 of UNCITRAL Model Law on Cross Border Insolvency deals with the applicability of the model law. It states that this law will apply wherein the foreign Court or a foreign representative has sought assistance in the enacting state in regard with a foreign proceeding. Further, it states that it is applicable wherein in relation with the proceeding under the domestic laws of the enacting state regarding insolvency the assistance is sought by a foreign Court. It is also applicable wherein, under the domestic laws of an enacting state, the foreign proceeding is taking place in respect of a same debtor concurrently.

It also applies upon the persons like the creditors and others who are interested in requesting for the commencement of the proceeding or taking part in the said proceeding. However, there is an exception to this provision that does not apply to banks, insurance companies as they are covered under different insolvency laws.

Important definitions

Article 2 provides for various definitions under the UNCITRAL Model Law on Cross Border Insolvency.

Foreign proceeding

It refers to an administrative or a judicial proceeding taking place in a Foreign state. It also includes an Interim proceeding related to a law of insolvency wherein the assets and affairs of a debtor are main issues for the purposes of reorganisation and liquidation.

Foreign main proceeding

It refers to a proceeding wherein the debtor has the main interests in a Foreign State.

Foreign non-main proceeding

It means a proceeding not similar or other than the Main-proceeding wherein the debtor has an establishment as per the meaning given in sub paragraph (f).

Foreign representative

It means the following person or a body:

i) who is appointed on an interim basis,

ii) a person authorised to administer reorganisation,

iii) a person authorised to administer liquidation,

iv) a person to act in a foreign proceeding as a representative.

Foreign Court

It is a judicial or other authority who is competent enough to control or supervise the Foreign Proceeding.

Establishment

It is a place where the debtor carries out its economic activities by means of human, goods and services.

Concurrent proceedings

Chapter V, Articles 28–32 deals with the provisions regarding the concurrent proceedings.

Article 28 of UNCITRAL Model Law on Cross Border Insolvency

It states that after a Foreign Main Proceeding gets recognition, a proceeding related with the domestic laws of the enacting state can be initiated when the debtor has its assets located in the said state and those proceedings shall be restricted to the assets of the debtor.

Article 29 of UNCITRAL Model Law on Cross Border Insolvency

It provides for the principle of coordination and cooperation when the foreign proceeding or a proceeding under the laws of enacting are taking place concurrently. The Model Law empowers the Courts to cooperate and directly communicate with the foreign counterparts in order to make the proceeding fair and efficient.

Article 32 of UNCITRAL Model Law on Cross Border Insolvency

This Article deals with the provisions regarding the rule of payment in concurrent proceedings and it provides that if during the proceedings in a Foreign state the creditor has received a part payment then, he will not get the payment for the same claim in the laws of the enacting state with regard to the same debtor.

Indian scenario

The UNCITRAL Model Law on Cross Border Insolvency has been adopted widely in order to resolve their conflicts in an efficient manner. The issues regarding Cross Border Insolvency are increasing steadily and for the purpose of resolving the said conflicts a robust mechanism should be there.

Prevailing laws on cross border insolvency

Reports and discussions

The Ministry of Corporate Affairs in the year of 2017 constituted a committee namely ‘The Insolvency Law Committee’ under the chairmanship of Shri Injeti Srinivas, the then Secretary of Ministry of Corporate Affairs with a main objective to recommend amendments in the Insolvency and Bankruptcy Code, 2016. With respect to the matter regarding ‘Cross Border Insolvency’, the Committee decided to take this issue separately as the issue of Cross Border Insolvency is a complex one in order to provide recommendations and the committee wanted to examine the UNCITRAL Model Law on Cross Border Insolvency in depth. Later, the Committee submitted its report regarding the Cross Border Insolvency and recommended that the UNCITRAL Model Law on Cross Border Insolvency should be adopted.

Cross Border Insolvency and IBC

Nowadays, there has been a lot of surge in Cross Border Insolvency cases as a result of developing economic connections amongst different countries. In India, the issue of domestic insolvency has been dealt with effectively in the Insolvency and Bankruptcy Code (IBC), 2016. However, on the issue of Cross Border Insolvency the IBC has included few provisions for the same which are Section 234 and 235 that specifically talks about Cross Border Insolvency.

Section 234

This Section deals with the agreements with the foreign countries, and it empowers the Central Government to enter into bilateral agreement with the foreign countries in order to manage the aftermath of cross border. The Central Government may also direct the Code to be applicable when the assets of a debtor or its personal guarantor at any place in the country with whom the reciprocal arrangement has been signed.

Section 235

It deals with the doctrine of reciprocity and states that during the insolvency proceedings the resolution professional or the liquidator may make an application to the National Company Law Tribunal (NCLT) in order to receive any evidence or action taken in such regard and if the Tribunal is satisfied then as per Section 235(2), the Adjudicating Authority may issue the letters of request to the Courts of the country where the parties have entered into an bilateral agreement as given under Section 234 with a purpose to decide upon the issue of assets of the debtors situated outside India.

Draft Z

In the report of the Insolvency Law Committee, a draft chapter has been recommended which contains the issues regarding the Cross Border Insolvency and such provisions are based upon the UNCITRAL Model Law on Cross Border Insolvency. It includes the rights and claims of foreign creditors, the recognition of foreign proceedings and the scope of powers of insolvency professionals. The Draft Z provides for the same rights to foreign creditors as that of domestic creditors.

Judicial pronouncements

Rajah of Vizianagaram vs. Official Receiver, Vizianagaram (1962)

This is a landmark case in the history of Cross Border Insolvency in India wherein the Company in the present case namely Vizianagaram Mining Co. Ltd. was incorporated in England. The company took a certain piece of land on lease from the Raja of Vizianangaram who is the appellant in the present case. The company’s official receiver was appointed as the official liquidator. Some foreign creditors filed their claims before the official liquidator. The appellant opposed the claims made by the foreign creditors and stated that these claims in the liquidation proceedings can only be filed by the Indian creditors. However, the official liquidator rejected these contentions of the appellant and allowed the claims filed by the foreign creditors and held that as per the general as well as specific provisions of the Indian Companies Act, 1913, the foreign creditors may prove their claims in the process of winding up of an unregistered company. There are no reasons as to why foreign creditors should be excluded from filing their claims, the order for winding up of a company goes in favour of all contributors. Aggrieved by the said decision an application was filed by the appellant in the Court of District Judge, Vizagapatam wherein the application was dismissed. After this the appellant approached the High Court of Madras by way of filing an appeal, the High Court also dismissed the appeal by stating that the foreign creditors can prove their claims. Later, on the application of appellant under Article 133 of Indian Constitution, the High granted certificate to the appellant and hence he came before the Supreme Court by filing a civil appeal.

The Supreme Court observed that all the persons or contributors who have lent or contributed to the company can ask for their claims. The Court held that they can ask for their claims as the winding up proceedings of an unregistered company makes no difference between Indian and Foreign creditors and in their debts with respect to business, hence their claims are correctly filed.

Jet Airways (India) Ltd. vs. State Bank of India & Anr. (2019)

This is the first instance of Cross Border Insolvency in India. In this case, Jet Airways (India) Ltd. was declared as a bankrupt company in the Netherlands. Although, the Corporate insolvency Resolution Process (CIRP) of Jet Airways was already initiated in India as per the provisions of Section 7 & 9 of the Insolvency and Bankruptcy (IBC), 2016 but the NCLAT gave recognition to both the proceedings and termed them as ‘parallel proceedings’.

The tribunal also termed the proceedings held in India as ‘Foreign Main Proceedings’ as mostly the corporate debtors are located in India. The Court also suggested using the ‘Cross Border Insolvency Protocol’ that has been agreed by the administrator of Dutch and the insolvency professional of insolvency. Lastly, the Corporate debtor’s corporate insolvency resolution process was resumed, and the Dutch administrator was provided with the right to take part in the proceedings of the Committee of Creditors in order to provide relief to the creditors of both countries, India and Netherlands respectively. The present case plays a significant role and helps in establishing the urgent requirement to adopt the provisions of UNCITRAL Model Law on Cross Border Insolvency, 1997 by making changes in the present provisions regarding the issue.

Conclusion

It can be concluded by saying that one of the reasons for less development of economies of the country is their business failures, and it impacts a lot on the development and advancement of the country, but in order to minimise such losses that have been occurred a robust framework for resolving the insolvency matters has become a necessity, and it is one of the most important factors therein.

Now, as the agreements are taking place globally and the risk of Cross Border Insolvency is not new so in order to resolve that the structure of UNCITRAL Model Law on Cross Border Insolvency is there to resolve the issues of Cross Border Insolvency, however certain limitations are there as not every Country has adopted the Model Law and those like India who have adopted it has not become fully capable to implement it in an effective manner.

Frequently Asked Questions (FAQs)

How the UNCITRAL Model Law on Cross Border Insolvency came into being?

UNCITRAL Model Law on Cross Border Insolvency came into being after it received the approval from the United Nations General Assembly through a resolution in the year of 1997.

Who is a foreign Representative under the UNCITRAL Model Law on Cross Border Insolvency?

A foreign Representative is appointed under Article 2 (d) of the Model Law, and he is a person appointed on an interim basis or authorised to administer reorganisation and liquidation and mainly to act as a representative in a foreign proceeding as defined under Article 2(a) of the Model Law.

How the UNCITRAL Model Law on Cross Border Insolvency was adopted in India?

The Ministry of Corporate Affairs in the year of 2017 constituted a committee namely ‘The Insolvency Law Committee’ under the chairmanship of Injeti Srnivasa, Secretary of Corporate Affairs for a purpose to recommend amendments in the Insolvency and Bankruptcy Code, 2016. Hence, the recommendations were made by the committee to adopt the UNCITRAL Model Law on Cross Border Insolvency in the Indian context.

Which was the first case in India regarding the issue of Cross Border Insolvency?

The first case in India which deals with the issue of Cross Border Insolvency was Jet Airways (India) ltd. vs. State Bank of India & Anr. (2019)