This paper would be discussing the Insolvency and Bankruptcy Code (IBC) of
2016 and the situation of pre Insolvency and Bankruptcy and the importance of
IBC 2016. Insolvency and Bankruptcy 2016 provide a time-bound solution to the
problem arising out of Insolvency and Cross Border Insolvency.
This paper would also be discussing foreign creditors and the reason for which
they invest in India. In the case of cross border Insolvency section, 234 and
235 of IBC 2016 plays a crucial role and chapter 15 of US Insolvency Law plays a
crucial role in US Cross Border Insolvency Law, at the international stage,
United Nation Commission on International Trade Law suggested the Model Law also
known as UNCITRAL Model Law on Cross Border Insolvency. It was accepted on 30
May 1997 by the United Nations Commission of International Law.
Before the existence of the insolvency and bankruptcy code 2016. There were
multiple laws which were dealing with the situation of insolvency and bankruptcy
in the country.
The presence of multiple laws resulted in delays in the timely resolution of
insolvency and bankruptcy proceedings . Due to this delay, the value of the
addressee owned by the company depreciates and banks were very reluctant to
invest in businesses as they were not able to make a good recovery.
On 21 December 2015 Insolvency and Bankruptcy Code, 2015 was introduced in the
Lok Sabha and it was referred by the Joint Committee of Parliament on April 28,
2016, which in its report of 2015 recommended the Insolvency & Bankruptcy Code.
The major goal of these economic reforms is to focus on creditor-driven
The IBC 2016 is a revolutionary step as it provides a comprehensive and
time-bound result. Also, for the operation of businesses in India, it gives an '
The term Insolvency means a state in which an organization or an individual is
unable to fulfill its financial burdens which are due against the lenders in
terms of debts. In a situation When a company is declared as an insolvent there
are certain procedures that a company has to follow i.e. for making an
alternative mode of paying the debt an informal meeting is organized between a
company and its creditors
When the results of these meetings fail to address the situation, specific
bankruptcy proceedings are carried out, in which the liquidator acquires all of
the company's assets, evaluates them, and liquidates those assets to pay off the
Under the cross-border insolvency, the insolvent debtor owns assets in many
jurisdictions, or the creditors of the concerned debtor are not from the
jurisdiction where the insolvency proceedings are initiated.
Section 3(10) of the Code defines a Creditor – According to this section
creator "Means any person to whom a debt is owed and includes a financial
creditor, an operational creditor, a secured creditor, an unsecured creditor,
and a decree-holder."
Who are Foreign creditors:
Foreign Creditors are those creditors who are situated outside India and have
lent funds to Indian Entities. Further, these foreign creditors may have lent
not only for domestic ventures of Indian companies but also for the foreign
ventures of parent Indian Companies.
Two situations can be imaged in the case of a foreign creditor:
Reasons why foreign creditors invest in India
- When a domestic company has initiated insolvency and bankruptcy
proceedings against an Indian Debtor under IBC and the foreign creditor is
one of the creditors of that Debtor.
- When a foreign creditor wants to initiate insolvency and bankruptcy
against an Indian Debtor.
After the commencement of liberalization of the economy in 1991, India opened
its market to the foreign investors. Over the years the government has taken
several reforms in the foreign direct investment norms in order to encourage
more and more overseas investors to invest in the country.
The main reason for which the Foreign companies invest in India is to take
advantage of relatively lower wages, special investment privileges like tax
Foreign creditors invest in India as India provides a large and expanding size
of the market.
India provides well managed public finances and takes several decisions to
encourage digital revolution which attract the foreign creditors to invest in
Foreign creditors are whether financial creditors or operational creditors?
Foreign creditors should be both financial creditors as well as operational
According to section 5(7) of IBC(2016) financial creditor means any person to
whom a financial debt is owed and includes any person to whom such debt has been
legally assigned or transferred to.
according to section 5(20) of IBC 2016 operational creditor means any person to
whom an operational debt is owed and includes any person to whom such debt has
been legally assigned or transferred to.
In simple words, financial creditors are creditors who give money/cash to the
promoters(corporate debtor) For example - Bank. On the other hand, operational
creditors are those creditors who provide goods and services to the
According to section 3(8) of the IBC corporate debtor means a corporate person
who owes a debt to any person.
In simple words, corporate debtors are the person who takes loan or money from
financial creditors or takes goods or services from operational creditors as
Foreign investment in India
Foreign investment means Any type of investment that's made in India with the
source of backing that's from outside of India is a foreign investment.
According to this, Foreign Investments are classified as below.
Foreign Direct Investment (FDI)
When a company invests in a business that is located in another country is known
as FDI. In order for a private foreign investment to be considered an FDI, the
company that's investing must have no lower than 10% of the shares belonging to
the foreign company.
Foreign Portfolio Investment (FPI)
FPI means the investment which consists of securities and other financial assets
held by investors in another country. It does not give the investor with direct
power of a company's assets and is fairly liquid depending on the volatility of
The Framework for access by Indian IPs (Insolvency Professionals) to foreign
Where a proceeding is commenced in India in respect of a corporate debtor under
the IBC, the IP appointed in such a proceeding may apply for its recognition in
a foreign jurisdiction. Such jurisdiction may or may not have adopted the
UNCITRAL Model Law on Cross-Border Insolvency.
The CBIRC (cross-border insolvency rules/regulations committee) deliberated the
implications of this and concluded that there are no additional regulatory
concerns with allowing Indian IPs to access a foreign jurisdiction for seeking
recognition or co-operation with respect to an IBC proceeding. The CBIRC
recognized that the conduct of the IP with respect to such access would be
governed mainly by the laws of the jurisdiction in which the IP acts.
The IP Regulations and IBC 2016 doesn't stop an IP from applying for accessing
the insolvency system of a foreign or outside india jurisdiction. Accordingly,
no consequential amendments are required in respect of this issue. The Committee
recommends that the IBBI may instruct IPs to report assignments involving access
to foreign insolvency jurisdictions, accepted by them.
Cross border insolvency proceedings under IBC
Cross Border Insolvency Proceedings came into existence when the debtor and the
creditor are situated in two different countries. It is more useful in the case
of multi-national companies and other entities that operate across different
Section 234 and section 235 of IBC 2016 deal with Cross Border Insolvency:
- Section 234 of IBC gives power to the Central Government to make
a reciprocal agreement with other countries. It reads as follows:
Section 234(1) of the IBC 2016 states that "the Central Government may
enter into an agreement with the Government of any country outside India for
enforcing the provisions of this Code".
Section 234(2) of the IBC 2016 states that "the Central Government may, by
notification in the Official Gazette, direct that the application of provisions
of this Code in relation to assets or property of corporate debtor or debtor,
including a personal guarantor of a corporate debtor, as the case may be,
situated at any place in a country outside India with which reciprocal
arrangements have been made, shall be subject to such conditions as may be
"Section 235 of IBC 2016 is more in the essence of Mode of Recovery for the
purposes of successful Corporate Insolvency Resolution Proceedings. It reads as
- Notwithstanding anything contained in this Code or any law for the time
being in force if, in the course of the insolvency resolution process, or
liquidation or bankruptcy proceedings, as the case may be, under this Code,
the resolution professional, liquidator or bankruptcy trustee, as the case
may be, is of the opinion that assets of the corporate debtor or debtor,
including a personal guarantor of a corporate debtor, are situated in a
country outside India with which reciprocal arrangements have been made
under section 234, he may make an application to the Adjudicating Authority
that evidence or action relating to such assets is required in connection
with such process or proceeding.
- The Adjudicating Authority on receipt of an application under
sub-section (1) and, on being satisfied that evidence or action relating to
assets under sub-section (1) is required in connection with the insolvency
resolution process or liquidation or bankruptcy proceeding, may issue a
letter of request to a court or an authority of such country competent to
deal with such request.
Rather than these two sections, the foreign creditors were left in the
stagger on how to take advantage of the new law. Further, as of date, these two
sections haven't been used to help any foreign creditor. These sections are
practically clumsy and not timely which is against the goal of the Code for
Whether the Code makes any distinction between foreign and Indian creditors?
The IBC 2016 does not make any distinction between a foreign and Indian
creditor. The terms 'operational creditor' and 'financial creditor' have been
defined as 'persons' to whom a financial or operational debt is owed.
Consequently, the definition of 'persons' includes 'person resident outside
In the case of Macquarie Bank v. Shilpi Cable Technologies
 The supreme
court of India held that a foreign operational creditor cannot be excluded from
the purview of the Insolvency and Bankruptcy Code merely because it is unable by
virtue of its foreign residency to follow the procedural aspect in relation to
the filling of the application. The court allowed the foreign creditor's
application by remarking that article 14 of the Indian Constitution is also
applicable to foreigners.
The code empowers the foreign creditors to initiate a corporate insolvency
resolution process against financial creditors which include a corporate
guarantor. In the case of Stanbic Bank, Ghana v. Rajkumar Impex Private
 The National Company Law Tribunal Chennai allowed the initiation
of CIRP by a Ghana-based bank against an Indian company in respect of a
guarantee extended by it in relation to its subsidiary based in Ghana.
UNCITRAL Model Law
The Model Law 1997 was suggested by the United Nations Commission on
International Trade Law. The Model Law on cross-border insolvency was accepted
on May 30, 1997, by UNCITRAL during its 13th session in Vienna.
The Model Law provides an easy mechanism to resolve cross border insolvency
To achieve greater flexibility, the UNCITRAL model law was passed as a model law
and not as a convention so that the nations can make necessary changes in their
domestic laws with respect to cross-border insolvency as per the model.
The Model Law focuses on authorizing, encouraging cooperation, and coordination
between jurisdictions, rather than attempting the unification of substantive
insolvency law, and respects the differences among national procedural laws.
UNCITRAL Model Law can be divided into the following pillars:
- Pillar of Access
The provisions of Model law allow it to remove or reduce numerous current
obstacles that foreign liquidators face in terms of jurisdiction, standing,
and the right to be heard and will empower any foreign representative to
apply directly to a court in a state that has accepted the Model Law to
begin domestic insolvency proceedings.
- Pillar of Recognition 
The Model Law validates foreign proceedings and the relief granted by the
domestic court as a result of the recognition.
The report of the committee in 2018 recognized two categories of foreign
proceedings intending to determine the amount of control and authority that the
jurisdiction has over insolvency resolution procedures:
Pillar of Relief
- Foreign Main Proceedings:
Proceedings in the State where the corporate debtor has a center of its main
- Foreign Non-Main Proceedings:
It means the proceedings in the State where the corporate debtor has an
The types of relief defined under the Model Law can be granted in both foreign
main and non-main procedures. If the NCLT determines that a process is a foreign
main proceeding, the continuing domestic procedures are halted, and the estate
is handled by the foreign representative therefore appointed. On the other hand,
if a process is judged to be a foreign non-main proceeding, such remedy is at
the discretion of the court.
Pillar of Cooperation and Coordination
The Model Law creates the foundation for the best possible collaboration and
communication between domestic and foreign courts, as well as insolvency
practitioners. It also creates the foundation for concurrent insolvency
procedures, which are the initiation of domestic proceedings while a foreign
proceeding has already begun, or vice versa. It also promotes collaboration
among two or more concurrent insolvency processes that are taking place in
The Model Law also includes a public policy exemption, which allows courts in a
state to refuse to take any action authorized by the Model Law if such action is
inconsistent with the state's public policy.
US Cross Border Insolvency Law
Chapter 15 of US Insolvency law deals with CROSS BORDER INSOLVENCY
The main purposes of Chapter 15 are to achieve:
The Cooperation between the US and foreign courts and representatives.
Chapter 15 requires US bankruptcy courts to recognize a foreign proceeding
when each of the following conditions is satisfied:
- Fair and efficient administration of estates.
- Protection and maximization of assets.
- Facilitation of the rescue of financially disturbed businesses
- Greater legal certainty for trade and investment.
- A foreign representative should be a person or body.
- The petition includes the required documentation.
- The foreign proceeding is a main proceeding or non-main proceeding (see
below, Recognition of foreign proceeding as main or non-main).
Section 15 was added in response to a United Nations recommendation for
cooperation among nations on what it calls "cross-border insolvency.
The main aim of Chapter 15 bankruptcy is to promote cooperation among U.S.
courts, foreign courts, and their appointed representative and to make legal
proceedings of international bankruptcies more predictable and fair for debtors
As such, Chapter 15 of US Insolvency Law focuses on jurisdiction. This chapter
also tries to protect the value of the debtor's assets and, when possible,
financially rescue an insolvent business
This chapter allows a representative in a corporate bankruptcy case that has
been filed outside the United States (also known as a "cross-border insolvency")
to obtain access to the U.S. court system. This chapter is intended to provide
an efficient and common-sense mechanism for addressing insolvencies that involve
debtors, creditors, and assets associated with more than one country.
The main aim of Chapter 15 is outlined in the following objectives listed in
Title 11, Chapter 15, Section 1501 of the U.S. Code: 3
Chapter 15 History
- Promoting cooperation among U.S. courts and interested parties and the
courts of other countries involved in cross-border insolvencies
- Providing for the good administration of cross-border insolvencies that
protects the interests of all parties
- Protecting the value of the debtor's assetsAssisting financially
- Set up a better legal foundation for cross-border investment and trade
This chapter was added to federal law as part of the Bankruptcy Abuse Prevention
and Consumer Protection Act of 2005 and it was based on the United Nations
Commission on International Trade Law's "Model Law on Cross-Border Insolvency."
A total of 50 countries, including Japan, Canada, China, Australia, the United
Kingdom, Russia, Germany, Saudi Arabia, and Mexico, have adopted this law to
reduce the risk for creditors and stakeholders of international companies.
As formally referred to as "Chapter 15, Title 11 of the United States Code,"
Chapter 15 has its origins in Section 304 of the U.S. Bankruptcy Code, which was
enacted in 1978. This section given the increasing frequency of bankruptcies
involving more than one jurisdiction, Section 304 was repealed in 2005 and
replaced with Chapter 15, which carries the title of "Ancillary and Other
Cross Border Cases.
The IBC 2016 is a revolutionary step as it provides a comprehensive and
time-bound result. Also, for the operation of businesses in India, it provides
an exit strategy.
Foreign creditors play one of the major roles in the development of the country
by making investments in Indian companies. Cross-border insolvency is a
situation when the creditor and debtor are from different countries and the
debtor is unable to pay the debt which he owes to the creditor.
Section 234 and 235 of IBC 2016 deal with the cross-border insolvency in India
but these sections do not provide an exhaustive or broad framework in matters
related to cross-border insolvency.
India should adopt Model Law on cross-border insolvency as it provides wide
incorporation for all insolvency orders. It also helps in increasing foreign
investment in India and strengthens the cooperation between insolvencies
proceeding at the domestic and foreign level
- Prerna Bhadana- BA.LLB (H) Faculty Of Law Manav Rachna University
- Yash Sharma - BBA.LLB (H) Faculty Of Law Manav Rachna University