UPSC Mains 2019: UNCITRAL Model Law for Cross Border Insolvency issues



Topic: Panel recommends UNCITRAL Model Law for Cross Border Insolvency issues

Topic in Syllabus: Indian Economy – Bankruptcy

UNCITRAL Model Law for Cross Border Insolvency issues


India should adopt the UNCITRAL Model Law of Cross Border Insolvency, 1997 for its cross border insolvency framework, a Government-appointed Panel has recommended.

The Insolvency Law Committee (ILC) constituted by the Ministry of Corporate Affairs to recommend amendments to Insolvency and Bankruptcy Code of India, 2016, has submitted its 2nd Report to the Government, which deals with cross border insolvency.


More about on news:

  • The ILC has recommended the adoption of the UNCITRAL Model Law of Cross Border Insolvency, 1997, as it provides for a comprehensive framework to deal with cross border insolvency issues.
  • The Committee has also recommended a few carve outs to ensure that there is no inconsistency between the domestic insolvency framework and the proposed Cross Border Insolvency Framework.
  • This recommendation formed part of the second report of the Insolvency Law Committee, headed by Corporate Affairs Secretary Injeti Srinivas, submitted to Finance Minister
  • The necessity of having Cross Border Insolvency Framework under the Insolvency and Bankruptcy Code arises from the fact that many Indian companies have a global footprint and many foreign companies have presence in multiple countries including India.
  • Although the proposed Framework for Cross Border Insolvency will enable us to deal with Indian companies having foreign assets and vice versa, it still does not provide for a framework for dealing with enterprise groups, which is still work in progress with UNCITRAL and other international bodies.
  • The inclusion of the Cross Border Insolvency Chapter in the Insolvency and Bankruptcy Code of India, 2016, will be a major step forward and will bring Indian Insolvency Law on a par with that of matured jurisdictions.


Insolvency, Resolution, Bankruptcy and Liquidation

  • Insolvency refers to the inability of a person or corporate to pay up his debt /bills as and when they become due. He may be able to pay at a later date some amount or even in full, but at the promised date of payment, he is unable to make the payment. Insolvency leads to the state of default. Bereft of outright fraud, the default can happen due to financial failure (as evidenced by “cash flow test”) or business failure (as determined by “balance sheet test”).
  • Resolution refers to a plan proposed by any authorised person/entity for enabling the overdue payments of a corporate debtor through restructuring or through part payments, while allowing the corporate debtor to continue as a going concern.
  • Bankruptcy is the next state of insolvency where an individual and partnership firm is declared by the relevant authority under a specified law for the purpose, as incapable of paying up his debt / bills at any time in present as well as in the foreseeable future. Generally, failure of resolution process leads to bankruptcy.
  • Liquidation is the winding up of a corporation or incorporated entity under the supervision of a person or “liquidator”, empowered under law for such operation and for distribution of proceeds to the various creditors as per an agreed formula. Only firms can be liquidated. Defaulting individuals cannot be liquidated.


Insolvency, Bankruptcy and Liquidation Regime in India

The Insolvency and Bankruptcy Code, 2016 was passed by Parliament on 11.5.2016 and published in the Official Gazette on 28.5.2016.


The strategy adopted by the Code runs as follows:

  • When default takes place, an Insolvency Resolution Process (IRP) can be initiated and run for as long as 180 days. The IRP is overseen by an “Insolvency Professional‟ (IP) who is given substantial powers.
  • The IP makes sure that assets are not stolen from the company, and initiates a careful check of the transactions of the company for the last two years, to look for illegal diversion of assets. Such diversion of assets would induce criminal charges.
  • While the IRP is in process, the law enshrines a “calm period‟ where the moratorium shall be ordered prohibiting any claim including claims of creditors or transfer by debtor. This gives a better chance for the firm to survive as a going concern.
  • For the 180 days for which the IRP is in operation, the creditors’ committee will analyze the company, hear rival proposals, and make up its mind about what has to be done.
  • When 75% of the creditors agree on a revival plan, this plan would be binding on all the remaining creditors and other stakeholders.
  • If, in 180 days, no revival plan achieves support of 75% of the creditors, the firm goes into liquidation.
  • In limited circumstances, if 75 % of the creditors’ committee decides that the complexity of a case requires more time for a resolution plan to be finalized, a one-time extension beyond180 days’ period for up to 90 days is possible with the prior approval of the Adjudicating Authority. This is starkly different from present arrangements which permit the debtor / promoter to seek extensions beyond any limit.


Insolvency and Bankruptcy Code, 2016

Insolvency and Bankruptcy Code represents the legal and institutional mechanisms in India for dealing with debt default of companies and limited liability entities, partnership firms and individuals. However, this does not automatically cover default by financial service providers, unless notified by the Government.


Objective of the Code:

  • The new law aims to consolidate the laws relating to insolvency of companies and limited liability entities (including limited liability partnerships and other entities with limited liability), unlimited liability partnerships and individuals, contained in a number of legislations into a single legislation and provide for their reorganization and resolution in a time bound manner for maximization of value of their assets.
  • Such consolidation will provide for a greater clarity in law and facilitate the application of consistent and coherent provisions to different stakeholders affected by business failure or inability to pay debt.


Benefits of the Code:

  • The law will thus promote entrepreneurship, availability of credit and balance the interest of all stakeholders.
  • The vision of the new law is to encourage entrepreneurship and innovation. It is true that some business ventures will fail, but such failures will be handled rapidly and swiftly.
  • Entrepreneurs and lenders will be able to move on, instead of being bogged down with decisions taken in the past. The Code empowers the operational creditors (workmen, suppliers etc.) also to initiate the insolvency resolution process upon non-payment of dues.
  • Facilitating early resolution and exit is as important as facilitating investment. The essential idea of the new law is that when a corporate entity defaults on its debt, control shifts from the shareholders / promoters to a committee of creditors, who have 180 days (extendable by 90 days in deserving cases) to evaluate proposals from various players about resuscitating the company or taking it into liquidation.
  • When decisions are taken in a time-bound manner, there is a greater chance that the corporate entity can be saved as a going concern, and the productive resources of the economy (labour and capital) can be put to the best use.
  • The Insolvency and Bankruptcy Code is thus a comprehensive and systemic reform, which will give a quantum leap to the functioning of the credit market.
  • It would take India from among relatively weak insolvency regimes to becoming one of the world’s best insolvency regimes.
  • It lays the foundations for the development of the corporate bond market, which would finance the infrastructure projects of the future.
  • The passing of this Code and implementation of the same will give a big boost to ease of doing business in India.


Salient Features of the Code:

  • The Code separates commercial aspects of the insolvency proceedings from judicial aspects. While Insolvency Professionals (IPs) will deal with commercial aspects such as management of the affairs of the corporate debtor, facilitating formation of committee of creditors, organizing their meetings, examination of the resolution plan, etc., judicial issues will be handled by proposed Adjudicating Authorities (National Company Law Tribunal / Debt Recovery Tribunal) .
  • One more important institution created under the Code is the ‘Information Utility’ which would store financial information and data and terms of lending in electronic databases.
  • This would eliminate delays and disputes about facts when default does take place.
  • The Code also provides a fast track insolvency resolution process for corporates and LLPs. This will be an enabler for start-ups and small and medium enterprises (SMEs) to complete the resolution process in 90 days (extendable to 45 days in deserving cases).
  • The Code also addresses the important issue relating to cross border insolvency by providing the enabling mechanism on the subject. The Government, at an appropriate time, may come out with a detailed framework for cross border insolvency.
  • The code proposes setting up a regulator to register and regulate the functioning of insolvency professional agencies, insolvency professionals and information utilities.


UNCITRAL Model Law on Cross-Border Insolvency (1997)



  • The Model Law is designed to assist States to equip their insolvency laws with a modern legal framework to more effectively address cross-border insolvency proceedings concerning debtors experiencing severe financial distress or insolvency.
  • It focuses on authorizing and encouraging cooperation and coordination between jurisdictions, rather than attempting the unification of substantive insolvency law, and respects the differences among national procedural laws.
  • For the purposes of the Model Law, a cross-border insolvency is one where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State where the insolvency proceeding is taking place.


Relevance to international trade

  • Although the number of cross-border insolvency cases has increased significantly since the 1990s, the adoption of national or international legal regimes equipped to address the issues raised by those cases has not kept pace.
  • The lack of such regimes has often resulted in inadequate and uncoordinated approaches to cross-border insolvency that are not only unpredictable and time-consuming in their application, but lack both transparency and the tools necessary to address the disparities and, in some cases, conflicts that may occur between national laws and insolvency regimes.
  • These factors have impeded the protection of the value of the assets of financially troubled businesses and hampered their rescue.


Key provisions:

The Model Law focuses on four elements identified as key to the conduct of cross-border insolvency cases: access, recognition, relief (assistance) and cooperation.



  • These provisions give representatives of foreign insolvency proceedings and creditors a right of access to the courts of an enacting State to seek assistance and authorize representatives of local proceedings being conducted in the enacting State to seek assistance elsewhere.



  • One of the key objectives of the Model Law is to establish simplified procedures for recognition of qualifying foreign proceedings in order to avoid time-consuming legalization or other processes that often apply and to provide certainty with respect to the decision to recognize.
  • These core provisions accord recognition to orders issued by foreign courts commencing qualifying foreign proceedings and appointing the foreign representative of those proceedings.
  • Provided it satisfies specified requirements, a qualifying foreign proceeding should be recognized as either a main proceeding, taking place where the debtor had its centre of main interests at the date of commencement of the foreign proceeding or a non-main proceeding, taking place where the debtor has an establishment.
  • Recognition of foreign proceedings under the Model Law has several effects principal amongst them is the relief accorded to assist the foreign proceeding.



  • A basic principle of the Model Law is that the relief considered necessary for the orderly and fair conduct of cross-border insolvencies should be available to assist foreign proceedings.
  • By specifying the relief that is available, the Model Law neither imports the consequences of foreign law into the insolvency system of the enacting State nor applies to the foreign proceedings the relief that would be available under the law of the enacting State.
  • Key elements of the relief available include interim relief at the discretion of the court between the making of an application for recognition and the decision on that application, an automatic stay upon recognition of main proceedings and relief at the discretion of the court for both main and non-main proceedings following recognition.


Cooperation and coordination:

  • These provisions address cooperation among the courts of States where the debtor’s assets are located and coordination of concurrent proceedings concerning that debtor.
  • The Model Law expressly empowers courts to cooperate in the areas governed by the Model Law and to communicate directly with foreign counterparts.
  • Cooperation between courts and foreign representatives and between representatives, both foreign and local, is also authorized.
  • The provisions addressing coordination of concurrent proceedings aim to foster decisions that would best achieve the objectives of both proceedings, whether local and foreign proceedings or multiple foreign proceedings.


International practices:

  • The UNCITRAL Model Law has been adopted in as many as 44 countries and, therefore, forms part of international best practices in dealing with cross border insolvency issues.
  • The advantages of the model law are the precedence given to domestic proceedings and protection of public interest.
  • The other advantages include greater confidence generation among foreign investors, adequate flexibility for seamless integration with the domestic Insolvency Law and a robust mechanism for international cooperation.
  • The model law deals with four major principles of cross-border insolvency, namely direct access to foreign insolvency professionals and foreign creditors to participate in or commence domestic insolvency proceedings against a defaulting debtor recognition of foreign proceedings & provision of remedies cooperation between domestic and foreign courts & domestic and foreign insolvency practitioners and coordination between two or more concurrent insolvency proceedings in different countries.
  • The necessity of having Cross Border Insolvency Framework under the Insolvency and Bankruptcy Code arises from the fact that many Indian companies have a global footprint and many foreign companies have presence in multiple countries including India.
  • Although the proposed Framework for Cross Border Insolvency will enable the country to deal with Indian companies having foreign assets and vice versa, it still does not provide fora framework for dealing with enterprise groups, which is still work in progress with UNCITRAL and other international bodies, the release added.


Sample Question:

Q) Critically examine how UNCITRAL Model Law is effective tool for curbing Cross Border Insolvency issues