Foreign creditors get their foot in the door of the IBC

NEW DELHI : Foreign creditors and bankruptcy professionals will soon be able to take legal action against major shareholders of failed Indian companies who act as personal guarantors in Indian courts as part of a cross-border bankruptcy resolution framework proposed by India.

The Ministry of Corporate Affairs has solicited public comments on granting these rights to foreign creditors and bankruptcy officials.

The proposal – a new section to be included in the Insolvency and Bankruptcy Code (IBC) – will also allow foreign creditors to get local courts to recognize proceedings abroad in cases where the main interests of the personal guarantor lie in that foreign country. This would lead to an automatic moratorium on internal proceedings against this debtor, according to the proposal released by the ministry for consultation until December 15.

In addition to the bankruptcy provisions against personal guarantors, which are proposed in the latest draft, the proposals made earlier covering the failing Indian company in a cross-border insolvency scenario will also be legislated under a new section of the IBC. This framework, which will constitute “Part Z” of the IBC, will also cover foreign companies and limited liability companies with an establishment in India. It will, however, exclude all failed banks and financial institutions in India.

In addition, micro, small and medium-sized enterprises (MSMEs) which are unlikely to be in a situation of cross-border bankruptcy and for which a simpler insolvency resolution regime was proposed earlier this year, are excluded from Part Z proposed.

This decision marks an important milestone in the evolution of IBC and in the ease of doing business in India. The corrective measures available to deal with economic strains are a key consideration for investors when making investments and the ease of exit should help improve capital inflows.

The proposed regime is based on the United Nations Cross-Border Insolvency Framework adopted by 49 countries, including the United States, United Kingdom and Singapore.

In the case of a personal guarantor, his “usual” place of residence will be taken into account in deciding the jurisdiction where the main bankruptcy proceedings will take place. The Debt Collection Courts and the benches of the National Company Law Tribunal (NCLT) and their Courts of Appeal are the platforms where foreign creditors could initiate or participate in proceedings against personal guarantors in India.

“The introduction of a cross-border insolvency law within the IBC, in line with international best practices and adapted to the Indian context, can be beneficial for all stakeholders. The Part Z draft, as recommended by the Insolvency Law Commission, is being considered for adoption, ”the ministry said while proposing additional measures regarding personal guarantors.

The proposed cross-border insolvency regime only covers cases of sole proprietorships and not of groups involving several entities.

Work is progressing on another set of proposals to further amend the IBC, as recommended by a parliamentary standing committee.

This effort aims to allow more flexibility in the resolution process, improve the resolution value of the struggling business, and reduce the time required to complete the process.

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