Cross-Border Insolvency and the Challenges in Current International Legal Framework

Globalisation and Cross border insolvency

Globalisation has been the buzzword for the best part of the last three decades, the economic linkages fostered by globalisation have made the world a “global village”. A major characteristic of globalisation is the cross border movement of capital, the physical borders are no longer a major impediment to capital movement, and the economic jurisdiction of a country is no longer co-terminus with its physical frontiers.

Globalisation as a process has been a double edge sword in terms of encouraging wealth creation in several countries by creating pathways for investment but at the same time exposing the same countries to vulnerabilities owing to shocks arising elsewhere. Economic interdependence has meant that no country can claim immunity from economic events happening beyond its borders. Cross border insolvency is symptomatic of the dark side of globalisation, it is a state of financial distress in which a person or business is unable to honour the debt and financial obligations

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Insolvency is a financial condition that can have a host of negative outcomes and can potentially lead to bankruptcy. Events over the last couple of decades have displayed how trade and financial integration has played a part in enhancing global spillovers of macroeconomic fluctuations. The booms and busts of business cycles have cross border implications, cross border insolvency is one domain that countries have been trying to search for answers to, a case in point being the 2008 Global Financial Crisis, where the world witnessed a synchronised collapse in output in a number of advanced and emerging markets.

UNCITRAL Model Law

United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency, 1997 ("UNCITRAL Model Law") acts as a template for countries looking to come up with legislation addressing cross border insolvency. The model law has been adopted by several countries including the UK, the US, South Africa, South Korea and Singapore and the model law has also been given a vote of confidence by global institutions such as the World Bank and the International Monetary Fund.

The cardinal principles governing the UNCITRAL Model Law are Access, Recognition, Cooperation and Coordination. Access implies providing a mechanism for the foreign professionals and creditors to get direct access to domestic courts, enabling them to be actively involved in the insolvency proceedings. Recognition provides legitimacy to the rulings and awards that are granted abroad by recognising foreign proceedings in domestic courts and enables the courts to accordingly determine the relief to be granted. Coordination and cooperation of the model law seek to foster effective cooperation between insolvency professionals and courts of different countries and also ensure coordination so as to manage the conduct of concurrent proceedings in different jurisdictions.

Caveats in UNCITRAL Model Law

As the model law is more of a template and not a law cast in stone, it provides an opportunity for the nations to mould the model law as per their needs, but this has led to countries sometimes missing the core values of the model law. The countries are allowed to bring in certain exceptions to their laws, however, the exceptions are broader than what the Model Law prescribes. Some of the countries have chosen to exclude banks from the operation of the model law provisions, while some have gone ahead and left out all financial institutions that provide credit or investment services, stock exchanges, brokers and insurance companies and agents from the ambit of the cross border insolvency regime. The other such deviations are regarding the recognition of foreign proceedings and the granting of interim reliefs.

A recent report by the Ministry of Corporate Affairs has recommended the exclusion of financial service providers from being subjected to cross border insolvency proceedings. The report has cited examples of several countries exempting businesses providing critical financial services, such as banks and insurance companies, from the provisions of cross-border insolvency frameworks. The objective of having the Model Law is to have a harmonised mechanism to deal with cross-border insolvency that may arise in dealing with assets spread across multiple jurisdictions and to avoid multiple proceedings, the watering down the UNCITRAL Model Law can be self-defeating in purpose. The countries need not imitate the Model Law but need to ensure that their own legislation is holistic in nature and addresses the rights of creditors across the border and ensures there is justice for all parties involved.