India needs a way to resolve cross-border insolvency cases
The reciprocity clause meant that Indian courts would only recognize and enforce decisions taken by foreign courts if those countries granted India similar rights. Most experts in India's insolvency ecosystem were concerned about this. Instead, they recommended that India adopt the MLCBI in full to ensure seamless cooperation in cases of cross-border insolvency.
Also Read: Do creditor committees in insolvency cases need an oversight body?
Like many other soft-law treaties, the MLCBI emerged from a US-anchored liberal world order that fostered mutual benefit among nation states. However, this world order has undergone a fundamental shift. The changed world order provides us with an opportunity to introduce the MLCBI with a reciprocity clause as an enabler. As John Maynard Keynes is often cited as saying, 'When the facts change, I change my mind. What do you do, sir?"
Changed geo-economics has made India fast-track its trade pacts. It has finalized an agreement with the UK and negotiations are underway with the US, EU and the Gulf Cooperation Council. This is an opportune time to introduce the MLCBI on a reciprocal basis with major trade partners.
Clauses related to insolvency and bankruptcy have found passing references in trade and economic agreements, albeit not in an MLCBI context. Our economic cooperation pacts with Asean, Singapore, Malaysia and Korea include a clause on insolvency. This clause states that countries retain the right to restrict or delay the free transfer of funds, if necessary, to enforce their domestic laws on bankruptcy and insolvency, or to protect the rights of creditors, provided that these restrictions are applied in good faith and a manner that is equitable and non-discriminatory.
Also Read: JSW-Bhushan case: Time to rewrite India's insolvency code?
The next evolutionary phase of trade agreements may consider MLCBI adoption. In a world of zero-sum games, where every facet of trade is being re-negotiated, this could serve not only as a bargaining chip, but also strengthen investor confidence.
One might argue that reciprocity clauses for insolvency have never been part of trade agreements. However, this should not be a limitation. India can set the agenda, as it did with the International Solar Alliance without the backing of the United Nations or World Trade Organization. This unconventional approach helped mobilize funds for member countries and earned India goodwill and leadership status. Similarly, the recent India-UK free trade agreement has a novel Double Contributions Convention and a chapter on anti-corruption as well as anti-bribery.
Precedents exist of bilateral treaties that acquire global influence. Singapore pioneered digital economy agreements that are now being used as a template by other countries.
Also Read: The SC's JSW-Bhushan ruling will hit both the IBC and investor confidence
Though the MLCBI will address corporate insolvencies and personal insolvencies of corporate guarantors, digital-economy aspects will also be crucial components of India's trade negotiations. These negotiations are likely to focus on privacy and data localization. However, ease of data accessibility will be key for the efficient resolution of insolvencies.
An increasing number of Indian enterprises are storing their data and applications on the cloud, with most large cloud service providers based in the US. If payments to cloud service providers are suspended, the data is permanently deleted shortly after. It is highly probable that during periods of financial distress, a company may be unable to pay its cloud service provider. Consequently, the likelihood of data deletion is high when a resolution professional takes control, given the lengthy process from distress to default and the time required to admit an insolvency case. Bereft of data, the professional would be unable to perform his duties.
Trade agreements enabling restoration of such deleted data would ease the insolvency process. This issue becomes more pertinent in cases where the promoter or management intentionally withholds payment to a cloud service provider to conceal mischief and dodge accusations of data-evidence destruction.
Also Read: Mint Explainer: The Supreme Court's Bhushan Power ruling that has stunned India's insolvency ecosystem
Even for finalized trade treaties, the incorporation of an MLCBI addendum would support insolvency resolution, as many personal guarantors reside in the UK and UAE. The UK is also a major gateway for fund-raising and an MLCBI-including pact with London can annul its restrictive Gibbs Rule. The rule implies that a creditor cannot be bound by reorganization proceedings taking place in a jurisdiction other than the one whose law governs the debt contract. This effectively negates the jurisdiction of foreign insolvency proceedings.
The World Bank Principles on Effective Insolvency and Creditor/Debtor Regimes state that an effective insolvency system should respond to national needs. MLCBI inclusion in trade agreements with clear rules on jurisdiction, recognition of foreign judgments, international court cooperation and the choice of law will help India attract supply chains. If and when geo-economic conditions change, India could roll out an unconditional MLCBI.
The author is an INSOL fellow & interim leader.
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