Domestic and International Insolvency

Domestic and International Insolvency

Kamaraj IAS Academy | Domestic and International Insolvency
  • October 23, 2018, 8:56 pm

What is 'Insolvency' ?

Insolvency is a term for when an individual or organization can no longer meet its financial obligations with its lenders, as debts becomes due.  Insolvency can arise from poor cash management, a reduction in cash inflow forecasts or from an increase in expenses.

What about it ?

Indian government in order to save companies and banks from becoming insolvent has come up with an exit policy legislation called Insolvency and bankruptcy code,2016.

The above code solves the domestic insolvent issues by providing cross finance and other exit mechanisms.

An Act to consolidate and amend the laws relating to reorganisation and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximisation of value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders including alteration in the order of priority of payment of Government dues and to establish an Insolvency and Bankruptcy Board of India, and for matters connected therewith or incidental thereto.

Need for international insolvency code:

Nevertheless, the code fails to cover the cross border bankruptcy.

 The necessity of having a 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 a presence in multiple countries, including India. Hence ,a need for a code of cross border insolvency issues arises.

The Insolvency Law Committee (ILC) under Ministry of corporate affairs has recommended the adoption of the United Nations Commission on International Trade Law (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.

The UNCITRAL Model Law has been adopted in 44 countries and, therefore, forms part of international best practices in dealing with cross border insolvency issues.

Advantages :

 1.The precedence given to domestic proceedings and protection of public interest. 

2.Include greater confidence generation among foreign investors, adequate flexibility for seamless integration with the domestic insolvency law and a robust mechanism for international cooperation.