Personal guarantors may be part of cross-border insolvency framework

Taking lessons from recent big-ticket insolvency cases where creditors could not pursue the foreign assets of promoters, the government is actively considering bringing personal guarantors for corporate debtors under the purview of the cross-border insolvency regime.

The cross-border insolvency framework is yet to be notified under the Insolvency and Bankruptcy Code. So far, the regime under discussion was only for corporate insolvency resolution. The government wants to notify it together for both companies and personal guarantors for corporate debtors, according to official sources.

“Pursuing such cases under civil or criminal law is always cumbersome as the burden of proof is much more. Cross-border insolvency provides you a forum, and facilitates prevention of fraud and getting back the assets,” a senior government official told Business Standard.

The corporate affairs ministry is holding internal discussions on this subject and is likely to approach other economic ministries with a concept note soon, it is learnt.

The enactment guide of UNCITRAL (United Nations Commission on International Trade Law) states that fraud by insolvent debtors, particularly by concealing assets or transferring them to foreign jurisdictions, is an increasing problem in terms of its frequency and magnitude.

“The modern, inter-connected world makes such fraud easier to conceive and carry out. The cross-border cooperation mechanisms established by the model law are designed to confront such international fraud,” it says.

How will this process work? The centre of main interest, also called COMI, for the company facing insolvency proceedings has to be defined. Usually, the cross-border insolvency can take place at the country of registration of the company or it has to be established that the company had all its major functions such as management elsewhere.

While in the matter of Jet Airways, the matter was dealt with between Indian and Dutch parties even in the absence of a cross-border insolvency arrangement, government is concerned it has not been as lucky in some of other cases, including Amtek Auto and ABG Shipyard, among others.

“If you are going out and chasing these people, they will have all sorts of protection outside. Cross-border insolvency in the UNCITRAL model acts as a facilitator to track and get the assets to protect the rights of the creditor,” the senior government official added.

The government feels that the move will send a positive signal to the global investor community that India is ready to give equal treatment to the creditors. “This (UNCITRAL) framework gives you equal footage. India should do it,” the official said.

IBC experts, however, have reservations on how this would work. An IBC lawyer said corresponding changes might be needed in the foreign exchange management Act. “The enforcement mechanism of other countries would come into play as soon as a foreign asset is created,” the legal expert said.

Industry experts said there could be litigation at the point of deciding the centre of main interest of the company itself. Cross-border insolvency for personal guarantors to corporate debtors, experts believe, might be even trickier.

“Cross-border insolvency seeks harmonisation of insolvency laws of different jurisdictions and enhances the efficiency of resolution of stressed companies. Reciprocal access to the market is key to the success of cross-border insolvency regime,” said Rajiv Chandak, partner, Deloitte India.

Legislation based on the UNCITRAL model law has been adopted by 53 jurisdictions.