NEW DELHI: Foreign creditors and bankruptcy professionals will soon be able to approach Indian tribunals against major shareholders of defaulting Indian companies who are personal guarantor under a cross-border bankruptcy resolution framework proposed by India.

The ministry of corporate affairs has sought public comments on granting these rights to foreign creditors and bankruptcy officials. 

The proposal—a new section to be legislated into in the Insolvency and Bankruptcy Code (IBC)—will also allow foreign creditors to get local courts to recognise overseas proceedings in cases where the personal guarantor’s main interests are in that foreign country. This would lead to an automatic moratorium on domestic proceedings against that debtor, according to a proposal released by the ministry for consultation till 15 December.

In addition to the bankruptcy provisions against personal guarantors, which are proposed in the latest draft, proposals made earlier covering the defaulting Indian company in a cross-border insolvency scenario will also be legislated as part of a new section in IBC. This framework, which will be ‘part Z’ of the IBC will also cover foreign companies and limited liability partnerships with an establishment in India. 

It, will, however, exclude any defaulting banks and financial institutions in India. Also, micro, small and medium enterprises (MSMEs) who are unlikely to be in a cross-border bankruptcy situation, and for whom a simpler insolvency resolution regime was been offered earlier this year, are excluded from the proposed part Z.

The move marks a major milestone in the evolution of IBC and in the ease of doing business in India. Remedial measures available to deal with economic stress is a key consideration for investors at the time of making investments and the ease of exit is expected to help improve capital inflows.

The proposed regime is based on the UN framework for cross-border insolvency adopted by 49 countries including the US, the UK and Singapore.

In the case of a personal guarantor, his ‘habitual’ place of residence will be taken into account to decide the jurisdiction where the main bankruptcy proceedings will happen. Debt recovery tribunals and the National Company Law Tribunal (NCLT) benches and their appellate tribunals are the platforms where overseas creditors could initiate or participate in proceedings against personal guarantors in India.

“The introduction of a cross-border insolvency law in the IBC, that is in line with international best practices and suitable for the Indian context, may be beneficial to all stakeholders. Draft part Z, as recommended by the insolvency law committee, is under consideration for enactment,” the ministry said while proposing the additional measures regarding personal guarantors.

The proposed cross-border insolvency regime covers only cases of individual companies and not groups involving multiple entities.

Work is progressing on another set of proposals to amend IBC as recommended by a Parliamentary standing committee. That effort is focusing on allowing more flexibility in the resolution process, improving the resolution value of the company in distressed and reducing the time taken for completing the process.

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