Voluntary Liquidation: Think Global, Act Local – Budget Introduces Cross-Border Insolvency and Accelerates Voluntary Liquidation

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Finance Minister Nirmala Sitharaman during her budget speech announced that changes have been proposed to the Insolvency and Bankruptcy Code (IBC) to allow for seamless cross-border insolvency as well as more disputes quickly.

She said: “The necessary changes will be made to the CIB for more efficient dispute resolution and to enable cross-border insolvency resolution.”

The theme of the insolvency code reforms is that of glocalization. The adoption of a cross-border insolvency framework based on the UNCITRAL Model Law is a welcome development. In today’s world, supply chains span multiple geographies and assets can be moved and dispersed between jurisdictions.

Thus, access to foreign courts, recognition of proceedings initiated there, the subsequent granting of measures to protect the assets of the debtor or the interests of creditors, as well as communication and coordination between the courts will help to resolve with successful cross-border business.

The October 2018 cross-border insolvency report had prescribed a reciprocity condition. It is hoped that this requirement will be removed, as this will result in the exclusion of several European countries.

Currently, only 50 countries and 54 jurisdictions have adopted the model law on cross-border insolvency. Indian interests will in any event be protected, as recognition may be denied to a foreign proceeding, if it is manifestly contrary to public order or jeopardizes national security. The introduction of an accelerated voluntary liquidation procedure was long overdue. This will help to quickly release capital and resources from dead companies.

Currently, voluntary liquidation is mainly carried out, either under section 248 of the Companies Act 2013 (CA2013) or under section 59 of the Insolvency and Bankruptcy Code (IBC) . Additionally, CA2013 Section 271 and Section 361 provide for voluntary liquidation, although these sections are rarely used. According to the current economic study, 9,768 cases are awaiting liquidation under section 248 of the CA2013. Similarly, under article 59 of the CIB, at the end of September 2021, out of the 1,042 files filed, only 257 procedures undertaken have resulted in dissolution.

Although the Indian Insolvency and Bankruptcy Board clarified through a circular in November 2021 that a No Objection Certificate from the Income Tax Department is not required, an overall process encompassing all statutory authorities will go a long way to accomplishing a speedy voluntary liquidation; ease of exit is as important as ease of entry, for ease of doing business.

The author is an insolvency practitioner and restructuring consultant.

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