Author: Swetha G, University of Madras

In the contemporary world, trade and commerce extend beyond national boundaries, and the need for a framework to deal with insolvency cases involving multiple jurisdictions becomes evident. While business transcends boundaries, the legal system has also advanced with technology, and justice is served with a touch of innovation. However, this was not the case a few decades ago.

Definition of “Insolvency”:

The Oxford dictionary defines the word “Insolvency” as “The state of not having enough money to pay what you owe; an occasion when this happens”.

In the United Nations Commission on International Trade Law (UNCITRAL), Legislative Guide on Insolvency Law, 2004” defines ‘Insolvency’ as; “Insolvency is when a debtor is generally unable to pay its debts as they mature or when its liabilities exceed the value of its assets”.

The UK Insolvency Act 1986 does not explicitly define “insolvency”. However, it defines it as the inability to pay debts under Section 123, which states that “a company is considered unable to pay its debts if it fails to pay a debt exceeding £750 within three weeks of receiving a formal demand, if a court judgment against it cannot be enforced, or if the court is satisfied that the company cannot pay its debts as they become due. Additionally, a company is deemed unable to pay its debts if its total liabilities (including future or contingent liabilities) exceed its assets”.

 In the context of the Bankruptcy Law Reform Committee Report (BLRC report) explains corporate debtor as insolvent in the following circumstances:

1.  Financial failure – a persistent mismatch between payments by the enterprise and receivables into the enterprise, even though the business model is generating revenues, or
2. Business failure – which is a breakdown in the business model of the enterprise, and it is unable to generate sufficient revenues to meet payments.

From the above discussion we can understand that insolvency is defined differently across various legal frameworks. The Oxford Dictionary focuses on an inability to pay debts, while UNCITRAL and the UK Insolvency Act provide more specific criteria, such as the debtor’s inability to meet debt obligations or when liabilities exceed assets. The Bankruptcy Law Reform Committee further distinguishes between financial and business failure, emphasizing a company’s capacity to generate enough revenue to cover its debts. Overall, insolvency represents a serious financial condition with significant legal implications.

Development Of International Trade and Multinational Companies:

International Trade Law has a long historical development, tracing back to ancient civilisations through customs and early commercial practices, which have laid the legal foundation for modern principles. The International Trade Laws based on two maxims such as “Lex Mercatoria” which means “law for merchants on land”, and “Lex Maritima” means “law for merchants on the sea”. These principles were based on practice and custom among the trades.

The code of Hammurabi (1780 BCE) is known as one of the oldest trade laws related to maritime trade. Further, early trade laws emerged through bilateral and multilateral treaties such as the Treaty of Westphalia in 1648, which laid down the foundation for sovereignty and commerce. The Anglo-French Treaty of 1860 aimed to reduce tariffs. In 1927, the Geneva Convention on Import and Export Prohibitions was known as the multilateral treaty that regulated trade.

At the end period of World War II, the Bretton Woods Conference (1944) was held with the goal of international economic cooperation to achieve stability and prevent the crisis. This led to the establishment of institutions such as the International Trade Organisation, and the International Monetary Fund.

Further, we should know about the effect of the global economic collapse caused after World War II. It is considered the most expensive war in history. After World War II, the countries faced severe financial crisis, such as inflation, debt, poverty, and trade deficiencies. While Europe has recovered post-was effect by 1950; Japan, by 1952. On the contrary, the newly independent states such as India, Pakistan, and other Asian and African countries were facing a financial crisis.

During this period many bilateral and multilateral treaties and organisations were formed for international trade cooperation. In 1947, General Agreement on Tariffs and Trade (GATT) was established for multinational negotiations to promote trade liberalisation. Trade Related Aspects of Intellectual Property Rights (TRIPS) in 1994. The UNCITRAL was established in 1966 by the UN, and World Trade Organisation in 1995 for dispute settlement. This led countries to open their markets to foreign players, and the revolution of globalisation took place during the period from 1989 to 1999.

Globalisation has a positive effect on the overall development of countries. It has expanded the global opportunity in trade, investment, free flow of capital, cheap labour, and employment generation for developing countries. India adopted Liberalisation, Privatisation, and Globalisation (LPG) in 1991. India opened its market to global industry through Foreign Direct Investment (“FDI”). 

With the expansion of international trade and the rise of multinational corporations, businesses now operate across multiple jurisdictions. However, this interconnectedness also brings challenges, particularly when a company faces financial distress in more than one country. Cross-border insolvency deals with situations where an insolvent entity has assets and liabilities in multiple nations, necessitating cooperation between different legal systems.

As global trade flourished, legal frameworks evolved to address insolvency proceedings that extend beyond domestic jurisdictions. The UNCITRAL Model Law on Cross-Border Insolvency (1997) was a significant milestone, aiming to establish a uniform approach to insolvency cases across multiple countries. In India, the Insolvency and Bankruptcy Code (IBC), 2016, while comprehensive for domestic insolvency cases, is still evolving in terms of cross-border insolvency. The proposed framework, based on the UNCITRAL Model Law, aims to enhance international cooperation and provide better clarity for foreign creditors.

With increasing globalisation, effective mechanisms for cross-border insolvency are essential to maintain financial stability, protect creditors’ rights, and ensure fair resolution of transnational business failures. Legal systems worldwide are continuously adapting to address the complexities of multinational insolvency proceedings, reinforcing the need for robust international cooperation in trade and commerce.

Challenges and Issues in Cross Border Insolvency:

Cross-border insolvency presents a complex array of legal and procedural challenges that complicate the resolution of financially distressed entities with multinational operations. While domestic insolvency frameworks, such as IBC, 2016, provide structured mechanisms for asset realisation, creditor verification, and distribution prioritisation, these systems face significant limitations when applied to transnational cases. A primary concern revolves around jurisdictional conflicts, wherein resolution professionals encounter difficulties in asserting control over foreign-located assets due to competing territorial claims. This often results in fragmented insolvency proceedings, where multiple jurisdictions initiate parallel processes, leading to inefficiencies and diminished asset values.  

The treatment of creditor claims in cross-border scenarios introduces further complications, particularly regarding the recognition of foreign insolvency proceedings and the prioritisation of domestic claims. Indian creditors frequently face uncertainties regarding the admissibility of their claims in foreign proceedings, while local priority claims, such as employee dues and tax liabilities, may not receive adequate consideration under foreign insolvency regimes. Additionally, the enforceability of security interests held by Indian creditors over overseas assets remains contingent on the host country’s legal framework, creating recovery uncertainties. The absence of harmonised rules for avoiding preferential or fraudulent transactions across borders exacerbates these challenges, as domestic avoidance provisions may not be recognised or enforced in foreign jurisdictions.  

Procedural inefficiencies stemming from the lack of standardised recognition and cooperation mechanisms further hinder effective cross-border insolvency resolutions. Without established protocols for judicial cooperation, delays in administering multinational insolvencies become inevitable, increasing litigation costs and eroding stakeholder confidence. For emerging economies like India, which are increasingly integrated into global trade and investment networks, these challenges underscore the urgent need for a comprehensive legal framework to address cross-border insolvency. The current provisions under the IBC, particularly Sections 234 and 235, which facilitate bilateral agreements and limited foreign representative access, remain insufficient to tackle the complexities of modern multinational insolvencies. Adopting internationally accepted principles, such as those outlined in the UNCITRAL Model on Cross Border Insolvency, could mitigate these issues by providing clear guidelines for recognising foreign proceedings, facilitating judicial cooperation, and ensuring equitable treatment of creditors while respecting domestic policy priorities.

Enforcement Challenges and its Impact on Stakeholders:

Cross-border insolvency proceedings frequently encounter significant enforcement-related challenges, particularly in cases where the debtor holds assets or owes liabilities across multiple jurisdictions. Key concerns include the participation rights of creditors in foreign insolvency processes, the extent to which domestic courts are willing to recognise foreign proceedings, and the jurisdictional authority of courts in different countries over the insolvency resolution process.

One of the principal barriers to a coherent international insolvency framework is the hesitancy of several jurisdictions to adopt the UNCITRAL Model on Cross Border Insolvency. This reluctance is often rooted in a desire to preserve national sovereignty and retain exclusive legislative competence over assets situated within domestic borders. Moreover, beyond the adoption of the Model Law, disagreements persist regarding the underlying theoretical frameworks that seek to address cross-border insolvency conflicts.

The universalist approach, which advocates for the centralised administration of international insolvency proceedings by the courts of the debtor’s primary jurisdiction, is often resisted by sovereign states. This theory envisages a unified proceeding where a “home country” court assumes control over the debtor’s global assets and all claims against it. However, concerns over the erosion of local control and the extraterritorial application of foreign insolvency laws have limited its widespread acceptance.

In contrast, many jurisdictions continue to adhere to the territorialism approach, which mandates that insolvency proceedings be conducted independently under local laws, without recognition of foreign proceedings. While this approach upholds national autonomy, it frequently results in fragmented adjudication and undermines the equitable treatment of creditors across borders. Creditors with sufficient resources may be able to engage in multiple jurisdictional proceedings, whereas smaller or foreign creditors may lack the capacity to participate effectively, thereby perpetuating inequality.

Additionally, the territorialism model gives rise to a host of practical uncertainties, such as the potential relocation of assets to evade local proceedings, conflicting insolvency laws across jurisdictions, and inconsistent creditor outcomes.

An illustrative case that highlights these enforcement issues is the insolvency of Jet Airways (India) Ltd. Following the airline’s default on its financial obligations, insolvency proceedings were initiated in both the Netherlands by foreign creditors and in India before the National Company Law Tribunal (NCLT), Mumbai. The Dutch court appointed an administrator who subsequently approached the NCLT seeking access to financial data and formal recognition of the Dutch proceedings. However, the NCLT denied such recognition, citing the absence of any enabling provision under the IBC, 2016, to facilitate such cooperation. The Nation Company Law Appellate Tribunal (NCLAT) then directed cooperation between the Indian insolvency resolution professional and the Dutch trustee, resulting in the creation of a cross-border insolvency protocol. 

While this pragmatic resolution avoided a complete deadlock, the Jet Airways case underscores the complexities and jurisdictional frictions that continue to plague cross-border insolvency resolution. It reflects the pressing need for a harmonised legal framework that ensures procedural fairness, creditor parity, and judicial cooperation across national boundaries.

In sum, the present legal landscape reveals the limitations of a fragmented territorialism regime and the critical necessity for enhanced international collaboration. As cross-border corporate activities expand, so too must the commitment of states to adopt cohesive and reciprocal insolvency frameworks capable of addressing the multifaceted interests of stakeholders in a just and efficient manner.