Foreign creditors will be protected against personal guarantors of defaulting Indian companies

NEW DELHI: Foreign creditors and bankruptcy professionals will soon be able to take action in Indian courts against major shareholders of defaulting Indian companies who are personal guarantors under an India-proposed framework for cross-border bankruptcy resolution.

The Department of Corporate Affairs has requested public statements on granting these rights to foreign creditors and bankruptcy officials.

The proposal – a new section to be added to the Bankruptcy and Bankruptcy Code (IBC) – will also allow foreign creditors to get local courts to recognize foreign proceedings when the main interests of the personal guarantor are overseas. This would lead to an automatic moratorium on domestic proceedings against this debtor, according to a proposal from the ministry that was open for consultation until December 15.

In addition to the bankruptcy provisions against personal guarantors in the latest draft, earlier proposals for the defaulting Indian company in a cross-border bankruptcy scenario will also be legislated as part of a new section in the IBC. This framework, which will be “Part Z” of the IBC, will also cover foreign companies and limited partnerships with a branch in India.

However, it excludes all defaulting banks and financial institutions in India. Micro, small and medium-sized enterprises (MSMEs) that are unlikely to find themselves in cross-border bankruptcy and for which a simpler insolvency processing system was offered at the beginning of this year are also excluded from the proposed Part Z.

The move marks an important milestone in the development of IBC and facilitates doing business in India. The remedies available to manage economic stress are an important consideration for investors when 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 bankruptcies, which was adopted by 49 countries, including the US, the UK and Singapore.

In the case of a personal guarantor, his “usual” place of residence is taken into account when deciding on the place of jurisdiction where the main insolvency proceedings take place. Debt collection tribunals and the banks of the National Company Law Tribunal (NCLT) and their appeals courts are the platforms on which foreign creditors can initiate or participate in proceedings against personal guarantors in India.

“The introduction of cross-border bankruptcy law in IBC that is in line with international best practices and is suitable for the Indian context can be beneficial for all parties involved. The draft of Part Z, as recommended by the Bankruptcy Law Committee, is being considered for adoption, “the ministry said, suggesting the additional measures related to personal guarantors.

The proposed regime for cross-border bankruptcies only applies to sole proprietorships and not to groups with multiple companies.

Work on another set of proposals to amend the IBC, as recommended by a standing parliamentary committee, is ongoing. These efforts focus on making the settlement process more flexible, improving the settlement value of the distressed company, and reducing the time it takes to complete the process.

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