By Tanushree Dubey
Published on: 28 September 2023 at 10:30 IST
The contemporary world that is characterized by the rapid proliferation of technology, globalization, and the expansive reach of corporate entities, the traditional demarcations separating nations and businesses have emerged significantly. Practically every nation now engages in cross-border trade, leading to intricate insolvency processes that is complicated by the interplay of diverse legal systems.
The harmonization of domestic laws with international insolvency regulations remains an ongoing challenge, raising questions about the extent to which domestic and foreign insolvency laws align.
In this article, we will delve into the concept of cross-border insolvency, while exploring the pertinent legal framework in India, the UNCITRAL Model Law, and consider the limitations of cross border Insolvency.
Understanding Cross-Border Insolvency
Cross-border insolvency, often referred to as international insolvency, arises when an insolvent debtor finds itself with creditors and debtors dispersed across multiple jurisdictions, often spanning in different countries. Within domestic insolvency proceedings, several key phases are typically followed, including the identification of the debtor’s assets, the assessment of creditor claims, and the eventual settlement of these claims, all subject to approval by the relevant Adjudicatory Authority.
In India, the Insolvency and Bankruptcy Code, 2016 (IBC) stands as the principal legislation governing insolvency and bankruptcy matters. However, despite notable progress in streamlining insolvency processes within India, the IBC lacks comprehensive provisions for the regulation of cross-border insolvency proceedings. Acknowledging this gap, the Ministry of Corporate Affairs (MCA) formed the Insolvency Law Committee on Cross-Border Insolvency (ILC) to evaluate the implementation of the IBC.
Legal Framework for Cross-Border Insolvency in India
Cross-border insolvency primarily revolves around the regulation of insolvency proceedings that transcend domestic jurisdiction.
Key facets of cross-border insolvency encompass:
- Equality of Treatment for Domestic and Foreign Creditors: Ensuring equitable treatment for both domestic and foreign creditors.
- Protection of Assets: Safeguarding the value of a debtor’s assets situated in different jurisdictions.
- Standardization of Insolvency Laws: Promoting uniformity in insolvency laws and practices across varying jurisdictions.
- Collaboration Among Judicial Authorities: Facilitating coordination and cooperation among courts and judicial bodies in different jurisdictions, while adhering to the applicable domestic laws.
Relevant provisions under IBC
The IBC furnishes two provisions, namely Section 234 and Section 235, which are intended to address cross-border insolvency matters:
- Section 234: Empowers the Central Government to enter into bilateral agreements with foreign jurisdictions for the resolution of cross-border insolvency issues.
- Section 235: Empowers the Adjudicating Authority to issue letters of request to courts in countries with which bilateral agreements under Section 234 have been established. These letters aim to address the fate of assets of corporate debtors located outside India.
However, bilateral agreements often prove to be time-consuming, costly, and inconclusive, largely due to the intricacies of negotiation. While these provisions provide some guidance on cross-border insolvency in India, they fall short of providing a comprehensive framework, a limitation acknowledged by the ILC in its report of 2018.
UNCITRAL Model Law on Cross-Border Insolvency, 1997
The UNCITRAL Model Law offers legislative guidance for managing cross-border insolvency cases. It is widely endorsed for its potential to provide holistic solutions for cross-border insolvency challenges. International institutions like the World Bank and the International Monetary Fund (IMF) advocate for the adoption of the Model Law to enhance cooperation and coordination among courts and authorities in various jurisdictions.
The Model Law is underpinned by four fundamental principles:
- Accessibility: It enables foreign creditors and professionals to directly access domestic courts, allowing them to participate in or initiate insolvency proceedings against a debtor.
- Recognition: The Model Law provides for the recognition of foreign proceedings in domestic courts, permitting these courts to grant relief in alignment with the foreign proceedings.
- Cooperation: The Model Law promotes effective cooperation between insolvency professionals and courts in diverse jurisdictions, ensuring the efficient management of concurrent proceedings.
- Coordination: The primary objective of the Model Law is to assist nations in shaping their insolvency laws within a modern, harmonized framework to more effectively address cross-border insolvency cases. Importantly, the Model Law respects the differences in domestic laws and concentrates on enhancing cooperation and coordination between countries, rather than seeking to unify domestic legal frameworks.
Draft Part Z: Tackling Cross-Border Insolvency in India
In response to the limitations of the existing cross-border insolvency mechanism in India, a set of draft guidelines was introduced to address this issue. A specific chapter within these guidelines, Part Z, aims to provide a framework for managing cross-border insolvency. These guidelines, recommended by the ILC in 2018, draw inspiration from the UNCITRAL Model Law.
Key Highlights of the Draft Chapter:
- Applicability to Corporate Debtors: The Draft Chapter exclusively applies to corporate debtors and does not extend to personal insolvency or individual debtors.
- Limited to Model Law Adopters: It is applicable solely to countries that have incorporated the Model Law into their domestic legislation.
- Determining the Centre of Main Interests (COMI): The Draft Chapter outlines a mechanism for determining a corporate debtor’s COMI. It presumes that a corporate debtor’s COMI is its registered office, provided the registered office has not changed jurisdictions within three months before the commencement of insolvency proceedings.
- Foreign Proceedings Classification: The Draft Chapter distinguishes between two types of foreign proceedings: Foreign Main Proceedings and Foreign Non-main Proceedings. These categories are contingent on the location of the corporate debtor’s proceedings.
Limitations of Cross-Border Insolvency in India
- Lack of a comprehensive legal structure: The current cross-border insolvency framework in India is limited to the provisions in the Insolvency and Bankruptcy Code (IBC), which are dependent on bilateral treaties between India and other countries. This means that there is no clear and comprehensive legal framework in place to handle cross-border insolvency cases where no treaty exists.
- Proactive efforts are needed: India has not yet taken many proactive steps to develop a comprehensive cross-border insolvency law. This includes negotiating bilateral treaties with other countries, which is a time-consuming and demanding process.
- Challenges in obtaining evidence and information: There is a lack of information on the procedures and options available to insolvency professionals when dealing with cross-border cases. This can make it difficult to obtain evidence and information located in other countries.
- Limitations of the Civil Procedure Code: While the Civil Procedure Code provides a framework for executing foreign judgments, it is not comprehensive enough to cover all insolvency decrees. This can create uncertainty and delays in cross-border insolvency cases.
Case Laws
In Jet Airways V. State bank of India, Jet Airways became the first Indian company embroiled in a cross-border insolvency case in India in the year 2019. The National Company Law Tribunal (NCLT) set a precedent by initiating a Joint Corporate Insolvency Resolution Process, exemplifying the complexities inherent in cross-border insolvency disputes. Simultaneously, insolvency proceedings were launched against Jet Airways in a Dutch court, where a bankruptcy administrator was appointed to oversee assets located in the Netherlands. Initially, due to the absence of effective cross-border insolvency provisions, the NCLT refused to stay Indian insolvency proceedings or recognize the Dutch proceedings. However, the National Company Law Appellate Tribunal (NCLAT) subsequently overturned the NCLT’s decision, directing cooperation between the Bankruptcy Administrator and Resolution Professional. This cooperation was guided by principles akin to those found in the Model Law.
In State Bank of India V. Videocon Industries Ltd. the Mumbai Bench of the National Company Law Tribunal (NCLT) made a ground-breaking decision, allowing the consolidation of 13 out of 15 companies within the Videocon Group for insolvency proceedings. This marked the first instance of group consolidation for insolvency under the Insolvency and Bankruptcy Code (IBC), aiming to maximize asset value and setting a precedent for group insolvency cases. The doctrine of “substantial consolidation” empowers the NCLT to merge assets and liabilities of individual corporate entities for a unified insolvency resolution process, ensuring fair value for stressed group assets and protecting creditors’ interests. In the absence of specific IBC provisions, the NCLT invoked principles from US and UK bankruptcy jurisprudence, ruling in favor of consolidation. In February 2020, NCLT extended group insolvency to include four foreign-based companies, raising questions about extraterritorial IBC application and asset amalgamation processes. This case highlighted coordination challenges in cross-border insolvency and emphasized the need for legislative frameworks to govern such situations.
The first-ever recognition of Indian insolvency proceedings under Chapter 15 of the US Bankruptcy Code signifies an important development.
Chapter 15 of the United States Bankruptcy Code outlines the procedure for US bankruptcy courts to acknowledge foreign insolvency proceedings. In November 2019, a significant milestone was achieved in the case of SBI V. SEL Mfg. Co. Ltd.
In this case, the Indian insolvency proceedings pending before the NCLT, Chandigarh Bench, obtained recognition as a “foreign main proceeding” under Section 1502(4) of the US Bankruptcy Code. This recognition was granted by the US bankruptcy court following an application by the foreign representative, who identified India as the “centre of main interests” for the foreign debtor, SEL Manufacturing.
The court ruled that recognizing the Indian insolvency proceeding did not contravene US public policy. Furthermore, it stressed the importance of granting the foreign representative and the debtor the relief outlined in Section 1520 of the US Bankruptcy Code. This recognition ensures the maximization of asset value while responsibly considering the interests of creditors.
Conclusion
India currently lacks a proper legislative framework to govern cross-border insolvency disputes, which complicates matters for the judiciary when dealing with cases involving conflicts between Indian and foreign companies. A cross-border insolvency framework would improve the future stability of the Indian financial system by promoting transparency, financial stability, market integration, and efficient risk management. It would also help stakeholders promptly resolve issues in the enterprise sector and ensure efficient access to credit and allocation of resources, which would boost economic productivity and growth.