This article is written by Soha Goyal, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from Lawsikho.com.
Table of Contents
Introduction
With rapid globalization, the economies of nations are connecting and becoming integrated into a global economy. Globalization has improved the ease in conducting cross borders trade activities and have thus resulted in a surge in international commerce. This has opened gates for investors around the globe and have developed many investment avenues and opportunities. While dealing and conducting businesses across borders, investors end up taking a lot of risks too. Different countries mean multiple jurisdictions and separate laws and regulations. Thus, foreign investors have to analyze a lot of factors before making an international investment which shall also include insolvency laws as one of them. This article is going to analyse the status of cross border insolvency in India.
Cross Border Insolvency
When a company becomes insolvent, every investor would want to safeguard his own rights and interest and thus cross border insolvency laws comes into the picture. Cross Border Insolvency laws deals with a situation wherein the insolvent corporation has operations in more than one jurisdiction. Recently, in the insolvency proceedings against Jet Airways, arose a situation wherein an insolvency proceeding had been initiated against Jet Airways in Netherlands as well as in India. The Dutch Court appoint Administrator approached the NCLT Mumbai to have the NCLT recognise the Dutch proceedings. The NCLT Mumbai while rejecting the plea stated that there exists no provision in the law which recognises the judgement passed by a Foreign Nation.
The Dutch Court appoint Administrator then appealed to the NCLAT, who asked the creditors of Jet Airways to file an affidavit on whether they are willing to cooperate with the Dutch Administrator. Pursuant to the NCLAT’s directions, the Dutch Court Administrator and the Resolution Professional agreed upon a ‘Cross Border Insolvency Protocol’ wherein India was recognized as the ‘centre of main interests’ and the Dutch proceedings were recognized as the ‘non-main insolvency proceedings. The case of Jet Airways is actually one of the countless cases that demonstrate the requirement for an inclusive system that deals with similar situations where a corporate debtor may have international operations thus having creditors and assets dispersed across various jurisdictions.
Overview of the UNCITRAL Model Law
In order to resolve insolvency of companies with operations in multiple jurisdictions, the United Nations Commission on International Trade Law (UNCITRAL) in 1997 proposed the UNCITRAL Model Law on Cross Border Insolvency (Model Law). The Model Law came into force on 30th May 1997 at the 13th session of UNCITRAL held at Vienna. As of today, the Model Law has been adopted in 44 countries globally as a common framework to deal with cross border insolvency.
The Model Law does not obligate the implementing countries to unify their substantive domestic laws on insolvency and bankruptcy rather it prescribes four elements to facilitate the cross-border insolvency process i.e., access, recognition, relief (assistance) and corporation. The Model law has been bifurcated into five chapters which cover general provisions; access of foreign representatives and creditors to courts in a state; recognition of foreign proceedings and relief; cooperation with foreign courts and foreign representatives; and lastly procedure to deal with concurrent proceedings. The Model Law defines two concepts i.e., ‘foreign main proceedings’ where the debtor has the ‘centre of main interest’ and ‘foreign non-main proceedings’ where the debtor has an ‘establishment’ and further it identifies the criteria for determining the two. The Model Law also contains a public policy exception, wherein a country can refuse to take an action in accordance with the Model Law if such an action would be ‘manifestly contrary to the public policy’ of such country. Nations have adopted the Model Law into their domestic legal system after making suitable variations according to their jurisdictions.
Singapore Model Law
Singapore is one amongst the countries who have adopted the UNCITRAL Model Law and have also imbibed it into their present legal framework by making amends in their Company Law which became operative in 2017. The introduction of Section 354B and the Xth Schedule into the Companies Act is considered to be a great step of the legislative to enhance the cross-border insolvency process. With these amendments, the Singapore Legal system, now recognises a foreign insolvency proceedings and their insolvency representatives in Singapore. Further, additional provisions have been imposed in respect with the moratorium in line with the UNCITRAL Model Law.
The Model Law also provides for intervalence of the Singapore Courts in case when the Model Law is in contravention of the public policy of Singapore. By virtue of Article 7 of the Model Law, it can be understood that the common law will continue to play an important role in interpreting the provisions of the Singapore Model Law along with for the alternative relief options.
In the recent case of Re. Zetta Pte Ltd., the Singapore High Court took account of the proceedings of Re. Zetta in the United States as foreign main proceedings. While doing so, the Singapore Court delved into the question of determining a centre of material interest, considering the presence of Re. Zetta entities in Singapore. This was later settled by the courts by prioritising the date of making the application which was also the position adopted by the US.
United States of America
Earlier, Section 304 of the Bankruptcy Code dealt with foreign insolvency proceedings in the United States of America. Later, this section was replaced by Chapter 15 of the Bankruptcy Code which provided for cross-border insolvency laws and made why for USA’s adopted of UNITRAL Model Law. This Chapter was introduced by the Bankruptcy Abuse Prevention and Consumer Protection Act, 2005.
Thus, interpretation of the US Model Law must be coordinated with other nations who have incorporated the Model Law as their internal insolvency law in order to achieve a uniform and integrated legal system for cross border insolvency cases. This is implemented by the five layered objectives of the statute. First, to establish a cooperative relationship between the US courts, the parties involved, the foreign court and the foreign competitive authorities involved in resolving cross-border insolvency. Second, to achieve substantial legal certainty. Third, to protect the interest of all stakeholders and to maintain fairness and efficiency in cross-border insolvencies. Fourth, to ensure protection and maximization of debtor’s assets’ value. Fifth, to smoothen the reconstruction of financially unstable businesses.
Current Scenario of Cross-border Insolvency in India
In recent times, India has experienced a restructure in its insolvency resolution regime with the enactment of the Insolvency and Bankruptcy Code, 2016 (Code). The Code came into force on December 15, 2016 focuses on consolidating and amending the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner, to promote entrepreneurship and availability of credit and to improve the ease of doing business and facilitate more investments leading to higher economic development. The Code is currently applicable on corporate person and the part dealing with partnerships and individuals is yet to be notified by the legislation. Although, it hasn’t been a long time since the enactment of the Code, it has been evolving through various amendments, judicial interpretations and regulations. Currently the Code contains two provisions that deal with cross-border insolvency cases:
- Agreement with foreign nations:
Pursuant to Section 234 of the Code, the Central Government may enter into an arrangement with the foreign country’s government for enforcing the provisions of the Code. Further, the Central Government may also enter into an agreement with regards to applicability of the Code on the assets or properties of the Corporate Debtor, an individual or their personal guarantor which are situated overseas.
- Letter of request:
When the evidence or action in relation to the assets of the Corporate Debtor are situated in a foreign jurisdiction is required for the insolvency resolution procedure, the liquidator, resolution professional or bankruptcy trustee can move to the NLCT pursuant to Section 235 of the Code. If the Court approves the application, it may issue a letter of request to the Court or authority of the foreign country with which an agreement under Section 234 of the Code has been entered into.
Although, the Code through Section 234 and Section 235 recognises and promotes cross-border insolvency resolution, it is observed that not enough have been steps taken to effectively implement the inter-governmental agreements. Today, the order of an NCLT would not be directly recognised or enforced in any foreign country. Further, these provisions do not cater to the complicated problems arising out of cross-border insolvency.
Pursuant to the situation, the Insolvency Law Committee (“Committee”) submitted their report in October 2018 suggesting the adoption of UNCITRAL Model Law by the Code and the modifications necessary in the Indian context after consultation with public at large.
Road Ahead
It can be clearly seen that there is pressing need of standardising and formulising the framework of cross border insolvency in India to have consonance with rapidly increasing foreign trade. If the Draft Provisions are adopted, despite the existence of some procedural and legal challenges, the framework suggested by it could go a long way in ensuring coordination and communication between jurisdictions to successfully address the resolution of cross-border insolvency cases. The Government of India is working towards the implementation of norms and will soon come up with detailed framework which will benefit the entire nation and will help in improving ease of doing business in India.
References
- https://www.ibbi.gov.in/uploads/resources/Report_on_Cross%20Border_Insolv ency.pdf
- https://ibbi.gov.in//webadmin/pdf/order/2019/Jul/12th%20july%202019%20In %20the%20matter%20of%20Jet%20Airways%20(India)%20Limited%20VS% 20State%20Bank%20of%20India%20&%20Anr.%20[CA(AT)(Insolvency)707- 2019]_2019-07-15%2019:47:58.pdf\
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