This article is written by Sarad Kumar Singh, from Damodaram Sanjivayya National Law University, Visakhapatnam and Dishi Mishra, from Lloyd Law College. The article discusses Cross Border Insolvency, its status in India and the world and the article has been edited by Khushi Sharma (Trainee Associate, Blog iPleaders).

Introduction

“Life is all about a second chance. Bankruptcy is not a shame. It’s a matter of rebuilding and shaping a new world.”

Whenever we heard of the word insolvency, a word termed as “Bankruptcy” comes to our mind just because of the current legislations and financial scams of different firms, persons and companies. In India, the capitalists consider Bankruptcy as a shame. The people also used the words like “Kangaal” to make fun of those people or companies. However, this gesture of people and capitalists are not real capitalism. Every person was failed once in their life in something. Without being failed, one cannot think of the happiness of being passed. Similarly, a business can also be failed, so, failing in a business is not a matter of shame. 

Real capitalism doesn’t see bankruptcy as a shame. Several examples are there in the world that got failed multiple times, but now they are change-makers, the wealthiest persons and the most powerful man in the world. But now the question that arises is, whether Insolvency and Bankruptcy are the same? If not, then what are the differences between them? To understand Cross Border Insolvency in a deeper context, let us first understand what Insolvency and Bankruptcy are and also the differences between Bankruptcy and Insolvency. The paper deals with the insolvency cross border Insolvency, Insolvency laws across the world and the laws in India dealing with cross border insolvency. In the end, we had given the conclusion citing solution as well.

What are insolvency and bankruptcy

People often use the expression “bankrupt” to illustrate a condition in which an individual or company has no more resources to pay back debts and responsibilities. This is what insolvency is called. Insolvency takes place if an individual, corporation or other organisation, as due, cannot discharge its financial debt responsibilities. Bankruptcy is not precisely just like insolvency. Bankruptcy is an insolvency identification of overcoming the insolvency with the prescribed legal set of instructions that were made by a court of law. Insolvency defines a condition in which the debtor cannot satisfy his responsibilities. Bankruptcy is a legal scheme that seeks compensation from an insolvent debtor.

One of the very basic fundamentals of being insolvent and bankrupt is just the same as we had read in the context of Contract, where, it was termed that “All contracts are agreements but all agreements are not contracts”. Similarly, the same principle applies in the case of Insolvency and Bankruptcy, where, it was stated that “Someone who is bankrupt is insolvent, but someone who is insolvent isn’t necessarily bankrupt”.

Before 2016, in India, the insolvency resolution usually took 4.3 years on average, which is higher in comparison to other countries like UK and USA, where insolvency resolution took 1 year and 1.5 years respectively. And this delay was caused because of the court proceedings and time taken to resolve cases in courts, because of the dilemma of the frameworks related to bankruptcy.

Insolvency and bankruptcy code

Background

In the year 2016, the government of India came up with a law that was unique of its kind in the history of our country. In India, Insolvency law finds its root long back from the legislation of the English people (Britishers). There was just no existing insolvency law in India until the British came to India. In India, the insolvency law was primarily essential in the cities where the British, i.e. Bombay, Calcutta and Madras, were responsible for significant trades.  In order to strengthen the bond between the creditors and the debtors, the Insolvency and Bankruptcy Code (IBC) 2016 (See here) was implemented. In order to merge the current legislation on insolvency and bankruptcy, the Insolvency and Bankruptcy code (IBC), 2016 was enforced.

Aim

The Insolvency and Bankruptcy code 2016 was made applicable to companies and individuals. It provides a time-bound resolution of insolvency. When a failure arises in reimbursement, debtor assets are regulated by creditors and decisions must be taken to address insolvencies over a period of 180 days. The Code as well presents debtors with protection from claims of creditors throughout this time to facilitate an uninterrupted resolution phase. In addition, the codes consolidate the existing statutory structure and provide a shared forum to address insolvency for debtors and creditors of all groups.

Facilitating insolvency resolution

To facilitate the insolvency resolution the government created various institutions under the IBC, 2016. These institutions are as follows:

  1. Adjudicating Authorities: National companies law tribunal (NCLT), a tribunal was established, for the adjudication of the proceedings of the process of resolution, by the central government. It was an authority for the companies. For the individuals, the Debt Recovery Tribunal (DRT) was set up. The tasks of the authorities include authorization to begin the settlement process, designate the insolvency specialist and accept the creditors’ final judgement. NCLT and DRT are the judicially constituted bodies.
  2. Insolvency and Bankruptcy Board:  The Board regulates insolvency professionals, insolvency professional agencies and information utilities provided in accordance with the Code. The Board will comprise of representatives from the Reserve Bank of India, members from the Finance, Corporate Affairs and Law ministries. IBBI is responsible for approving the list of resolution professionals. It also sets out and enforces laws to handle insolvency, corporate payments, insolvency and individual bankruptcy in accordance with the 2016 Insolvency & Bankruptcy Code. In addition, IBBI is involved in the introduction of new Code amendments.
  3. Committee of creditors: The committee of creditors (CoC) was given under Section 21, comprise of only financial creditors. The function of the COC is to accept and reject the resolution plan suggested by the insolvency resolution professionals. At the COC meeting, the minimum vote needed for approval of the plan of resolution is 75%. The operating creditors will take part but do not have the right to vote, in the meeting of the creditor committee.

Insolvency and Bankruptcy Code (amendment), 2020

Due to the hardship of the global pandemic, called COVID-19, destruction around the world is created. Across the world, a number of people got infected and still the number is keeping on increasing. This widespread global catastrophe, almost the entire world was under lockdown. This lockdown hit hard to the economy, financial market and business at large scale and many of them were closed. This worldwide closure affected the cash flow in the market which further increases the Non-Performing Assets (NPAs) which ultimately caused a default in Repayment of the banks, creditors and financial institutions.

The Government of India introduced two changes to the 2016 insolvency and bankruptcy code in an attempt to protect the corporate interest and save those corporations who might just fail in existing debt. As a result of its Atma Nirbhar economic reforms, this Ordinance was implemented by the Indian government. The preamble to the Ordinance mentions that owing to circumstances immense to the pandemic of Covid-19, it was issued in order to avoid companies from being placed in insolvency or liquidation.

Sections 7, 9, 10, deals with the applications filed by financial creditors, operational creditors and the corporate debtors themselves, respectively. These sections were filed against corporate debtors that are suspended for a period of minimum of 6 months. Meanwhile, in the period starting 25 March 2020 to 24 September 2020 or it can be extended to further periods. The suspension of Sections 7, 9 and 10 however does not apply to the company default made before 25 March 2020, pursuant to those Sections See here.

Cross-border insolvency

In the management and disposal of debtor assets, the insolvency laws tend to support both the debtor and the creditor. Recently insolvency petitions against numerous companies are being admitted.  Some of those companies still have properties in other jurisdictions and the handling of those assets is one of the key issues. This is the field of cross-border law on insolvency. 

Cross-border insolvency, which can also be termed as International Insolvency, governs the protection of debtors, who are financially troubled, and have their assets and/or creditors over one or more than one nation. We had heard of the word MNC. MNC is abbreviated as Multi-National Company that is spread over the entire world, which regulates its business. So, whenever an MNC or company, which is across the border, got insolvent, then the Cross-border insolvency comes into effect. In the context of insolvency that is in any way outside the limits of a particular legal system, Professor Ian Fletcher proposes that “cross-border insolvency be seen as a situation in which insolvency occurs in such a way that a single set of domestic insolvency provisions cannot be immediately or exclusively used regardless.” Refer this

Cross-border insolvency rules on a global basis are focused on the one nation that provides aid for the other country to take over the assets and then dispose of the debtor firm’s assets. The mutual understanding of the insolvency system of each country achieves these goals. To understand cross border insolvency more clearly, let us take an example, the United Kingdom acknowledges those Commonwealth jurisdictions’ insolvency laws and courts in the UK is obliged to support courts in those jurisdictions. India is not one of the courts which qualify under this route for the gain. There is one of the most powerful cross-border structures in the European Union where the laws of that country immediately take precedence and have equal impact in all the other member states and regulate all problems other than those expressly exempted, in accordance with the Insolvency Regulations, where there is an action taken against the debtor and the Center of Main Interest.

Area of conflicts

National insolvency regimes may take widely differing approaches in some key points in every effort to align or promote cross-border management of insolvent companies.

  1. Secured Creditors: If bankruptcy proceedings are or are not an impediment to the protection of the rights of secured creditors in relation to the way any proceedings are conducted.
  2. Corporate rehabilitation regimes: In order to liquidate companies and allocate the proceeds to debtors, bankruptcy processes based on the rehabilitation of companies are radically different in purpose and effect for closing-up systems.
  3. Set-off rights: Although some countries authorize creditors with reciprocal debtors to fully compensate for the debtor claims, others enable the creditors to pay any amounts due to the debtor until they demand the full amount in the proceedings. There can be differences in jurisdictions which permit set-off, whether set-offs should be on the basis of a person or community.

UNCITRAL model law

United Nations Model Law on Cross border insolvency (1997) for an efficient way of handling cases that involve cross-border insolvency was formulated by the United Nations Commission on International Trade Law (UNCITRAL). The Model Law does not recommend compulsory integration in the individual States which enforce the substantive domestic rules. 

Alternatively, four components are proposed to promote the mechanism of cross-border insolvency resolution:

  1. Access
  2. Recognition 
  3. Relief (assistance) and 
  4. Cooperation.  

Two types of procedures, foreign main proceedings and foreign non-main proceedings, are acknowledged by Model Law. This model law addresses quarter main concepts of cross-border insolvency, including the direct participation or opening of insolvency proceedings against a defaulting debtor by an international insolvency practitioner and foreign creditors.

Other main guidelines include the acknowledgement and remedy of international procedures, the collaboration between domestic and foreign courts and insolvency professionals at home and abroad. The coordination of two or more competing insolvency proceedings in separate countries has also been a matter of principle.  The key procedure is based on the idea of the Centre of Main Interest.

EC Regulation on insolvency proceedings, 2000

The European Commission (“EC”) established cross-border insolvency legislation, providing a structure for EU (“EU”) Member States. The European Commission’s insolvency scheme of EU members is not harmonised by the EC Regulation. Instead, it encourages the determination of competence and the relevant law in cross-border insolvency proceedings by the Member States. It also ensures that insolvency proceedings are automatically recognised through Member States of the EU. The framework of the EC Regulation is restricted to the joint insolvency procedure involving a limited or overall debtor divestment and a liquidator appointment. 

Three types of insolvency proceedings can be recognised in the EC’s Regulation. These are:

  1. Main Proceedings: Here the debtors have the centre of interest within the EU. The main insolvency proceedings in one jurisdiction and secondary proceedings in another are recognized by EU if insolvency proceedings in one jurisdiction might actually occur. The main proceedings cover all debtors’ properties and are of universal reach. The debtor has to have its “core interests’ in the jurisdiction of that Member State in order to have the case regarded as a “main proceedings.” The main interest centre refers to the location at which the debtor administers the EC Regulation periodically and is subject to third parties’ determinations.
  2. Secondary Proceedings: Here the debtor has an establishment. “The Establishment is designated to indicate any place of operation for which the debtor undertakes non-transitional economic activity in conjunction with the main proceedings, by human means and goods.” Throughout the Member State in which the debtor has an establishment, secondary proceedings can be initiated. The consequences of the secondary proceedings are restricted to the properties of the State concerned.
  3. Territorial Proceedings: The debtor has an establishment here, but there have still not been any main proceedings in other places.

Status of Cross-border insolvency in India

India’s insolvency system has recently been thoroughly overhauled. On 15 December 2016, the Insolvency and Bankruptcy Code 2016 entered into force and consolidated several laws on the company, partnership and private individuals’ insolvency resolution. The Code presently applies the applicability of this Code to corporate individuals and the relationship and individual requirements have still not been notified. The Code has evolved considerably through modifications, rules and judicial interpretation, despite its recent development.

There are two main clauses in the Code to facilitate cross-border insolvency disputes:

Agreements with foreign countries

The Government might well establish an agreement in accordance with Section 234 of the Code with the Government of another nation for the enforcement of the Code. The Government might even guide the implementation by means of a mutual agreement of the clauses in the Code relating to the assets or property of an entity or a company owner, including a corporate owner’s personal guarantor, outside India.

Letter of request

If evidence or action is needed in connection with an insolvency resolution process concerning the properties of a corporate debtor located abroad, the resolution professional, liquidator or bankruptcy trustee may submit a request under Section 235 of the Code to the NCLT. If the NCLT considers it appropriate, a letter of request might well be issued in accordance with Section 234 of the Code to a court or authority of the country with whom a mutual agreement has been made.

Even though it was noted that no measures had been undertaken to fully enforce the intergovernmental agreements in order, though this incorporation of Sections 234 and 235 in the Code was to promote the resolution of cross-border insolvencies. An NCLT’s order will not be recognised or directly implemented in any foreign country at this time in a cross-border insolvency dispute. In addition, while informed, the complicated issues resulting from cross-border Insolvency cases are not appropriately addressed in these clauses. 

So there comes a need for a more codified and followed the structure and for the same, a high level called Insolvency Law Committee was formed.

Insolvency law committee

Injeti Srinivasa, Secretary of Corporate Affairs, headed the Insolvency Law Committee (ILC). The UNCITRAL Model Law for Cross Border Insolvency 1997 allows for an integral structure for addressing international insolvency issues and hence it was recommended by the ILC to adopt it in the Indian context.

Recommendations

Insolvency Law Committee on 16 October 2018 presented a report on the inclusion of model law (Draft Provisions) into the Code. The Draft provisions include some changes and changes to the model law that the Committee considers essential in the Context of India.

The following are the main features of the draft provisions:

  1. Applicability: It deals with the applicability like on whom the draft provision applies to? The Code has been notified only with respect to corporate persons as corporate debtors. The conditions when it is applied? Procedures pursuant to the Code can only be initiated when the corporate debtor has assets in India. The draft provisions include a reciprocity clause that applies in other countries for proceedings begun outside India. Its application will then apply to foreign countries that have implemented the Model Law in their domestic frameworks. 

It also deals with the granting of access in case of proceedings commenced outside India. When reciprocity is established, the NCLT can request for recognition of an international proceeding by the ‘foreign representative.’ The international representative may take part throughout the insolvency proceedings, as provided for under the draft provisions, after approval of the foreign procedure by NCLT. The draft provisions shall also provide the Government with the authority to administer for foreign representatives a code of conduct.

  1. Recognition of Foreign Proceedings: Foreign proceeding in accordance with an insolvency statute is a legal or administrative proceeding in a foreign country. In a foreign proceeding, the corporate debtor’s properties and affairs are subject to a reorganizing or liquidation oversight by a foreign court. Two forms of foreign proceedings, foreign main and foreign non-main proceedings, are highlighted in the draft provisions.
  2. Mandatory and Non-Mandatory Relief: A moratorium guarantees that the property of the corporate debtor is secured during the insolvency procedure. In cross-border insolvency cases, the establishment of a moratorium is particularly important as the properties of the corporate debtor may be in more than one juridical jurisdiction. Depending on the essence of the external proceeding, the proposed provisions provide with mandatory and non-obligatory relief.

Conclusion

Presently, the resolution of cross-border insolvency proceedings in India has no efficient legal framework. In attempt to be inserted into the code as it currently stands, the draught provisions proposed by the Committee should necessarily be formulated as billed. Currently, the date of such modifications is unclear, although newspaper reports state that the government plans soon to add a chapter on cross-border insolvency to the Code. The amendment in IBC made by Indian government is somehow a good step for the way ahead. The Code’s primary goal is to revise and insolvency to maximize asset value in a time-linked way. Despite the ambiguities, the order is a welcome step in order not to misuse this in the current economic scenario.

While the suggested Cross-Border Insolvency Framework would make it possible for the country to deal with Indian companies with foreign assets and vice-versa, issues like insolvency treatment of corporate groups will still be a challenge. For individual companies and not business groups, this proposed framework is intended. The trans-boundary framework is intended to create further because UNCITRAL and other international bodies resume examining these problems and developing feasible international alternatives.


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