This article is authored by Akash Krishnan, a law student from ICFAI Law School, Hyderabad. It discusses in detail the existing international and national regimes for cross-border insolvency, problems in the existing regime, the need for a separate cross-border insolvency mechanism and recent developments that support the cause.
Table of Contents
Introduction
With the growth of the Indian economy, the inflow of foreign investors is at its peak. The increase in the number of foreign companies that finance Indian companies and set up manufacturing units in India has also called for the enactment of cross-border insolvency laws in India. Insolvency refers to a state wherein an organisation or an individual is unable to satisfy their due financial burdens. In simple words, an individual or organisation which is insolvent is unable to pay its debts.
Cross-border insolvency is a means to deal with the insolvency of organisations that have assets or creditors present in a jurisdiction other than their own. If we look at businesses globally, we can identify that cross-border investment agreements and their outcomes are highly affected by the insolvency laws in both jurisdictions, i.e., the insolvency laws of a country set the foundation for foreign investments in that country.
Cross border insolvency laws protect the rights of the foreign creditors against the assets of a corporate debtor who resides in a different jurisdiction. It allows the inclusion of such assets even if the insolvency proceedings are being conducted in a different jurisdiction. Before delving into the need for cross border insolvency laws in India, let us first try and understand the concept in detail.
Theories of cross-border insolvency
The territorial theory
Under this theory, the home state exercises its jurisdiction over all the assets of a corporate debtor that are within its jurisdiction. The home state does not recognise the rights of any foreign jurisdiction over the assets of a corporate debtor that are located within its territory. This theory does not favour the ideology of cross border insolvency laws.
The universalist theory
This theory suggests the formation of an independent and international body to administer the cases of cross-border insolvency. This body will have jurisdiction over all cross-border insolvency claims and also over the assets of the corporate debtors in such cases irrespective of where these assets are located. The body will have the power to determine the insolvency status of the corporate debtor and to distribute the assets or the proceedings from these assets accordingly.
The hybrid theory
There are two hybrid theories in place. These theories have been discussed below:
Modified universalism
According to this theory, in cases of cross border insolvency, all the countries involved should cooperate to identify the most relevant jurisdiction and empower the judicial institutions in that country to deal with the assets of the corporate debtor located in any of the countries involved.
Cooperative territorialism
Under this theory, the home state exercises its jurisdiction over all the assets of a corporate debtor that are within its jurisdiction. This is subject to the existence of multilateral agreements with other countries wherein the home state has given up their jurisdiction w.r.t cross border insolvency cases and permitted the other country involved to deal with the case and also the assets of the corporate debtor.
The international regime of cross-border insolvency laws
The United Nations Commission on International Trade Law (UNCITRAL) Model on Cross Border Insolvency
The UNCITRAL Model Law on cross-border insolvency was adopted in 1997 during the Vienna Conference. This Model law proposed multiple rules to facilitate cross-border insolvency resolution. The major aspects of this Model law have been discussed below in brief:
Rule of access
According to this rule, the creditor in a cross-border insolvency resolution can approach any Court in any jurisdiction that has adopted the Model Law to initiate proceedings against a corporate debtor who is the national of another country that has adopted the Model Law.
Rule of recognition
According to this rule, any country that has adopted the Model Law should recognise and help in the enforcement of the rulings passed by the courts of another country that has adopted the Model Law. To determine the jurisdiction of a particular country, the Model law divided cross-border insolvency resolution proceedings in the following manner:
Foreign main proceedings
The country wherein the principal assets/central interest of the corporate debtor is located will have the jurisdiction to try the case.
Foreign non-main proceedings
The country wherein the commercial establishment or registered office of the corporate debtor is located will have the jurisdiction to try the case.
Rule of relief
In the case of a foreign main proceeding, the relief granted by the foreign court is enforceable in the domestic countries where the assets of the corporate debtor are located. In the case of a foreign non-main proceeding, the domestic court has the jurisdiction to determine the relief and deal with the assets of the corporate debtor.
Rule of cooperation and coordination
According to this rule, there should be coordination and cooperation between judicial bodies in foreign and domestic jurisdictions so as to enforce the reliefs ordered in cases of cross border insolvency.
European Commission regulations on cross-border insolvency resolution proceedings
The applicability of these Regulations is restricted to the EU member states. It recognises the following three forms of proceedings:
Main proceedings
The state of the EU wherein the principal assets/central interest of the corporate debtor is located will have the jurisdiction to try the case.
Secondary proceedings
The state of the EU wherein the commercial establishment or registered office of the corporate debtor is located will have the jurisdiction to try the case.
Territorial proceedings
If the state of the EU wherein the principal assets/central interest of the corporate debtor are located has failed to initiate proceedings, the state of the EU wherein the commercial establishment or the registered office of the corporate debtor is located will have the jurisdiction to try the case.
Indian regime of cross-border insolvency laws
Current position in India
The Insolvency and Bankruptcy Code was enacted in 2016 based on the recommendations of the Bankruptcy Law Reform Committee 2014. The following provisions of the IBC, 2016 are relevant for the current discussion.
Agreements with foreign countries
Section 234 of the IBC empowers the Central Government to enter into agreements with foreign countries for enforcing the provisions under the Code. It further empowers the Central Government to extend the provisions of the Code to the assets of a corporate debtor that are located in any foreign country. This power is subject to the existence of reciprocal agreements between India and other foreign countries.
Letter of request
Section 235 of the Code provides that if the insolvency resolution professional is of the opinion that the assets of the corporate debtor located in a foreign country are to be dealt with, then he can make an application to the adjudicating authority for the same. The Adjudicating authority on receiving such an application, if it deems fit, may issue a letter of request to a court or any other adjudicating authority in the foreign country to comply with the request of the insolvency professional.
However, for issuing a letter of request, it is necessary that the country in which the assets of the corporate debtor are located has entered into a reciprocal agreement with India under Section 234 of the Code.
Problems with the current regime
Reciprocal agreements
One of the objectives of the Code is the timely completion of corporate insolvency resolution proceedings. Entering into reciprocal agreements is a long and cumbersome process and as of now, there are no reciprocal agreements in place. Thus, if a resolution professional wants to initiate an action against the assets of a corporate debtor located in a foreign country, India will first have to enter into a reciprocal agreement with that country.
This will significantly extend the duration of the insolvency process thereby failing the object of timely resolution of insolvency proceedings. Also, there is no guarantee that the reciprocal agreement will be successfully negotiated and entered into. Thus, if the insolvency proceedings are stalled for the time being to enter into a reciprocal agreement, and India fails to enter into a reciprocal agreement, it is difficult to recover the loss suffered by the creditors due to the suspension of proceedings.
Letter of request
The Code has provided provisions for issuing a letter of request but has failed to provide any procedure for doing the same. Therefore, there is a need for establishing a detailed procedure in this regard to guide the adjudicating authorities.
Need for a new framework
The lack of reciprocal agreements and proper procedure under the Code has rendered the code ineffective when it comes to cross-border insolvency proceedings.
In the absence of such a regime, an uneven playing field is created in India. If an Indian company undergoing insolvency has multiple assets in different countries, the creditors of the company will face a severe loss just because the foreign assets are not included in the insolvency proceedings leading to their debts not being realised in full. The company on the other hand, even after undergoing insolvency will have significant financial assets spread across multiple jurisdictions.
Therefore, there is a need for establishing a proper procedure or a separate set of laws governing cross border insolvency laws in India to level the playing field. Let us now discuss the various methods by which a cross-border insolvency mechanism can be introduced in India.
Adopting the UNCITRAL Model Law
The UNCITRAL Model law was passed with the intent of facilitating cross border insolvency resolution proceedings. As of now, around 44 countries have adopted the Model Law, including countries like the USA and the UK. In 2018, an Insolvency Law Committee chaired by Shri Injeti Srinivas, recommended the adoption of UNCITRAL Model Law of Cross Border Insolvency. The Report identified the loopholes in the existing insolvency regime and stated that the adoption of the UNCITRAL Model Law will bring about the much-needed change in the Indian insolvency regime. While recommending the adoption of the Model Law, the Report made the following observations:
- The Model Law gives precedence to domestic proceedings.
- It facilitates the protection of public interest.
- It will instil confidence in foreign investors and attract more foreign investors to India.
- It provides a detailed procedure for cooperation and coordination among different countries to deal with cross-border insolvency cases.
- It does not mandate the existence of reciprocal agreements. Thus, the cumbersome process involved in forming such agreements can be set aside.
- It will help to deal with assets of Indian companies located in foreign companies and vice-versa.
- The inclusion of the Model Law will bring Indian insolvency laws at par with foreign jurisdictions.
Even though these recommendations were made in 2018, no steps have been taken to date to follow up on these recommendations and adopt the UNCITRAL Model Law.
Entering into BITs
BITs are Bilateral Investment Treaties or Bilateral Investment Agreements that two countries enter into to protect the interests of their nationals who invest in the host country. One of the objectives of cross-border insolvency is to establish a secure environment for foreign investors. Therefore, if India can incorporate provisions for cross-border insolvency in these bilateral agreements, then foreign investors can invest in India without any external insecurities.
However, one of the drawbacks herein is that it takes a significant period of time to enter into BITs or amend the existing BITs. Also, different countries have different insolvency regimes and negotiations to form a mutual insolvency resolution process is a difficult process.
Recent developments
The Jet Airways saga
In 2019, Jet Airways became the first Indian company to undergo a cross-border insolvency resolution. In the initial proceedings under the NCLT, SBI had filed an application from initiating a corporate insolvency resolution process against Jet Airways. The application was accepted by the NCLT.
Soon after this, an Administrator of the Dutch Court approached NCLT with the plea that insolvency proceedings against Jet Airways were going on in the Dutch Court and that NCLT should not continue with the current proceedings. The NCLT dismissed this plea on the ground that there was no reciprocal agreement between India and Netherlands and thus the NCLT was not bound to heed such requests. Further, the NCLT also held that the proceedings in the Dutch Court are not applicable or enforceable in India and would be deemed null and void in the Indian Courts.
This order of the NCLT was appealed by the Dutch Administrator to the NCLAT. The NCLAT set aside the order of the NCLT on the precondition that the Dutch Court will not alienate the off-shore assets of Jet Airways. It further stated that the Dutch Administrator could participate in the Indian insolvency proceedings, attend meetings of the committee of creditors etc. However, the right to vote in such meetings was not granted. Also, the NCLAT ruled in favour of a coordinated approach between the insolvency professionals in India and the Netherlands and asked them to form a resolution plan that was in the best interest of all the stakeholders.
In furtherance of this ruling by the NCLAT, the insolvency professionals of both countries formed a cross-border insolvency protocol to administer the case. This protocol was based on the UNCITRAL Model Law. The protocol recognised India as the country of main proceedings and the Netherlands as the country of non-main proceedings. Thereafter, the insolvency proceedings continued in India.
This is the first case of cross-border insolvency in India. The NCLAT has clearly taken a stand wherein it balances the interests of the creditors and in doing so, it has also called for an effective cross border insolvency mechanism to be established in India.
US Bankruptcy Code
USA had adopted the UNCITRAL Model law in 2005 and had included provisions for cross-border insolvency in Chapter 15 of their Bankruptcy Code. In SBI v. SEL Mfg. Co. Ltd, SEL was undergoing insolvency. The NCLT Chandigarh bench received an application from a US-based representative of the corporate debtor in which he sought the recognition of the Indian proceedings as the foreign main proceedings. The NCLT herein ruled in favour of the foreign representative and recognised the proceedings as foreign main proceedings.
This was the first case in which a court had recognised the status of foreign main proceedings as provided under the UNCITRAL Model Law.
Conclusion
Currently, the legal regime for cross-border insolvency is still in a very preliminary stage for most of the countries. In India, the Insolvency Law Committee has been submitting reports recommending the incorporation of Model laws of UNCITRAL but they are yet to be passed. Presently there is a lack of clarity with regards to cross border insolvency laws; there are also procedural challenges when dealing with such cases. The adoption of UNCITRAL model laws shall pave the way to eliminating such challenges.
In India, this concept needs a proper legal framework. It can be seen very clearly that there is a pressing need to standardise and formalise the framework of cross border insolvency in India to have consonance with rapidly increasing foreign trade. When we look at the present situation of the Make in India movement, where we are inviting foreign nations to invest here, to motivate the investors India should adopt flexible laws like the UNCITRAL Model Law. Cross border insolvency can only be applied if India enters bilateral treaties with other countries. When the rights and interests of foreign investors are secured, other nations invest here. Therefore, it’s essential that a proper insolvency regime is established which promotes foreign direct investment in India.
References
- https://www.scconline.com/blog/?p=247207Â
- https://indiacorplaw.in/2020/02/reciprocity-requirements-in-indias-adoption-of-the-uncitral-model-law-on-cross-border-insolvency.htmlÂ
- https://blog.ipleaders.in/implication-foreign-court-insolvency-proceedings-india/Â
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