This article has been written by Saswata Tewari pursuing the Diploma in M&A, Institutional Finance, and Investment Laws (PE and VC transactions) from LawSikho.
Did you know that India received the largest overall Foreign Direct Investment inflow of US$ 81.72 billion in 2020-21?
India is a fast-growing country that is booming at an unprecedented rate, making it a desirable destination for foreign investors to invest in. But what if the investors are not entitled to their rights in terms of getting back their investment. That would not be fair at all. This is precisely what occurred in the case of Jet Airways India Private Limited. The National Company Law Appellate Tribunal (“NCLAT”) overturned the ruling of the National Company Law Tribunal (“NCLT”) allowing a Dutch administrator to participate in and attend the committee of the creditor’s meeting. However, to avoid a conflict of interest, NCLAT eventually authorized the administrator to attend the meeting but only as an observer. Nonetheless, this was not the first instance in which the lacunae were discovered. The insolvency proceedings of cases like Videocon Industries highlight the necessity for legislation in India that focuses on the smooth conclusion of foreign court insolvency processes.
The purpose of this article is to discuss the present state of foreign insolvency procedures in India, as well as recommended improvements to address the system’s flaws. Now, before we get into the meat of the matter, let us define foreign or as we say cross-border insolvency proceedings.
Insolvency occurs when an individual or business is unable to pay off its financial obligations owed to lenders in the form of debt. When a business is declared bankrupt, there are different processes that it must follow, such as informal meetings between the company and its creditors to work out an alternate method of repaying the debts. When the results of these meetings fail to address the situation, specific insolvency proceedings are carried out, in which the liquidator acquires all of the company’s assets, evaluates them, and liquidates those assets to pay off the liabilities.
In cross-border insolvency, the insolvent debtor owns assets in many jurisdictions, or the creditors of the concerned debtor are not from the jurisdiction where the insolvency proceedings are initiated.
Let’s use an example to illustrate the point. Assume XYZ Ltd (XYZ) is a business established in India with assets in the United Kingdom in the form of subsidiary companies and physical assets. XYZ also has certain international debtors, with whom it has a legal relationship governed by English law. Now, XYZ’s domestic creditors file an insolvency petition against the company, which is accepted, and an Interim Resolution Professional (IRP) is appointed. The IRP convenes a meeting of all creditors, and the Committee of Creditors agrees on a plan for XYZ’s resolution. However, the foreigners, in this case, are unable to take part in the resolution process. This is where cross-border insolvency laws come into play, providing a solution to these issues.
There are now three distinct components to cross-border insolvency proceedings:
- The first is to defend the interests of foreign creditors who have specific rights to the assets of the concerned debtor that are located in jurisdictions where insolvency procedures are pending.
- The second aspect is when the debtor’s assets are spread across many jurisdictions and the creditor seeks to include those assets in the bankruptcy procedures.
- Third, insolvency procedures against the same debtor are ongoing or have been initiated in many jurisdictions.
These components help the legislation to identify the areas around which laws are to be made.
Current laws on foreign insolvency
The matters of insolvency in India are governed by the Insolvency and Bankruptcy Code, 2016(“IBC”) which came into force on 15th December 2016. Two provisions relate to cross-border insolvency disputes;
- Section 234 (Agreement with foreign countries)
As per Section 234 of the IBC, the Central Government has the power to enter into an agreement with foreign Governments. Further using a reciprocal agreement, the Central Government may also direct the application of the IBC’s provisions to assets or property of a corporate debtor or an individual, including a personal guarantor of a corporate debtor, located outside India.
- Section 235(Letter of request)
The resolution professional, liquidator, or bankruptcy trustee can apply to the NCLT under Section 235 of the IBC where evidence or action pertaining to assets of a corporate debtor situated outside India is sought in connection with an insolvency resolution process. If the NCLT finds it appropriate, it may issue a letter of request to a court or judicial authority of a country with whom a reciprocal agreement has been formed under Section 234 of the IBC.
Even though the above-mentioned provisions of the IBC were designed to extract the most value from the corporate debtor’s assets, India has yet to engage in any reciprocal arrangement with any nation, and also, no meaningful steps have been done to enforce the inter-government agreements.
Observing the existing laws of IBC are not sufficient enough to address the problems arising out of cross-border insolvency, the Insolvency Law Committee(“Committee”) submitted a report on the 16th of October 2018. The report includes various adjustments and alterations to the Model Law that the Committee felt necessary in the Indian context.
Uncitral model law
The UNCITRAL Model Law on Cross Border Insolvency, 1997 (the “Model Law”) was suggested by the United Nations Commission on International Trade Law. The Model Law was accepted on May 30, 1997, by the UNCITRAL during its 13th session in Vienna.
The Model Law provides for a uniform approach to matters of cross-border insolvency by mixing national insolvency laws dealing with it. It does not provide for substantive insolvency law unification; rather, it recognizes the variety of insolvency laws between jurisdictions and allows countries to design their national laws following the Model Law after making any changes they consider appropriate.
Model Law can be divided into the following pillars:
- Pillar of Access
The Model Law’s provisions allow it to remove or mitigate many current obstacles that foreign liquidators face in terms of jurisdiction, standing, and the right to be heard and will authorize any foreign representative to apply directly to a court in a state that has accepted the Model Law to begin domestic insolvency proceedings.
- Pillar of Recognition
The Model Law recognizes foreign proceedings and the relief granted by the domestic court as a result of the recognition.
The Committee report of 2018 recognized two categories of foreign proceedings intending to determine the amount of control and authority that the jurisdiction has over insolvency resolution procedures:
- Foreign Main Proceedings – proceedings in the State where the corporate debtor has a centre of its main interest.
- Foreign Non-Main Proceedings- proceedings in the State where the corporate debtor has an establishment.
- Pillar of Relief
Model Law defines the types of relief that can be granted in both foreign main and non-main procedures. If the NCLT determines that a process is a foreign main proceeding, the continuing domestic procedures are halted, and the estate is handled by the foreign representative thus appointed. Whereas, if a process is judged to be a foreign non-main proceeding, such remedy is at the discretion of the court.
- Pillar of Cooperation and Coordination
The Model Law establishes the foundation for the best possible collaboration and communication between domestic and foreign courts, as well as insolvency practitioners. It also establishes the foundation for concurrent insolvency procedures, which are the initiation of domestic proceedings while a foreign proceeding has already begun, or vice versa. It also facilitates collaboration among two or more concurrent insolvency processes that are taking place in separate countries.
The Model Law also includes a public policy exemption, which permits courts in a state to refuse to take any action authorized by the Model Law if such action is inconsistent with the state’s public policy.
Now, what can be the possible implications if the suggestions and alterations suggested by the report of the Committee are implemented in India.
Change in the legal proceedings in India
If the report’s recommendations are implemented in India and the NCLT determines that a foreign proceeding is a foreign main proceeding, any arbitration and litigation procedures in India against the corporate debtor will be automatically subjected to a moratorium i.e will be put to a halt. However, If the NCLT finds that a foreign proceeding is a foreign non-main proceeding, the NCLT will have the power to impose a moratorium, thereby halting all litigation and arbitration proceedings against the corporate debtor in India.
Until the report’s recommendations are adopted in India, any arbitration or legal proceedings in India can continue, even if insolvency proceedings have been initiated against the corporate debtor in other countries. However, if insolvency proceedings have been initiated against the corporate debtor in India, a moratorium on commencing or continuing legal actions against the corporate debtor would be imposed upon admission of the insolvency application.
Local law supremacy
The suggestions of the report give the proceedings of IBC precedence which means that if insolvency proceedings under IBC are initiated, any foreign proceeding recognized by NCLT must not conflict with the proceeding governed by the IBC. NCLT has the power to alter or cancel reliefs to make sure that coordination and consistency are being maintained with the provisions of IBC. Because of the broad powers granted to the NCLT, it needs to be seen how successful recognition of foreign proceedings will be in coordinating concurrent insolvency procedures.
Public policy exemption
NCLT has the discretion to not take any action under the suggested foreign insolvency guidelines if it is manifestly contrary to the public policy of India. However, the suggested draft provisions do not include the definition of ‘public policy’.
Countries that have embraced the Model Law have formed their concept of public policy based on court precedents. Singapore, for example, has not included the phrase “manifestly” in its public policy exception. As a result, when the first case under the insolvency legislation occurred, the Singapore High Court decided in the matter of Zetta Jet Pte Ltd that the bar for interpreting public policy reasons is significantly higher than other jurisdictions that have embraced the word “manifestly” in their public policy exemptions.
The Indian courts’ approach to the interpretation of public policy is unclear at this point. It would have been preferable if the public policy exception had been explicitly defined, with an emphasis on restricting the extent of its applicability through legislation.
To give life to the report’s recommended recommendations, supplementary assistance in the form of amendments and subordinate laws is necessary. For example, under Indian laws, concurrent hearings with other jurisdictions are prohibited. Furthermore, the guidelines also have delegated a great deal of information to the subordinate laws from the Central Government and the Insolvency and Bankruptcy Board of Insolvency. Therefore such amendments and rules and regulations must be promulgated promptly to align with the objective of the Model Law and prevent confusion in the settlement of cross-border insolvency cases.
The IBC sets tight timeframes for the resolution of insolvency proceedings, which have been repeatedly ruled to be inalienable. It is currently unknown if such stringent timelines would apply to foreign insolvency cases, and if so, how they will be properly adhered to amid numerous insolvency processes.
Even though there is an issue with the system, Indian officials have been working for a long time to correct its shortcomings. The Supreme Court of India ruled in the case of Macquarie Bank Limited v. Shilpi Cable Technologies Ltd that foreign creditors have the same rights as domestic creditors to start and participate in corporate insolvency resolution processes in India. Also, in the year 2000, the need for such legislation was acknowledged by the High Level Committee on Law Relating to Insolvency headed by Justice Eradi and the adoption of the Model Law was urgently prescribed. Next, the NL Mitra Committee Report of the Advisory Group on Bankruptcy Laws detailed the then-current foreign insolvency framework and repeated the recommendation for the Model Law’s implementation.
It won’t be long until we see a complete law based on the concept of the Model Law being implemented in India, but the issue is whether it will be able to address the present problems or generate new ones. Nations adopting the Model Law face several persistent problems, such as identifying the center of primary interests and consolidating the numerous local insolvency legislations of various countries. Only time will tell if Indian courts will be able to overcome these obstacles and give consistent interpretations.
Whether there are obstacles or not, enacting foreign court insolvency regulations in the country will go a long way toward ensuring that jurisdictions work together to resolve cross-border insolvency matters successfully. Not only that, but it would make doing business in India even simpler by boosting foreign investors’ confidence in Indian rules and will showcase India as an attractive investment destination.
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