This article is written by Harmanpreet Kaur of Amity University, Kolkata. The article will deal with the current scenario of cross-border insolvency in India.
The law of insolvency plays a major role in a free modern enterprise in terms of economy. However cautious and farsighted a person may be in his financial and business dealings, he sometimes gets involved in financial difficulties and therefore is unable to meet the financial obligations. This leads to him being insolvent. In legal terms, a person can only be declared insolvent only by the competent courts as per the laws that deal with the phenomenon of insolvency, which can be termed as the Laws of insolvency. Insolvency can be termed as an act in which the state takes possession of the property of the debtor who cannot pay his debts or discharge his liabilities and distribute accordingly and equitably among all his creditors. The effect and the reach of a nation state’s insolvency laws have become more important as the world’s economies have become more consolidated and interdependent. Now with the development of insolvency laws in the nation-states, the need for the laws of cross-border insolvency is also gaining momentum in the present 21st century and has gained prominence and importance since the 20th century. It can be thus stated that the need for the laws of cross-border insolvency was felt after globalization.
The present article will focus on the present stand of cross-border insolvency in India, the legislation concerning cross-border insolvency, and the need for insolvency laws.
Cross border insolvency
Cross-border insolvency, can also sometimes be referred to as International insolvency. It implies a situation, wherein the insolvent debtor has assets and liabilities in more than one jurisdiction or in the other foreign countries, or where the creditors are from different jurisdictions of nations. The aspect of cross-border insolvency regulates the financially disturbed and depressed debtors, where such debtors and the creditors have the assets and liabilities in more than one company, which can either be in India or in other foreign countries. Usually, cross-border insolvency is the insolvency of the unstable companies operating in more than one country and not the insolvency of bankrupt individuals. The cross-border insolvencies have resulted in the majority of significant corporate failures like in the case of Chanda Deepak Kochhar vs Icici Bank Limited (2020), wherein Videocon held the director-general responsible for conducting bribery against the bank, making it a frequent scenario. The increase in commercial technology has led the cross-border trade to not only to the large multinational corporations but also the companies.
Model laws on cross border insolvency
The model laws were made by the United Nations and the efforts were taken by the various international legal entities to make a model law that would be beneficial to solve the disputes relating to cross-border insolvency. The model laws were created as a result of difficulties arising from the recessions in the early 1990s. This experience showed the need for some uniformity and harmonization in the multi-international companies when they deal with some sort of insolvency, to avoid multiple insolvency administrations, and allow creditors in one state to access the assets of the insolvent entity in another.
- UNCITRAL Model Law on cross border insolvency
The UNCITRAL Model Law on cross-border insolvency was designed by the United Nations Commission on International Trade in 1997. It was introduced to provide a system of procedural recognition with the principles of comity and court intervention to assist any recognized foreign insolvency proceeding to achieve a more effective and speedy disposition of cases. The system was introduced because of the increase in the disputes related to cross-border insolvency so that they can be solved and handled with efficient administration and supreme authorities. The objectives of the model law can be summarized as follows:
- While the cases are solved by the courts, the interests of the creditors, the debtors, and the other parties should be protected and be considered to be of primary concern.
- There should be no conflict between the parties and cooperation and coordination should be maintained.
- The law introduced four elements, to resolve the cases of cross border insolvency i.e, access to the courts for the recognition of simple proceedings, relief should be granted to the parties following the principles of justice, fairness, and equity, there must be the maintenance of cooperation among the parties and the judicial system i.e, the courts.
- The courts should grant an action in the cases, while not acting against and contrary to the public policies.
- The assistance to be made to the debtor’s assets and a preferable legal certainty for trade and investment.
The model law has been implemented and adopted by countries like Australia, The United Kingdom, and the United States of America so that assistance can be provided to the domestic courts and the foreign courts in the proceedings related to cross-border insolvency.
India has still not taken initiatives to introduce and adapt model law in its jurisdiction. India should take measures for the implementation of model law in its jurisdiction as this would assist the courts of India to provide and take assistance from the foreign courts in solving the cases and will provide transparency and justiciability to the Indian legal system.
- The European convention regulation on cross border insolvency
The European Union also contributed in recognizing the model law to the other countries and has provided a legal framework on the proceedings that should be adopted to solve the cases related to cross-border insolvency. The measures adopted on cross border insolvency by the European convention regulation are:
- It facilitated that the members should determine the jurisdiction and considerably apply laws and legislation for the cross-border insolvency proceedings.
- It provided for automatic recognition of insolvency proceedings related to cross-border insolvency.
- It stated that the cooperation between the member states should be maintained and sustained.
- It recognized and introduced three kinds of proceedings related to the matters of cross-border insolvency. They were;
- Main proceedings- These are the proceedings that were determined to take place in one jurisdiction and the debtor was recognized as the centre of main interests i.e., the administration of the interests can be regularly ascertained.
- Secondary proceedings- These are the proceedings that would take place in the nations where the debtor has an establishment.
- Territorial proceedings- These are the proceedings that have not been commenced anywhere.
However, the adoption of the European regulation on cross-border insolvency could be challenged for the member states to adopt it in their legal procedure because it requires them to incorporate the provisions in the nation’s domestic legal framework.
Reasons for adopting the Model Law in India
There are various reasons why the Indian government and Parliament should adopt model law in their legal systems. The reasons are:
- This would increase the ease of recovering foreign assets by the Indian administrators from the foreign jurisdictions.
- There would be an efficient treatment of international insolvency involving Indian businesses and companies.
- The adoption of the model law would help in the uniformity and consistency of the administration of cross border insolvencies.
- The foreign administrators and the directors would have direct access to the courts and other admissible authorities.
- It would help in the speedy and clear process for the resolution of the cross-border insolvency cases.
- It would help in achieving a satisfactory degree of harmonization, uniformity, and certainty of interpretation.
Reasons for not adopting the Model Law
There are various drawbacks as to why the model law should not be adopted and India has to think beyond the Model law. These are:
- There can be conflicts in the domestic legislation if the model law is adopted in India.
- There can be a risk for the arguments about the legislative intentions and conflict of laws.
- Before adopting the model law in the Indian legislation, there should be an appropriate law on cross-border insolvency.
Legislation in India governing cross border insolvency
There is no appropriate legislation and laws to resolve the matters related to cross-border insolvency.
The Insolvency and Bankruptcy Code, 2016 was introduced and implemented in the year 2016, with the main aim to consolidate and amend the matters related to insolvency and to solve disputes for the matters related to insolvency among multinational corporations and companies. The Insolvency and Bankruptcy Code, 2016 (IBC) does not directly deal with the cases of cross-border insolvency, but there are only two Sections that are relevant to deal with the cases of cross-border insolvency i.e., Section 234 and Section 235. The particular two Sections were introduced by the recommendations from the Joint Parliamentary Committee.
Section 234 provides for the provisions for agreements with foreign states. It states that-
- The central government has been given the power to enter into an agreement with any foreign government.
- The agreement should be made to enforce the provisions of the Act.
- The central government should specify in its official gazette through a notification and accordingly direct that the reciprocal agreements made with the foreign governments shall be subject to the conditions specified in the Act.
- The assets, properties, and liabilities of the corporate debtor located anywhere inside and beyond the provinces of Indian territory should be governed by the agreements and shall be subject to the conditions under the Act.
Section 235 provides for the provisions that the letter of request should be made to a country outside India. It states that-
- After the reciprocal agreements are made under Section 234 of the Act, the application can be made by the central government to the adjudicating authority to request evidence and take appropriate measures.
- The evidence and the measures are required for cases related to liquidation, bankruptcy proceedings, insolvency resolution process and to solve any dispute related to the cross border insolvency.
- The Adjudicating Authority has the power to make an application if he is convinced that the evidence and measures are required for the case.
- If the Adjudicating Authority gets convinced, then he has the power to issue a letter of request to the country involved in the case.
- He has the responsibility to then send the letter of request to the court, requesting the authorities to try the cases within their jurisdiction who are competent to do that.
These are the only two Sections that deal with the procedure of the cases, concerning the disputes related to foreign countries. But as there is a considerable increase in the case of cross-border insolvency, there is a crucial need to add provisions related to cross-border insolvency in the Insolvency and Bankruptcy Code, 2016.
Recommendations proposed by the committees in India to introduce laws related to cross border insolvency
The nation-states of Singapore, the UK, the USA have already adopted the provisions of Model Law and have incorporated them into their respective legal system, not as a replacement but as subsequent different provisions to deal with the cases related to cross-border insolvency.
From time to time, different formulations and recommendations have been put forward by the committees before the Indian Government to deal with the disputes related to cross-border insolvency. The recommendations that were adopted by the committees are:
- Justice Eradi Committee
The first effort was made by the Justice Eradi Committee in the year 2000, wherein the report was submitted to the Parliamentary authorities regarding the matter of cross-border insolvency. The committee suggested that the laws should be made to adopt the UNCITRAL Model Law in the Companies Act, 1956 to deal with the cases of cross-border insolvency as this would help the courts for the quick disposal of cross-border insolvency cases and provide efficacy and transparency to the law.
- N L Mitra Committee
The second efforts were made by the N L Mitra Committee in the year 2002, to the Parliamentary Committee stating that the efforts should be made, and there should be an adoption of Model Laws in the Indian regime and also there must be an introduction of legislation related to the cross border insolvency to solve the disputes, dealing with the cases of cross border insolvency.
- The Insolvency Law Committee
The Insolvency Law Committee in the year 2018 made a recommendation and submitted its report to the Ministry of Corporate Affairs stating that Insolvency and Bankruptcy Code, 2016 should be amended and the provisions related to cross border insolvency should be incorporated in it. The recommendations that were proposed by the committee are:
- If the UNCITRAL Model Law is adopted in the Indian legislation, then it would provide a comprehensive framework to the cases related to cross-border insolvency.
- It stated that if the international laws are accepted in the municipal laws, then it would provide a balance between the two, and there would be no conflicting areas between the two laws, because the Model Law does not provide provisions for replacing it with the domestic laws, but to incorporate the provisions for the better functioning of the courts.
- The framework of the cross border insolvency under the Insolvency and Bankruptcy Code is required and is necessary because the Indian companies have a global footprint and many foreign companies have their presence in the Multinational companies including India and this would provide assistance to deal with cases where the Indian Companies have foreign assets, properties, and liabilities and the vice-versa.
- The new legislation or framework would bring the Insolvency Law Committee on a par with that of matured jurisdictions.
The Ministry of Corporate Affairs in September 2019 had included the recommendations of the Insolvency Law Committee for reference and had passed the draft to the Krishnan-led Committee to consider the formulations of the draft and act accordingly.
India has not yet been conferred with the proper legislative framework that can govern the cross-border insolvency disputes, which creates complications for the judiciary if they have to solve the cases related to the Indian and foreign companies’ conflict. The framework for the Cross Border insolvency would improve the future stability of the Indian financial system. It would bring transparency (data dissemination, fiscal and monetary policy), financial stability, and marketing integration at the national and international levels. It would help the stakeholders to better manage their financial risk and enterprise sectors promptly and would also ensure efficient access to credit and allocation of resources enhancing economic productivity and growth.
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