This article is written by Shwetha Prabhakar, pursuing a Certificate Course in Insolvency and Bankruptcy Code from Lawsikho.com.

Introduction

When the Insolvency and Bankruptcy Code came into existence in 2016, it was welcomed by creditors across the board. But which creditors? The domestic creditors. The foreign creditors had no reason to rejoice because there was no clarity on their position and status in the IBC.

Foreign Creditors are those who are situated outside India and have lent funds to Indian Entities. Further, these creditors may have lent not only for domestic ventures of Indian companies but also for the foreign ventures of parent Indian Companies.

Two situations can be envisaged in case of a foreign creditor:

1. When a foreign creditor wants to initiate insolvency against an Indian Corporate Debtor.
2. When a domestic company has initiated insolvency proceedings against an Indian Corporate Debtor under IBC and the foreign creditor is one of the creditors of the Corporate Debtor.

In the pre-IBC era, separate proceedings were initiated during the winding up of companies for its assets situated in India and for the assets situated in a foreign country.

The IBC is not an extra-territorial law. Thus, courts in foreign jurisdictions will not recognize insolvency or liquidation proceedings of a company in India for its obligations abroad. Thus situations involving foreign creditors must be dealt with by cross border insolvency proceedings.

Cross border insolvency proceedings under IBC

Cross Border Insolvency Proceedings take place when the debtor and the creditor are situated in two different countries. It is more useful in the case of multi-national corporations and other entities that operate across different nations.

Under IBC, Section 234 and section 235 deal with Cross Border Insolvency:

Section 234 empowers the Central Government to make a reciprocal agreement with other countries. It reads as follows:

“234. (1) The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code.

(2) The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified.

Section 235 is more in the nature of Mode of Recovery for the purposes of successful Corporate Insolvency Resolution Proceedings. It reads as follows:

(1) Notwithstanding anything contained in this Code or any law for the time being in force if, in the course of the insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding.

(2) The Adjudicating Authority on receipt of an application under sub-section (1) and, on being satisfied that evidence or action relating to assets under sub-section (1) is required in connection with the insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to a court or an authority of such country competent to deal with such request.”

Apart from these two sections, the foreign creditors were left in the lurch on how to take advantage of the new law. Further, as on date, these two sections have not been used to assist any foreign creditor. These sections are practically cumbersome and not timely which is against the objective of the Code for timely resolutions.

Need for corporate border insolvency regulations

The Ministry of Corporate Affairs (“MCA”) constituted the Insolvency Law Committee (“Committee”) on 16 November 2017 to assess IBC Code to identify issues in the corporate insolvency resolution process (‘CIRP”) and liquidation process under the Code. In its report dated March 2018, the committee emphasized the need to re-evaluate the cross border insolvency framework in India. It was observed that the present system is incompetent, fragmented, incomplete, and not in line with present global standards. Thus, without the provisions for an efficient cross border insolvency regime, the insolvency laws and framework in India are incomplete.

Salient features for an efficient cross border insolvency

In the case of cross border insolvency, the role and principles of Private International Law also must be considered.

Further, across the globe, the UNCITRAL Model is used as a base for insolvency laws. Even the IBBI Report of the Insolvency Law Committee on Pg. 13 observed about the UNCITRAL Model as follows:

“The Committee noted the need for a comprehensive cross-border insolvency framework. It was discussed that adoption of the UNCITRAL Model Law on Cross-Border Insolvency is a complex exercise and requires detailed research of the manner of such adoption in international jurisdictions, and the approach to be adopted for India. Thus, the recommendations vis-à-vis a cross-border insolvency framework will be provided separately after such exercise has been undertaken.”

The UNCITRAL was approved in 1997 and since then has been adopted by 44 countries including the United States of America, the United Kingdom, South Korea, Singapore, etc.

But it is important to note that under the IBC, only reciprocal arrangements have been dealt with and not the adoption of any foreign law or model.

Thus, it would have been more fruitful if the Code lays clear guidelines on how to proceed with Cross Border Insolvency.

Assistance to a foreign representative and creditors

Apart from the assistance provided under the law as such, the visionary interpretations of the Supreme Court also encourage the development of a friendly insolvency regime for foreign creditors. For example, in the case of Macquarie Bank Limited v Shilpi Cable Technologies Ltd (Civil Appeal No. 15135 of 2017), the apex court interpreted certain provisions of the IBC in favor of the foreign operational creditor. In this case, the  Foreign Operational Creditor initiated a Section 9 Application against the Corporate Debtor. Among other things, the National Company Law Tribunal rejected the Application because the Foreign Operational Creditor could not comply with the requirement of Section 9(3)(c) which required the Foreign Operational Creditor to submit a certificate from a financial institution. The National Company Law Appellate Tribunal upheld the decision of the NCLT.

The issue before the Supreme Court was whether the requirements of section 9(3)(c) mandatory or directory. It was contended by the Operational Creditor that if the aforesaid section is read with the Insolvency and Bankruptcy (Application to Adjudicating Authority) Rules, 2016 (“Adjudicating Authority Rules”), then the requirements prescribed under the aforesaid section is not mandatory. It further argued that if the requirement is mandatory it will cause undue hardship to an innocent party without furthering any objective. Thus, the rules of interpretation require that such provisions should be read down to be a directory in nature.

It was also argued that under IBC, a copy of the certificate can only be from a “financial institution” as defined under S.3(14). Therefore, since a non-resident bank such as Macquarie Bank is excluded, then the rigid requirement of obtaining the certificate should not operate to a legal action initiated by such a foreign creditor. 

The respondent Shilpi Cables, on the other hand, argued that provisions of IBC must be interpreted strictly. In the case of Operational Creditors, the only defence available to a corporate debtor is a pre-existing dispute. The threshold amount for default is also very nominal. Thus, procedural requirements should be strictly implemented.

The Apex Court holding in favor of the Foreign creditor held that a certificate from the financial institution is only confirmatory evidence and therefore it is not a pre-condition to trigger IBC. If a foreign creditor having a foreign bank account is excluded on the basis of this procedural or technical requirement, it would be discriminatory in nature.

Purposive interpretations such as these by the judiciary can assist foreign creditors in innumerable ways, thus strengthening the resolution process in India.

Recognition of foreign insolvency proceeding and cooperation with foreign courts and concurrent proceedings

If we want foreign jurisdictions and courts to accept our rulings on insolvency, then it is equally vital that we accept their verdict and laws as well. In an inter-connected world, it is essential that commercial laws of different nations adhere to the principle of mutuality. Cooperative addressing of issues is the need of the hour. A very good example of achieving synergies through such cooperation is evident in the realm of international taxation where countries across the world have cooperated to address issues of common concern. Even for other areas of law, including insolvency, a universal effort by all nations would provide synergic benefits to all in the long run.

Conclusion

Despite the noblest of intentions, no concrete steps have been taken to pave way for easier access to the insolvency regime to foreign creditors. For making India a lucrative destination for financial investment through lending, the safety of credit extended must be ensured.

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