Saumya Vanwari[i]
With growing globalization and an increasingly inter-reliant and competitive world, no country can develop in isolation. The creditors and corporate entities of different jurisdictions, all around the globe are incessantly engaging with each other through business transactions to further the growth of their domestic economies. India has also, through its Make-in-India initiative and the relaxations on FDI policies attracted many foreign investments. Nevertheless, these capital investments and tax exemptions cannot alone be sufficient for foreign investors as they will be more inclined to invest in countries which have a robust insolvency legal framework. However, India has no proper cross-border mechanism until now.
Cross-Border Insolvency Laws in India
Insolvency is the situation when an individual or a corporate entity fails to fulfil its financial burdens or debts which are due to its lenders. For insolvency cases of corporate entities involved in transnational operations, the term Cross-Border Insolvency is used. In cross-border insolvency, the insolvent company or debtor has assets or creditors in different international jurisdictions. Two theoretical approaches and one hybrid approach governs these foreign insolvency issues.
Firstly, there is the “territorial approach” which sets out that courts in a certain country should have exclusive authority over the assets under its jurisdiction. Secondly, there is the “universalist approach” that treats all foreign insolvency proceedings under a single global regime. Thirdly, there is the “modified universalism approach” which is the combination of both the theoretical approaches–territorialism and universalism. It is based on the concept of voluntary cooperation, where courts are not obliged but encouraged to cooperate with other foreign nations. For instance, in In Re Maxwell Communication Corpn Case, the US court adopted the modified universalism approach. Following the concept of universalism, the assets were collected and distributed on a worldwide basis. However, the decision was based on the local court's discretion so that they could follow the home country procedures and also protect the interests of home country creditors.
At present, Section 234 and 235 of the Insolvency and Bankruptcy Code, 2016 (‘Code’) regulate cross-border insolvency matters. The former empowers the Central Government to enter into a reciprocal agreement with the government of a foreign country while the latter allows the adjudicating authority to issue a letter of request to its bilateral treaty partner to deal with evidence or action relating to overseas assets.
Flaws in Current Regime
The current Indian insolvency regime offers many challenges.
Firstly, the scope of Section 234 and Section 235 is limited to only those states which have entered into bilateral treaties with India. Negotiations of these bilateral treaties could be time-consuming and expensive. The situation can be more complicated in cases involving multiple jurisdictions i.e. where the assets of the debtor are in countries A and B (or others) and the creditor is in country C. In these cases, entering into bilateral agreements with each state could be a cumbersome procedure and may create an unnecessary administrative burden. Further, it can complicate the matters for Indian courts when they face any cross-border insolvency matter as they will have to deal with each treaty separately.
Secondly, the Code does not specify the manner in which a cross border insolvency procedure is to be conducted. This creates difficulties in the resolution process when there are no bilateral agreements, as the insolvency law varies across different states.
Thirdly, India currently does not recognize foreign insolvency proceedings. The law may recognize foreign judgments and decrees of the U.K. and Singapore (or other reciprocating countries) under Section 44A of Code of Civil Procedure, 1908 (‘CPC’). However, it can only be recognized if it fulfils the requirements provided under Section 13 of the CPC. For instance, a foreign decree cannot be recognized if it is not passed on merits, as opposed to public order, or obtained via fraud, etc. Further, the provision is not broad enough to cover insolvency-related matters like reorganization processes, interim orders, administrative orders, etc.
Thus, many judgments related to insolvency issues would remain invalid in India. Similarly, for Indian proceedings to get recognized in other states, the procedural rule of that jurisdiction has to be applied. Furthermore, the current framework faces difficulties in resolving complex issues. One such instance arose in the Jet Airways case when the airline was facing insolvency proceedings in the Netherlands and India simultaneously. Consequently, the question raised before the NCLT was whether parallel insolvency proceedings could be conducted against the same corporate debtor in different jurisdictions, with different insolvency laws. To this, the adjudicating authority held the Netherlands proceedings to be completely null and void. However, later the NCLAT followed the United Nation Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (‘Model Law’) and came up with the “Cross-Border Insolvency Protocol”. Additionally, it held that the respective authority of the foreign country could be the part of Committee of Creditors (CoC) and Corporate Insolvency Resolution Process (CIRP) in India, in case of parallel insolvency.
Another complication was witnessed in the Videocon Industries case. The question raised before the NCLT was (i) whether the foreign assets and properties of the Videocon group, could be admitted as the property of the corporate debtor; and (ii) whether Section 14 of the Code is applicable to foreign oil and assets. Currently, the Code has no provision for addressing the situation of automatic attachment of overseas assets. Therefore, the court followed the Model Law to resolve the complexities it faced.
There are various other situations in which the Indian insolvency framework is silent. For instance, in every cross-border insolvency proceeding, steps need to be taken to ensure that the assets deliberated in India are not the subject matter of parallel proceedings in a foreign jurisdiction; however, the law is silent on this. Hence, the country needs to adopt a comprehensive legislative framework to deal with such issues. The Insolvency Law Committee, in its 2018 report, has suggested the incorporation of a chapter on cross-border insolvency based on the Model Law, into the Code.
UNCITRAL Model Law
The Model Law was adopted on May 30, 1997. It aims to provide states with an efficient cross-border insolvency framework which they could adopt in their domestic regime for resolving issues related to insolvency and unify different legal regimes. At present, 48 states inclusive of developed economies like the USA and UK have adopted the Model Law in their domestic legal regime.
Reasons for India to adopt the UNCITRAL Model Law
The Committee has proposed a draft “Part Z” on cross-border insolvency and has provided recommendations based on the Model Law to resolve the complex issues discussed above.
The Model Law allows foreign insolvency professionals and creditors direct access to domestic courts and confers on them the ability to participate in domestic insolvency proceedings against the debtor. The Committee has adopted this approach and has provided a framework for foreign representatives to access Indian courts. This would give them the ability to participate in and commence insolvency proceedings against a debtor. However, they did not recommend direct access to Indian proceedings, but by appointing an Indian insolvency professional as a representative of the foreign professional. The Committee deemed it appropriate for the Central Government to provide the extent of the right to access.
Further, it lays down principles that would help analyze the “most appropriate jurisdiction” for commencing insolvency proceedings. The Model Law is based on the “modified universalist approach”. This approach allows recognition of foreign proceedings in domestic courts, which then provide remedies based on it. The foreign “main proceedings” is to be recognized by determining the jurisdiction in which the debtor has its centre of main interests (‘COMI’). COMI is not defined under the Model Law but it is generally presumed as the registered office or habitual residence of the debtor. The “non-main proceedings” are ancillary proceedings that take place in jurisdictions, where the debtor has an establishment. The recognition of the main proceeding would result in automatic relief in the form of stay or moratorium on the transfer of assets of the debtor. This would provide the foreign representative greater power to maintain the assets of the debtor. However, the relief for non-main proceedings would depend on the discretion of local courts.
Moreover, Indian courts have already accepted the modified universalism concept on which the Model Law is based. In the Jet Airways Case, the NCLAT facilitated cooperation and highlighted the importance of “comity principle” by recognizing and allowing parallel insolvency proceedings in the Netherlands. The adoption of the Model Law could help develop India’s cross-border insolvency legal framework and assist in other complicated commercial matters.
The Model law lays down basic procedures that would fill the gap found in different state laws by encouraging cooperation between domestic and foreign courts, and domestic and foreign insolvency professionals. This cooperation would prevent the dissipation of assets and provide the finest solution for enterprise re-organization. The Committee believed India to be at a premature stage, thus although it allowed for cooperation and communication, it limited the matters to the Central Government screening in the interests of all stakeholders.
Further, the Model law being a unilateral framework with no mandatory requirement for reciprocity is very convenient in adoption. Additionally, it neither requires states to notify the United Nations or other states regarding its decision of implementation nor prescribes the mandatory unification of insolvency laws of different states due to differences in national laws of countries implementing it.
However, some recommendations provided in the committee report should be reconsidered. The draft suggests the adoption of Model law on a reciprocal bargain. It means India would only recognize those countries that have adopted the Model Law or any other similar legislation. The reciprocity requirement would limit the powers of the adjudicating authority to only those 48 countries that have adopted the Model Law until now. In another way, it would take us back to Section 234 and Section 235 and limit the court’s approach to certain foreign insolvency proceedings. Further, there is no requirement for reciprocity to be adopted, because the Model Law provides sufficient regulatory mechanism under Article 6 to prevent exploitation. This provision denies recognition or relief to actions that are “manifestly” against “public policy”. Many countries like the U.S. and U.K. have retained the word “manifestly” but the countries like Singapore have removed it. By adopting the Singaporean idea of removing “manifestly” from Article 6 and widening the “public policy” term rather than adopting the concept of reciprocity, India can also maintain the Model Law objective without harming the economy.
Conclusion
After a careful analysis of the cross-border insolvency framework in India, it has been established that the country lacks a comprehensive law related to it. Recently, various important cases such as Videocon Industries, Essar Steel, Amtek Auto, and others have arisen, and have suffered many obstructions due to cross-border issues, either in the form of assets disbursal, procedural inconsistencies or cumbersome procedure, etc. Moreover, the absence of proper and substantive mechanisms has also resulted in a long-drawn judicial process and upshot huge losses to companies. The Insolvency Committee has suggested the adoption of the Model Law and has even framed a draft chapter based on it. However, there has been no certainty regarding its implementation. Further, during insolvency cases like Jet Airways and Videocon Industries, the country adopted a Model Law approach in its resolution process by implementing “Cross Border Insolvency Protocol” and “overseas assets recognition” respectively. This highlights the significance and relevance of the Model law as an efficient mechanism. However, setting up of few precedents by the judiciary cannot be a final solution of all the inconsistencies present as the precedents can only be applied depending on a case-to-case basis. Thus, there needs to be a properly designed cross border legislation to deal with these issues. The Model Law would expand cooperation among India and foreign countries in the insolvency resolution process and would help India attract more foreign investments. Thereby, even though the draft provision might offer many procedural and legal challenges in the future, it would still improve the current scenario of cross-border insolvency laws in India and lead the country towards a better position.
[i] Saumya Vanwari is a third-year student at the Institute of Law, Nirma University, Ahmedabad. Any query on the article can be directed to saumyavanvari@gmail.com. Preferred Citation: Saumya Vanwari, Cross Border Insolvency laws in India: An imminent need to adopt UNCITRAL model law, Arbitration & Corporate Law Review, Published on 18th July 2020.
This article was reviewed by Shebani Bhargava and Kareena Sobti.