Need for Cross-Border Insolvency laws in India

INTRODUCTION

India is becoming a hotspot of foreign investments largely due to the government’s efforts in easing the laws which can be seen by India’s improving standards in Ease of Doing Business. Ease of Doing business does not only mean how easier it is to start a business, getting permissions etc but it also factors in the case of insolvency.

Section 234 and 235 deal with cross-border insolvency in the Act.[1] Section 234 states that the Government of India may get into an agreement with another country with regards to the insolvency procedures and henceforth the insolvency process shall be as per the reciprocal arrangements. Section 235, on the other hand, states that in case an insolvency or bankruptcy process needs to be formulated with regards to cross-border insolvency then resolution professional, liquidator or bankruptcy trustee has to make an application to the Adjudicating Authority that evidence or action is required and the Authority being satisfied, is required to issue a letter of request to a court or authority of the country which is competent to deal with such request.

Cross-Border Insolvency has not been defined specifically under the Code but is generally understood as insolvency proceedings across different or multiple jurisdictions. At present, the law related to cross-border insolvency is only allowed when there is a bilateral agreement however it is vastly different from when India adopts the United Nations Commission on International Trade Law (hereafter referred to as “UNCITRAL”) Model Law on cross border insolvency.[2]

UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY

The UNCITRAL Model Law on Cross-Border insolvency was adopted in 1997 in order to assist states to equip their insolvency laws into a modern framework and to effectively solve the issues which debtors face due to insolvency.

The Model Law does not provide for unification of insolvency laws due to the difference in national laws but provides for a framework for cooperation between different jurisdictions and also provides a way for uniform cross-border insolvency.

Some of these solutions are:

  • Providing a foreign representative with access to courts in such state and providing them with ‘breathing space’ and allowing the courts in the state to determine the coordination among the jurisdictions or any other relief warranted for optimal disposition of the insolvency.
  • Determining “recognition” of foreign insolvency proceeding and the consequences of the same.
  • Allowing Domestic courts in effectively cooperate with foreign courts and representatives in an insolvency matter.
  • Establishing rules for effective coordination where an insolvency proceeding in the domestic courts concurrently with a proceeding in a foreign court.
  • Providing a transparent regime for the right of foreign creditors to commence, or participate in, an insolvency proceeding in the domestic courts;
  • Authorizing domestic courts and persons administering insolvency proceedings to seek assistance abroad;
  • Establishing rules for coordination of relief granted in the enacting State to assist two or more insolvency proceedings that may take place in foreign States regarding the same debtor.[3]

INSOLVENCY LAW COMMITTEE REPORT

The Insolvency Law Committee had submitted its report to The Ministry of Corporate Affairs in October 2018 regarding the inclusion of the model law into the Code. The Committee in its report had proposed a ‘Draft Z’ in the code which they recommended to be applicable for Corporate Debtors only for the time being. The Committee had also noted that there were Companies Act, 2013 also contained provisions regarding the insolvency of foreign companies. After the Draft Z was enacted, it would create a double regime of laws regarding the insolvency of foreign companies hence the Ministry was advised to look at the provisions of the Companies Act and whether to retain them.

The Insolvency Law Committee in its report stated the advantages of adopting the UNCITRAL Model Law. Some of these advantages were increased foreign investment, flexibility, Protection of domestic interest, priority to domestic proceedings and mechanism for cooperation.

The main points of the report were-

  • Access to Foreign Representatives- the UNCITRAL Model Law allows the foreign insolvency professionals and foreign creditors’ access the domestic courts directly to seek a remedy. In the present scenario, foreign creditors are allowed to access domestic courts but with regards to Foreign Insolvency Professionals, the committee recommended that the government devise a way which is acceptable in the Indian courts.
  • Centre of Main Interests (COMI)- the UNCITRAL Model Law allows for foreign proceedings and allows relief based on this recognition. The relief is basically divided among main and non-main proceedings. If the domestic courts determine a debtor has its COMI in a foreign country, then that proceeding will be recognised as the main proceeding which will provide certain relief which will ensure greater power to foreign representatives to handle debtor’s estate. In the case of non-main proceedings, such relief will be at the discretion of the domestic court.
  • Reciprocity- This determines that the foreign judgements shall be held valid subject to the foreign country having similar legislation as the domestic country with regards to cross-border insolvency. The Committee had recommended that the Model law shall be initially adopted and may be diluted in the future upon re-examination.
  • Concurrent proceedings- Concurrent proceedings refer to the coordination between two courts of different international jurisdictions with regards to insolvency by cooperation between these two courts. The UNCITRAL Model Law has provided a framework for the same.
  • Public Policy- In a case where there is a violation of public policy, then the Adjudicating Authority may refuse to take action under the court. In such a case, the Authority will have to send a notice to the Central Government regarding the same.

JET AIRWAYS

The Jet Airways case[4] was the first case in India with regards to cross border insolvency. A Jet Airways firm was grounded in the Netherlands for non-payment of dues to a European Cargo Firm. The Jet Group had been facing insolvency proceedings in the Netherlands court as well as the Indian courts at the same time. The Dutch court appointed an administrator to have the NCLT[5] recognize the decision of the Netherlands Court. The NCLT, however, stated that there was no law in the Insolvency Code with regards to cross-border insolvency and hence cannot recognize the judgement.[6]

The Dutch Administrator appealed to NCLAT after the NCLT rejecting its plea. After NCLAT’s directions, the Dutch Administrator and the Resolution Professional agreed upon a ‘Cross-Border Insolvency Protocol’ wherein India was the ‘centre of main interest’ and Dutch insolvency as ‘non-main insolvency proceedings’.

While the Protocol plugs a huge gap, it is in no way a substitute for comprehensive cross-border insolvency law. Most sophisticated economies have well developed cross-border insolvency laws.[7]

Jet Airways case was the first one relating to cross-border insolvency in India. However, Videocon had requested the Tribunal to include its overseas assets in the Insolvency Resolution Process. There exists an issue as there is no substantive law for cross-border insolvency and therefore the courts have to look on a case-by-case basis.

CONCLUSION

There is no substantive law for cross-border insolvency in India. The government is planning to add a chapter in the code as advised by the Committee report but that needs to be formulated in a bill. This chapter will be similar to the adoption of UNCITRAL Model Law with certain amendments made as necessary to the Indian context.

In the Present scenario, Cross-Border insolvency is only possible in cases where the Indian government enters into an agreement with the other country. However, that is a lengthy process as opposed to the adoption of the Model Law as it provides for an effective framework for Cross-Border Insolvency proceedings.

Therefore a need arises to have a proper substantive law with respect to cross-border insolvency. Such law will help facilitate effective cross-border insolvency and also provide for cooperation between countries with regards to such issue.

[1] Insolvency and Bankruptcy Act, 2016.

[2] S. Jain, A. Sheth, Cross Border Insolvency: Why India Should Adopt the Uncitral Model Law, Available at: https://www.indialawjournal.org/cross-border-insolvency.php

[3] UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation.

[4] State Bank of India vs Jet Airways (India) ltd. [2019] 156 SCL 642

[5] State Bank of India and Ors. vs. Jet Airways (India) Limited (20.06.2019 – NCLT – Mumbai) : MANU/ND/7877/2019

[6] The Tribunal observed that “there is no provision and mechanism in the I&B Code, at this moment, to recognise the judgment of an insolvency court of any Foreign Nation. Thus, even if the judgment of Foreign Court is verified and found to be true, still, sans the relevant provision in the I&B Code, we cannot take this order on record.

[7] S. Batra, Cross Border Insolvency Protocol fills a gap, but is not a comprehensive law, Financial Express, Available at https://www.financialexpress.com/opinion/cross-border-insolvency-protocol-fills-a-gap-but-is-not-a-comprehensive-law/1751255/


ABOUT THE AUTHOR

Adwait Kolwalkar

IMG_20190719_134758_158

Adwait is a second-year student of NMIMS School of Law. His interests lie in Corporate Law and Public Policy.

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