May 6, 2021

Cross Border Insolvency: The Need To Adopt UNICTRAL Model Law With Modifications in India

Cross Border Insolvency

Abstract

India has been at the forefront of introducing economic reforms indomitable to foster global integration. The focus on ease of doing business by the government is the prime example to ensure conducive environment for business. Two important pillars of that project were arbitration and insolvency. In last four years, major reforms to these laws were introduced. The focus, now, is on insolvency, for which many reforms were undertaken, including the enactment of IBC,2016 and introduction of fast track Corporate Insolvency Resolution Process(CIRP). The underlying principle being to ensure maximum recovery for creditors. However, Cross Border Insolvency reform is the arena which still needs to be given due consideration. 

This paper analyses the current regime of Cross Border Insolvency in India, the lacunae in the present legal system of Cross Border Insolvency, the suggestions given by the Insolvency Law Committee through its reports and how the UNCITRAL Model Law on Cross Border Insolvency, which is a universal framework on insolvency laws can be adopted with sui generis modifications so as to improve the economic framework for foreign investors in Indian companies and for Indian investors abroad.

Keywords: UNCITRAL Model Law; recognition; centre of main interest; public policy; committee of creditors; corporate insolvency resolution process; group insolvency; parallel proceedings.

Introduction

With the recent surge in globalisation and increase in trade and business overseas, not only the Multinational companies but also various other business entities have taken their business to foreign countries by investing in foreign markets, acquiring assets and incurring liabilities thereby subjecting themselves to wide array of national laws of the countries in which they carry out their business. This foreign investment has been hugely beneficial to Indian economy in many aspects, but at the same time, it cannot be denied that we do not have any explicit framework to deal with insolvency of such companies. This is where the cross border insolvency regime comes into picture. In this paper, the present cross border insolvency regime in India is analysed with how the judiciary has come up with a creative approach in dealing with cross border insolvency cases and suggestions are made with respect to what laws India might adopt to make its legal framework cooperative for dealing with any cross border insolvency cases that arise in India.

What is cross border insolvency?

Cross border insolvency denotes a situation where the assets of a company are situated in a jurisdiction other than where the corporate debtor is situated or some of the creditors of the corporate debtor are situated in another jurisdiction than where the corporate debtor is situated.[1] Prof. Ian Fletcher, a renowned jurist of Insolvency laws describes cross border insolvency as a situation in which a single set of law on insolvency cannot be directly and completely applied because of the presence of different jurisdictions in the case. Therefore, Cross Border Insolvency is that part of the Insolvency Law which goes beyond the precincts of a Single Legal System.[2]

The major challenge in cross border insolvency as compared to insolvency of companies within India is that in the latter the companies are subjected to laws of only one jurisdiction so no question of difference of national laws arises. In cross border insolvency, since the jurisdiction in which the corporate debtor resides is different from where its assets and liabilities are situated, there arises a need for bilateral contracts between the such jurisdictions so that the cooperation can be provided to the foreign creditors and their requirements are given weightage, equal to that of domestic creditors. In the absence of such contractual framework, there is a chance that their demands might be overlooked. This is the main reason why a definite set of universal law is required which enroots the formation of cross country relationship for handling of cross border insolvency disputes.

Present Law on Cross Border Insolvency in India

The present law on insolvency in India is enshrined in Insolvency and bankruptcy code 2016. Section 234 and 235 of the code[3]are the only provisions which talk about cross border insolvency in India. They cater to cooperation with the foreign countries and initiation of insolvency proceedings by entering into a contract. However, these provisions are not yet notified.

So, in order to enforce a foreign judgement in India one has to take recourse to section 4 of civil procedure code, 1908. However, the leeway provided under section 4 of CPC for enforcement of foreign judgments is very limited and does not include insolvency orders on Process of reorganization, administration, interim orders etc. for cases involving Cross Border Insolvency disputes, which in turn leads to non-enforcement of many judgments and orders of Insolvency in India.

Judicial Pronouncements on Cross Border Insolvency

It would be wide off the mark to even think that no cases of cross order insolvency have come up in India. Nevertheless, the Judiciary in India has been very innovative in passing judgements recognizing modern principles of cross border insolvency. However, they have dealt with these issues on a case to case basis.

This can be very evidently seen in the case of Jet Airways[4].The company, Jet Airways (India) Ltd., was declared bankrupt in Netherlands and an administrator appointed by the Dutch Bankruptcy Court[5] contended before the NCLAT for the recognition of the proceedings of the Dutch Bankruptcy Court and providing relief thereof. Since, the Corporate insolvency resolution process (CIRP) of Jet airways had commenced in India under section 7 and 9 of the code[6], the NCLAT recognized the proceedings of both the courts as ‘parallel proceedings’. The court also stated that the proceedings in India would be considered as ‘foreign main proceedings’ as Centre of Main Interest(COMI) of the Corporate debtor lies in India because Corporate debtor’s headquarters and majority of creditors are situated in India. The court also directed the use of certain principles of cross border insolvency in the form of “cross border insolvency protocol” agreed to between the Dutch Administrator and the Resolution Professional of Jet Airways (India) Ltd. Ultimately, the CIRP of the Corporate debtor resumed and Dutch administrator was given right to participate in the Committee of Creditors(CoC) meetings so that the relief can be provided all the creditors, both in India and Netherlands, proficiently.

Another recent dispute in this regard is of Videocon Industries Ltd[7], wherein group insolvency was taken into account by the NCLT. In this case after the application of the Chairman of the Corporate Debtor, its foreign subsidiary and associated companies were also attached, for the valuation in the insolvency process. For this the NCLT in its order[8], laid down the conditions which were fulfilled by the thirteen Group Companies of Videocon Industries Limited which led to the consolidation of their proceedings. The conditions were:

(i) common control, Directors, Assets and liabilities;

(ii) inter- dependence among different entities of the Corporate Group so much so that the subsidiaries are intricately linked with the Parent Company;

(iii) entwined finance which lead to pooling of resources and the similarity in financial creditors;

(iv) entwined accounts and inter-looping of debts which lead to cross shareholding among different personnel of the Group Company.[9]

The Insolvency Law Committee has already stated that certain modifications are required in the present system of law which treats every company as a separate legal entity, be it a subsidiary or an associate company because the prevalence of corporate groups, and the control these groups exercise on the overall operations of its subsidiaries it is necessary to deduce down the insolvency of these entities into one particular group.[10] In the Videocon case both on shore and off shore assets of the corporate debtor were merged for the purpose of valuation which are not only different legal entities but also subjected to different jurisdictions. So basically, here the court took the corporate group approach as against the established rule of dealing with disputes on entity-to-entity basis, as prevalent in India.

These cases of are wakeup call for the Legislature to introduce the cross border insolvency regime in India, because in the coming period, such cases would no more be exceptional but a normal phenomenon. In the absence of a framework for cross-border insolvency resolution, several questions remain unanswered and unclear, the recent Jet Airways and Videocon cases being a primary example. For instance, if insolvency proceedings have commenced in India for a particular debtor who has assets abroad, what are the measures to ensure that such assets will not be the subject matter of a parallel proceeding in that foreign jurisdiction? What if there exist concurrent insolvency proceedings in several jurisdictions in relation to the debtor and its assets? A possible solution to confront these problems is a certain degree of harmonization of insolvency laws of multiple jurisdictions since there exist several pervasive differences between the legal systems of countries.[11]

Adoption of UNCITRAL Model Law on Cross Border Insolvency

The UNCITRAL Model Law on Cross Border Insolvency is a widely accepted framework of rules governing cases of cross border insolvency. Presently, 44 countries have adopted this model law with a few modifications. The Model Law is accepted by the countries because of its emphases on authorizing and encouraging cooperation and coordination between jurisdictions, rather than attempting the unification of substantive insolvency law, and also it respects the differences among National procedural laws.[12]

The Model Law touches four upon major principles of cross-border insolvency- the First being the access to foreign insolvency professionals along with foreign creditors to participate in or commence domestic insolvency proceedings against a defaulting debtor; Second is the recognition of foreign proceedings and provision of remedies; Third is cooperation between domestic and foreign courts and domestic and foreign insolvency professionals; and the Fourth being coordination between two or more concurrent insolvency proceedings in different countries.[13]

In the past, the adoption of the Model Law in India was recommended by the Eradi Committee[14] and the N.L. Mitra Committee[15]. However, the same had not taken the form of legislation. Again, a recent development in this regard was initiated by the Insolvency Law Committee[16], which has proposed a draft law, in consonance with UNCITRAL Model Law of Cross-Border Insolvency, 1997.  The following section seeks to analyze the report of the insolvency law committee focusing on the proposed draft i.e. Draft Part Z (Annexure 2 of the report).

Draft Z and the way ahead

The recent report of the Insolvency law Committee[17], has included a draft chapter for issues pertaining to cross border insolvency. These provisions are largely based upon the UNCITRAL Model Law.

Some of the factors that the chapter focused upon, are:

  • Rights and claims of foreign representative and foreign creditors
  • Recognition of foreign proceedings
  • Formation of reciprocal relationship
  • Widening the powers of Insolvency Professional and the Liquidator
  • Cooperation and coordination with foreign courts
  • Parallel proceedings

The draft part Z includes provision for acknowledging the rights of the foreign representatives and creditors and provides them with the same status as the domestic creditors. It also states that these foreign representatives have the right to approach the adjudicating authority to acknowledge the ongoing foreign proceedings. This would require documents as proof as per section 12(2) of the draft chapter Z. If the adjudicating authority deems fit, it could appreciate the foreign proceeding as a main or non-main proceeding which would be contingent upon the determination of centre of main interest (COMI). This would be followed by the declaration of moratorium, if NCLT recognizes foreign proceedings as the main proceedings. Otherwise, the NCLT will exercise its jurisdiction in order to secure the asset of the company or interest of the creditors.

The principle of reciprocity as framed in the chapter, states that if the professional is of the opinion that assets of debtor are in other countries, the adjudicating authority by its order would obligate other jurisdictions only if there happens to be a reciprocal arrangement in place. This draft therefore tries to establish a relationship of recognition, assistance, cooperation, and apt relief when it comes to multinational insolvency proceedings.

As per provision of the draft chapter under section-22, it has also been introduced that the professional would be in constant touch of the foreign courts and could undertake any work under the supervision of adjudicating authority. With this, the draft paper attempts to widen the scope of action of the Insolvency professional. However, the draft chapter puts the responsibility on the government regarding the methodology withwhich the communication would be established.

Lastly, the draft deals with the issue of parallel proceedings. The rules to deal with this states that foreign proceedings and proceedings under code can initiate at the same time, provided, it is against the same debtor. This comes with its set of conditions, that foreign proceedings have to be recognized by the adjudicating authority, and, that the debtor should have some assets in India.[18]

Challenges in adopting the Model Law via Draft Part Z

There are various issues that need to be redressed before the adoption of the UNCITRAL Model Law. These are as follows:

  1. The model law does not define centre of main interest(COMI)
  2. ‘establishment’ has been given a narrow approach [19]
  3. Interpretation of ‘public policy’ is equivocal

As per Article 2(b) of the Model law, recognition of foreign main proceedings is dependent on determination of COMI which is central to operation of the Model Law as it accords proceedings in the COMI greater deference and, more immediate, automatic relief.[20] However, the Model Law does not define the centre of main interest(COMI).The Ministry of Corporate Affairs has in its Draft Chapter on cross border insolvency mentioned that COMI will normally lie where the registered office of the company is situated. However, NCLT has been given the discretion to arrive at an independent assessment, in a given case, to ascertain COMI for the corporate debtor.

Article 2(f) of the Model Law defines ‘establishment’ and includes ‘with human means and goods’ phrase which excludes the E-commerce trade from its purview. The Insolvency Law Committee took this into consideration but still noted that, “at this juncture, it may be advisable to let jurisprudence develop further before recommending any such change to the definition of ‘establishment’ provided in the Model Law.” Here, the committee should have drawn lessons from U.S.A so as to bring a wider range of businesses entities within the definition of ‘establishment’. In the US Code[21], ‘establishment’ is defined as “any place of operations where the debtor carries out a non-transitory economic activity”. Because of the fact that there are large E-commerce businesses having a substantial a presence in India, it is essential that the scope of law must be wide enough to encompass all such entities and to allow domestic creditors to proceed against such entities, if required, even if India does not happen to be the centre of main interest.[22]

So far as ‘public policy’ is concerned, this has been a very debatable topic even in International Commercial Arbitration. This is because of the fact that ‘public policy’ has been given a hugely wide scope in India, the entire jurisdiction of NCLT will depend on whether the action ‘would be manifestly contrary to the public policy of India’ or not, in order to recognize a foreign proceeding. The Proposed Amendment also makes provision for the Central Government to specify what will manifestly be contrary to public policy of India. The Hon’ble Supreme Court has held that the meaning of the expression ‘public policy’ under section 48 of Arbitration and Conciliation Act, 1996 is limited to Fundamental policy of India, Interests of India and Justice and morality[23]. The ambit of these terms is very wide and may give a freedom to the State not to recognize any particular foreign proceeding under the veil of it being against the public policy.

Modifications required in the proposed Draft

The Draft chapter by far is the most accommodating representation of rules that the Insolvency Law Committee has come up with but there are still some anomalies that subsist, which are broadly mentioned in the previous section. This section contains the suggestions as to what modifications can be made to the proposed draft so that such anomalies can be removed in order to make it favourable to the Indian economy entirely.

As far as the determination of centre of main interest(COMI) is concerned, the draft chapter gives it a very narrow meaning and does not take into consideration the wide ambit of jurisprudence available on the subject. It is only a presumption that the COMI of the corporate debtor lies at a place where the corporate debtor is situated, until proved contrary. Thus, this is not the principle but the presumption until and unless something contrary is proved in this regard.  The most commonly applied test to determine COMI is the ‘command and control’ test.[24]It states that for determining COMI, the place where the central administration of the debtor takes place, the location which is readily ascertainable by creditors,[25]the location of the majority of the debtor’s creditors or of a majority of the creditors who would be affected by the case[26]and the location of the debtor’s primary assets would also be relevant. Thus the broad approach should be taken into consideration by the insolvency law committee so that no anomaly relating to determination of COMI may arise in future.

This is an established fact that there are large E-commerce businesses having a substantial foothold in India, and it becomes important that ample scope is provided to them by the law. The definition of ‘establishment’ provided by the insolvency law committee must be modified to include E-commerce related businesses. This would also allow domestic creditors to proceed against such businesses, even if India is not the COMI. Hence, the definition of ‘establishment’ needs to be changed. The other alteration should be given in determination of what is manifestly contrary to the public policy of India. To make the scope of public policy uniform, the Government should prescribe through an order what would constitute ‘manifestly contrary to the public policy’ of India.

The Model Law is based on cooperation among States. India must adopt the Judicial Insolvency Network (JIN) guidelines for better implementation of the Model Law. The aim of the Guidelines is to encourage communication and co-operation between Courts, overseeing parallel insolvency proceedings with a view to improve efficiency and reduce cost for all proceedings concerned.

Conclusion

The insolvency law committee has suggested the adoption of cross border insolvency regime twice and in both cases, the suggested model has been the UNCITRAL Model Law on Cross border insolvency. In fact, the proposed Draft Z of Insolvency Law committee report, 2018, majorly embodies the provisions of the Model Law itself. With the introduction of this law, it can be concluded that India is trying to move from a territorial approach to universal approach of insolvency law.

This is a clever move by the Insolvency Law Committee, taking into consideration the growing arena of global presence of companies. Introduction of chapter on cross border insolvency will empower the Insolvency and Bankruptcy Code by amplifying its impact as a one-stop-shop legislation for all Insolvency-relating issues.

We cannot overlook the contribution of the Company Law Tribunals also, in this respect, which were few, but instrumental enough for developing and attracting the focus of law framers towards the issue of cross border insolvency.

Once the Legislation comes into force, it will restore the creditors’ confidence in getting back their dues, which in turn would lead to increase in investments of Indian as well as foreign investors in the Indian Market, because the Model Law reassures foreign investors interests in India, as factors such as instability and unpredictability of the law are done away with, and as a result, foreign investment will increase because of the presence of a specified framework of rules that protects their interests from being violated. With this enactment, the Indian Insolvency Framework will gain global acceptance and recognition as businesses would become more transnational leading to enhancement of ease of doing business in India which has been the motto of the government in the present era of globalization.

References


[1]Vyapak Desai, Introduction to Cross Border Insolvency, Nishith Desai Associates (Apr. 2020), http://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Introduction-to-Cross-Border-Insolvency.pdf

[2] Ian F. Fletcher, Insolvency in Private International Law: National and International Approaches. 69 Nord. J. Int. Law, 527, 527-528 (2000).

[3] Insolvency and Bankruptcy code, 2016, No. 31, Acts of Parliament, 2016 (India).

[4] Jet Airways (India) Limited (offshore regional hub) v. State Bank of India & Anr. [2019] 111 taxmann.com 35 (NCL-AT)

[5]Noord District Court, North Holland (Petition No. C/ 15/288017/ FT RK 19/540R)

[6] State Bank of India v. Jet Airways (India) Ltd. [2019] 106 taxmann.com 267 (NCLT – Mum.).

[7] State Bank of India v. Videocon Industries Ltd. [2020] 115 taxmann.com 104 (NCLT – Mum.).

[8] State Bank of India v. Videocon Industries Ltd. [2020] 115 taxmann.com 104 (NCLT – Mum.).

[9] Richa Saraf, Videocon Ruling: Setting the benchmark for Group Insolvency, Vinod  Kothari Consultants (Feb. 28, 2020), http://vinodkothari.com/2020/02/videocon-ruling-group-insolvency/#_ftn5

[10]Committee chaired by Mr. Injeti Srinivas, Report of Insolvency Law Committee on Cross Border Insolvency (Oct. 16, 2018), https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf

[11] D. McKenzie,International Solutions to International Insolvency: An Insoluble Problem, 26U. Balt. L. Rev., 15, 15 (1996).

[12]Neil Cooper & Rebecca Jarvis,Recognition and Enforcement of Cross-Border Insolvency, (1996).

[13]Anish Gupta, India’s tryst with a cross border insolvency regime – Mammoth challenges & manageable solutions, (Sep. 18, 2019) [2019] 110 taxmann.com 82 (Article) https://www.taxmann.com/filecontent.aspx?Page=ART&isxml=Y&id=105010000000016867&PageType=1&search=cross%2bborder%2binsolvency%2b&tophead=true

[14] Committee chaired by Shri Justice V. Balakrishna Eradi, Report of The High Level Committed on Law Relating to Insolvency and Winding Up of Companies,(Jul. 31, 2000), http://reports.mca.gov.in/Reports/24-Eradi%20committee%20report%20of%20the%20high%20level%20committee%20on%20law%20relating%20to%20insolvency%20&%20winding%20up%20of%20Companies,%202000.pdf

[15] Committee chaired by Dr. N. L. Mitra Report of The Advisory Group on Bankruptcy Laws(May 9, 2001), https://rbidocs.rbi.org.in/rdocs/PublicationReport/Pdfs/20811.pdf

[16] Committee chaired by Mr. Injeti Srinivas, Report of Insolvency Law Committee on Cross Border Insolvency (Oct. 16, 2018), https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf

[17]Committee chaired by Mr. Injeti Srinivas, Report of Insolvency Law Committee on Cross Border Insolvency (Oct. 16, 2018), https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf

[18]Shivan Charan, Cross Border Insolvency: Expanding The Regime In Step, (Oct. 19, 2019) [2019] 110 taxmann.com 441 (Article), https://www.taxmann.com/filecontent.aspx?Page=ART&isxml=Y&id=105010000000016949&PageType=1&search=cross%2bborder%2binsolvency%2b&tophead=true

[19]Committee chaired by Mr. Injeti Srinivas, Report of Insolvency Law Committee on Cross Border Insolvency (Oct. 16, 2018), https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf

[20] United Nations Commission on International Trade Law, UNCITRAL Model Law on Cross Border Insolvency with Guide to Enactment of The UNCITRAL Model Law on Cross-Border Insolvency (United Nations, 2014) 144 [145–147].

[21] United States Bankruptcy Code, 11 U.S.C. § 1502 (2019).

[22]Anish Gupta, India’s tryst with a cross border insolvency regime – Mammoth challenges & manageable solutions, (Sep. 18, 2019) [2019] 110 taxmann.com 82 (Article) https://www.taxmann.com/filecontent.aspx?Page=ART&isxml=Y&id=105010000000016867&PageType=1&search=cross%2bborder%2binsolvency%2b&tophead=true

[23] Shri Lal Mahal Ltd. v. Progetto Grano, (2014) 2 S.C.C. 433.

[24]Ian F. Fletcher, Insolvency in private international Law, 390 (2 ed. 2005).

[25] United Nations Commission on International Trade Law, UNCITRAL Model Law on Cross Border Insolvency with Guide to Enactment of The UNCITRAL Model Law on Cross-Border Insolvency (United Nations, 2014) 71 [145–147].

[26] In re SPhinX, 371 B.R. 10 (S.D.N.Y. 2007).

Author Details: Vidhi Krishnan, 4th year, B.A. LL.B. (Hons.), Dr.Ram Manohar Lohiya National Law University

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