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Cross Border Insolvency: Lack of legal framework
Globalisation of markets has necessitated unification of legal principles governing commercial transactions. Capital searches the Globe for best returns. With the advent of digital technology and interconnected computer networks it is easy to move money out of a nation’s financial system by a click of a button. In a modern society, substantial business transactions take place between businesses operating in multiple jurisdictions. Globalisation and growth in international trade have resulted in companies having business in multiple jurisdictions across the globe. When an investor invests in a multinational enterprise having assets and creditors in foreign nations and the event that enterprise becomes insolvent, such insolvency would have cross-border consequences, leading to conflicts between the national laws concerning insolvency and liquidation. When a company goes into insolvency, both foreign-based and domestic investor would seek to protect their rights and interests and this is when cross-border insolvency laws come into the picture. In the event of insolvency, businesses are often involved in coordinating cross-border insolvency proceedings through a number of jurisdictions in which that business may operate, or in which that business may have assets or be due accounts receivable from various third parties. To address this need, many sophisticated economies have well developed cross-border insolvency laws.
In 1980, International Bar Association published a Model Law namely “Model International Insolvency Co-operation Act”, however same was not adopted by any country. With the passage of time, different laws of different jurisdictions dealing with insolvency and bankruptcy realised the need of support and cooperation to the insolvency practitioners of different jurisdictions in order to ensure effective administration of estates and assets of the company undergoing insolvency.
Cross border insolvency in India is legal terrain that is wholly unregulated. This lacuna in India’s nascent insolvency regime has sought to be remedied by the Government of India, (GOI) which recently released a set of draft guidelines. However, resorting only to national laws in relation to multinational players could be ineffective. In turn, a robust institutional arrangement is needed to efficiently deal with such disputes having cross-border consequences. Earlier, countries had intra-jurisdiction focused insolvency laws operating within their borders and therefore, leading to conflicts in the restructuring of the foreign-based corporate debtor. Hence, with the ultimate aim to facilitate a uniform approach, the significant reforms happened on the subject with the development and adoption of the United Nation Commission on International Trade Law Model Law on Cross Border Insolvency (“UNCITRAL Model Law”) in June 1997 and EC Regulation on Insolvency Proceedings 2000 (“EC Regulations”) which came into effect in May 2002. The guidelines mirror the international insolvency framework established by the UNCITRAL Model Law on Cross Border Insolvency, 1997, (Model Law), albeit, with minor modifications.
As early as in 2002, the Prof. Mitra Committee Report on Bankruptcy Laws, inter alia, identified some of the issues which may arise in cross-border insolvency and highlighted the need for a cross border insolvency law. However, the Report was not acted upon. Due to the inadequacy of the bilateral treaty approach to deal with cross-border insolvency, it is necessary to explore other mechanisms to address the problem.
The Insolvency and Bankruptcy Bill, 2015 as recommended by the Bankruptcy Law Reforms Committee (BLRC) Report did not contain provisions to address cross-border insolvency issues. But when the Bill was examined by the Joint Committee of Parliament, the Committee expressed the need to address the cross-border insolvency issues. Since adequate institutional back up was not readily available to deal with cross-border insolvencies, the Insolvency and Bankruptcy Bill, 2015 did not address cross-border issues when it was introduced in the winter session of Lok Sabha in 2015. The requisite institutional backups were dedicated bankruptcy courts, well-organised resolution professionals, information utilities and seamless communication between bankruptcy courts of different jurisdictions. To address the lacunae the Joint Committee of Parliament which examined the Insolvency and Bankruptcy Bill, 2015 recommended two sections which were added as a stop gap measure and was enacted as the Insolvency and Bankruptcy Code, 2016 (Code) to deal with cross-border insolvency issues. However both these provisions do not provide the adequate framework to deal with cross border insolvency issues effectively.
The United Nations Commission on International Trade Law (UNCITRAL) Model law on Cross-Border Insolvency [MLCBI/ Model Law] adopts Modified Universalism and finds favour with most of the international community. It is the most widely accepted blue-print to effectively deal with cross-border insolvency issues, while ensuring the least intrusion into each country’s internal insolvency and bankruptcy laws. MLCBI contains uniform rules concerning large portions of modified universalism norms, specifically regarding recognition of main, as well as non-main, proceedings, a range of relief that should be provided to foreign proceedings, assistance to foreign courts and foreign representatives, and mechanisms to enhance cooperation and coordination between courts and insolvency representatives.
The Model Law is supplemented by:
UNCITRAL Legislative Guide on Insolvency Law (Legislative Guide), which, together with the World Bank Principles on Creditor- Debtor Regimes (World Bank Principles), constitutes the international best-practice standard for insolvency regimes (the Insolvency Standard)
UNCITRAL Practice Guide on Cross-Border Insolvency Cooperation (2009) (Practice Guide) which addresses two main subjects:
Possible forms of cooperation under Article 27 (Section II);
Cross-border insolvency agreements (Section III) – Containing agreements contemplated by Article 27(d) of the Model Law. The Practice Guide includes ‘sample clauses’, which are based to varying degrees upon provisions found in actual insolvency agreements. The Practice Guide also provides information for insolvency practitioners and judges on practical aspects of cooperation and communication in cross-border insolvency cases. It illustrates how the resolution of issues and conflicts that might arise in those cases could be facilitated by cross-border cooperation, in particular through the use of cross-border insolvency agreements, tailored to meet the specific needs of each case and the requirements of applicable law.
UNCITRAL Model Law on Cross-Border Insolvency: The Judicial Perspective, (2011) which contains a chapter entitled ‘Cooperation and Coordination’. It discusses the UNCITRAL Model Law on Cross-Border Insolvency from a judge’s perspective.
The norm of ‘modified universalism’ requires a global approach to multinational default, which can resolve conflicts and result in optimal insolvency solutions. The norm is reflected in the main global instrument for cross-border insolvency—the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency (MLCBI) of 1997. But the application of the MLCBI exposed a gap or uncertainty regarding its application to the enforcement of judgments, highlighted most impact fully by the UK Supreme Court in Rubin v. Eurofinance where the UK court refused to enforce a judgment emanating from the main insolvency process. These decisions had been eagerly awaited by the UK’s restructuring and insolvency community. The issue before the Supreme Court was whether a foreign insolvency judgment could be enforced in England. The appeals took place in the context of assisting foreign courts to enforce money judgments closely related to insolvency. Previous cases on cross-border insolvencies had seemed to indicate a steady trend in the UK towards a ‘universalist’ approach to cross-border insolvencies in which foreign court decisions taken in insolvency proceedings, were recognised and given effect in the UK, even where this took them beyond the scope of any existing statute or case law.
The insolvency regime of a sovereign nation reflects the priorities of that State. India, on 28-5-2016, took a step forward in this direction and introduced the Insolvency and Bankruptcy Code, 2016. The Code, primarily, provides the mechanism for the creditors of an entity to initiate corporate insolvency resolution process. Similar to the domestic insolvency regime, the National Company Law Tribunal, (NCLT) is the designated adjudicating authority for cross border insolvency issues. The guidelines introduce into Indian jurisprudence, familiar concepts of international insolvency such as ‘centre of main interest’ and ‘foreign main proceeding’.
However, there are certain aspects where the draft departs from the Model Law. For instance:
Applicable to Corporate Debtors only
The draft regime is only applicable to corporate debtors and does not extend to individual debtors- GOI’s rationale being that it intends to first observe the workings and impact on corporate debtors before extending it to individuals;
The applicability of the regime is restricted only to those states that have adopted the Model Law or to those states that have been notified by GOI;
GOI empowered to exclude States
GOI is conferred the power to exclude the application of the regime to any state on national security or public interest grounds;
Limited Jurisdiction provision omitted
There is no equivalent to Article 10 of the Model Law that expressly provides that an application by the foreign representative to the NCLT is not to be regarded as a submission by the foreign representative or the corporate debtor or its foreign assets to the jurisdiction of the Indian courts, other than for the purposes of the application;
No express obligation to co-operate to the maximum extent possible
The Model Law provision obliging the Court to co-operate to the ‘maximum extent possible’ with foreign courts and foreign representatives has been omitted. Although the draft provides for co-operation, an express assurance along the lines of the Model Law would align the draft with the key objectives of the UNCITRAL Model Law and avoid unnecessary ambiguity and debate;
Provision for Joint Hearing
The draft has introduced an additional provision allowing a “joint hearing” to take place in concurrent proceedings. It enables the conduct of a joint hearing with another foreign Court in a concurrent proceeding. This is a welcome provision in aid of the objective of cross-border ‘cooperation’ that accords with the philosophy of the Model Law and is aimed at avoiding inconsistent judgments resulting from parallel litigation of the same dispute.
The cross-border insolvency law guarantees an efficient restructuring mechanism to both creditor and corporate debtor by equitably safeguarding their interest and ensuring legal certainty of trade and investment. At present, following the recommendations of the Joint Committee on the Insolvency and Bankruptcy Code, 2015, the Code contains two provisions surrounding cross-border issues, yet to be implemented by the Central Government.
Section 234: Agreements with foreign countries
In order to enforce the provisions of IBC, the Central Government is empowered to enter into bilateral agreements with other nations to administer the cross-border ramifications and may also direct the application of the Code when assets or property of a corporate debtor or its personal guarantor is situated at any place in the country with which reciprocal arrangement has been expressly signed.
Section 235: Letter of request
This provision calls for the application of the doctrine of reciprocity, when, in the course of the insolvency resolution process, any evidence or action relating to the assets of a corporate debtor or its personal guarantor is required, the resolution professional or the liquidator or the bankruptcy trustee make an application to the National Company Law Tribunal (hereinafter referred to as “NCLT”) and NCLT, if satisfied, may issue a letter of request to a court or an authority of the country with which an agreement has been made to deal with such request.
The prima facie objective behind incorporating the abovementioned provisions in the Code is to maximise the asset value of the corporate debtor, however until now, for that purpose, India has not signed any reciprocal agreement with any other nation and also, no effective measures have been taken to implement the inter-government agreements.
It is significant to note that many large corporate giants of the country like Amtek Auto, Videocon Industries, Essar Steel, Jet Airways and others are undergoing insolvencies and is confronted with cross-border insolvency issues. Absence of prudent law to govern the cross-border insolvency has led these companies to face financial troubles resulting into significant economic losses.
Most interestingly, last year in the month of May, the Dutch court passed an order of insolvency of Jet Airways on the petition of creditors based in Netherlands; furthermore the resolution professional of one of the creditor seized the Aircraft of the airline parked in the Schiphol Airport near Amsterdam. The insolvency proceedings of the Jet Airways in the Netherlands provides an eloquent example of the cross-border insolvency, where the letter received by the Dutch trustee by the Dutch government to the Ministry of Corporate Affairs of India and other secured creditors of the grounded airline seeking their approval and cooperation to access the assets of the debtor.
The case of Jet Airways, REED 2019 NCLT Mum 06518, is actually one of the countless cases that demonstrate the requirement for an inclusive system that deals with similar situations where a corporate debtor may have international operations thus having creditors and assets dispersed across various jurisdictions. In jet airways case when the consortium of banks led by SBI filed insolvency proceedings under section 7 of the code before the NCLT (Mumbai Bench), the Adjudicating Authority informed the applicants that the insolvency proceedings have already been initiated through the order of the Dutch Court to administer bankruptcy process on such order. But the Adjudicating Authority held the foreign proceedings against the debtor as nullity ab-initio and held that the certain provisions of Code of Civil Procedure, 1908 such Sections 13, 14 and 44A doesn’t provide recognition and enforcement of foreign judgments in India. Now, the Indian creditors can claim their amount by initiating Corporate Insolvency Resolution Process (CIRP) against the debtor Jet Airways but that is not the case with foreign creditor situated in Netherland as India doesn’t ratify UNCITRAL model law on cross-border insolvency and the absence of provisions on cross-border insolvency in the code makes it harder for the court to accept foreign insolvency proceedings. According to this scenario, the foreign creditor is at a disadvantaged position with respect to Indian creditor as it would cause hardship to the foreign creditor to receive its claims.
With the advent of landmark cases like insolvency of Jet Airways and Videocon Group, REED 2019 NCLT Mum 08503, robust provisions dealing with cross border insolvency if introduced timely under the Code will add one more golden feather in the cap of the Indian legislature.
Given the lack of a legal framework to deal with cross-border disputes under IBC, the observations of the courts in recent decisions indicate a positive judicial trend as regards the potential of India to devise a corporate-friendly approach. Such cases should, however, serve as a clarion call for the Government so that the process of incorporating cross-border insolvency provisions is expediated. Notably, the draft provisions, as proposed by the ILC, if adopted, would provide a framework that could go a long way in ensuring coordination and communication among States to successfully resolve the cross-border insolvency disputes. A law in line with the Model Law, if enforced, will sufficiently strengthen the Code and would encourage foreign direct investment (FDI), therefore, pave the way for ease of doing business in India, which is the need of the hour. Moreover, though Sections 234 and 235 of the IBC suggests a way to deal with international insolvencies, their implementation in more practical scenarios attracts complexities. The entire process involves signing bilateral agreements with different nations having different terms of arrangement and entailing lengthy negotiations to work that out. For example, what is a fallback plan in situations when there exists no bilateral arrangement with the foreign nation? Such implications necessitate the adoption of uniform and stable framework like Model Law to resolve cross-border insolvency cases and thus, easing the whole process. Hence, IBC being completely silent on cross-border insolvency is akin to a half-baked cake.
It is important to emphasise that the additions and deviations to the Model Law highlighted above do not constitute law, as yet. Nevertheless, the draft guidelines do not mark a wholesale departure from established principles of international insolvency. The guidelines seek to integrate and align the Indian judicial system with international insolvency and are an acknowledgement that a modern and effective cross border insolvency regime is essential to sustain the ‘Ease of Doing Business’ policy of the GOI.