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The Need of Cross Border Insolvency Framework under IBC

The Need of Cross Border Insolvency Framework under IBC

The Insolvency & Bankruptcy Code (IBC), 2016 was introduced with an objective to improve the relationship between the creditors & debtors. This act covers the applicability on individuals as well as organizations, which can apply for insolvency under the provision of this act wherein the only point of difference in laws governing the insolvency of the above-mentioned was that in the case of individual it was called, bankruptcy and in the case for, corporate the same is called, corporate insolvency which can be understood as a situation wherein an individual or company is not able to pay the debt in the present or near future and the value of assets held by them is less than liability as Insolvency can be defined or understood as a state in which financial difficulties of a company are such that it is unable to run its business.

The main need for this law was that insolvency resolution was taking more time as compared to the United States or the United Kingdom. Consequently, these delays are caused due to time taken to resolve cases in courts and confusion due to a lack of clarity about the current bankruptcy framework. As a result, this code provided a time-bound process to resolve insolvency. In this code, when there is a default in repayment, creditors gain control over the debtor’s assets and are able to make decisions to resolve insolvency within a 180-day period. In addition, to ensure an uninterrupted resolution process, the Code also provides immunity to debtors from resolution claims of creditors during this period. Conclusively, The Code also consolidates provisions of the current legislative framework to form a common forum for debtors and creditors of all classes to resolve insolvency.

Earlier, every country had intra-jurisdictional law solely focusing on insolvency laws, operating within their borders and subsequently, raising the frictions within the sovereigns in the case of the foreign-based corporate debtor. Hence, after considering these fundamental problems, there was a need to facilitate a uniform approach while dealing with these controversies. As a result, the United Nations Commission on International Trade Law proposed the UNCITRAL Model Law on Cross-Border Insolvency, 1997. The aim of this model law was to offer legislative guidance for states. The primary objective was to assist states to facilitate insolvency laws in consonance with modern, and fair frameworks in a harmonised stricture to address cross-border insolvency disputes efficiently and swiftly. The Model Law recognizes two kinds of proceedings i.e., foreign main proceedings and foreign non-main proceedings. A foreign main proceeding takes place in the State where the debtor has the ‘centre of its main interests. A foreign non-main proceeding is a foreign proceeding other than the foreign main proceeding, where the debtor has an ‘establishment’

There is an existing mechanism for cross-border insolvency under IBC, as the code contains two provisions surroundings cross-border issues, which is section 234 & section 235 of the abovementioned code. Firstly, section 234(1) deals with agreements with foreign countries which says, The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code while clause (2) says, 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. Secondly, section 235(1) while dealing with Letter of request to a country outside India in certain cases says that, Notwithstanding anything contained in this Code or any law for the time being in force if, in the course of 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 while clause (2) adds that, 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 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. The prima facie objective after reading both the provisions can be ruled that the abovementioned provisions in the code are to maximise the asset value of the corporate debtor.

The advantage of model Law is that it seeks to provide a uniform approach to cross-border insolvency proceedings by harmonising national insolvency laws dealing with it. Though the model law does not provide for substantive unification of insolvency laws, on a wide note endorses the diversity found in the laws relating to insolvency of various jurisdictions and allows the concerned states to draft their national laws in consonance with the Model Law after certain modifications as they deem necessary. 

Cross-border insolvency denotes a situation where the insolvent debtor has assets in more than one jurisdiction or where some of the creditors of the debtor are not from the jurisdiction where the insolvency proceedings have been filed[1]. Cross-border insolvency should be considered as a situation wherein insolvency occurs in circumstances which in some way transcend the confines of a single legal system so that a single set of domestic insolvency law provisions cannot be immediately and exclusively applied without regard to the issues raised by the foreign elements of the case[2].

The need for a cross-border insolvency framework has been a requisite since the growing size of economies has lured companies to stretch their business beyond their home jurisdictions & organizing their activities across national boundaries. Due to this increasing globalization of business activities, businesses encounter a wide array of legal systems. Therefore, when multinationals become insolvent, it comes as no surprise that such insolvencies have cross-border consequences.

The collapse of Lehman Brothers in September 2008, which was a firm that conducted business in over forty countries through the instrumentality of about 650 legal entities outside the United States (which was their home jurisdiction), is the best illustration of the scale, complexity, and financial significance of cross-border insolvency. In addition, 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. The Jet Airways case is only one of many such cases that exemplify the need for a law that deals with situations where a corporate debtor may have creditors and assets dispersed across various jurisdictions. Recently, in the insolvency proceedings of Jet Airways (India) Limited (State Bank of India v. Jet Airways (India) Limited, REED 2019 NCLT Mum 06518) the National Company Law Tribunal (“NCLT”) in Mumbai expressly stated that while insolvency proceedings against the corporate debtor have already been initiated before the NOORD – Holland District Court, “there is no provision and mechanism in the I&B Code, at this moment, to recognize 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.”

While the Indian ILC has submitted draft provisions incorporating the Model Law customised for India, they have not yet been incorporated into the domestic law. In the absence of a cross-border legal framework, the adjudicating authorities have resorted to case-by-case resolution. Interestingly, courts have skimmed the provisions of the Model Law structure and have applied the same while deciding cross-border insolvency issues.

For instance, in the case of Jet Airways (India) Private Limited v.State Bank of India and Another, the National Company Law Appellate Tribunal (NCLAT) set aside the order of the lower adjudicating authority to allow a Dutch administrator to be a part of, and attend the meeting of the committee of creditors. In accordance with the NCLAT’s decision, the Indian Resolution Professional and the Foreign Administrator agreed upon a ‘Cross Border Insolvency Protocol’. India was recognised as the “centre of main interests”; the foreign proceedings were acknowledged as ‘non-main insolvency proceedings’ in line with provisions of the Model Law. Further, keeping the best interests of the company and its stakeholders, the NCLAT even directed the Indian Resolution Professional, in consultation with the committee of creditors to consider the prospect of cooperating with the foreign trustee. The NCLAT paid heed to the concept of modified universalism, as exemplified in the Model Law.

The Supreme Court in Macquarie Bank Limited v. Shilpi Cable Technologies Limited (Civil Appeal No. 15135 Of 2017. February 17, 2021) stipulated that foreign creditors shall have the same rights as domestic creditors to initiate and participate in the corporate insolvency resolution process under the Code. The Apex Court expanded the definition of ‘person’ to include persons residing outside India. The Court remarked that discriminatory interpretation would violate the right to equality enshrined in the Constitution of India, which applies to all persons, including foreigners.

Another example is that of Videocon Industries, where the NCLT ordered the inclusion of the diversified group’s overseas oil and gas business in the insolvency process. The Tribunal acknowledged that there is cross creation of the security interest by all lenders in other business assets of the Videocon Group treating it as a single economic entity. The abovementioned judgments serve as precedents for future cross-border insolvency disputes. They also demonstrate the need for provisions to deal with cross-border insolvency issues, involving creditors and assets located worldwide.

The National Company Law Appellate Tribunal (NCLAT) in the Jet Airways insolvency proceedings upheld the recent cross-border protocol agreed between the National Company Law Tribunal (NCLT) appointed Resolution Professional (RP) and the Dutch insolvency trustee, deciding that the Dutch trustee is equivalent to the RP. The trustee thus has a right to attend the committee of creditors meeting, as insolvency law provides. This decision of the NCLAT foreshadows and approves the apparent drive in the coming winter session of Parliament to introduce provisions for cross-border insolvency (CBI) in the field of corporate debt. It is likely that these provisions will lead the way for similar legislation in the area of personal insolvency.

Any new law affecting corporate insolvency should take note of the model law on international commercial arbitration (ML) adopted in 1985 by the United Nations Commission on International Trade Law (UNCITRAL) and amended in 2016. Key features of the ML relating to CBI are that there should be: (1) accessibility between courts and court-appointed insolvency professionals of different jurisdictions; (2) recognition of the main and non-main proceedings in foreign courts; (3) relief both on the application for recognition of foreign proceedings and the recognition itself, and (4) co-operation and coordination between local and foreign counterparts. In order to address the issues arising out of CBI, the Ministry of Corporate Affairs (MCA) has issued a draft chapter on CBI for corporate debtors based on the ML but modified to allow for local applicability. Emphasis is placed on: 

  1. the ease of doing business; 

  2. flexibility; 

  3. the protection of domestic interest; 

  4. the priority of domestic proceedings; 

  5. empowering insolvency representatives; 

  6. mechanisms for co-operation, 

  7. the protection of creditors; and 

  8. reciprocal remedies in other jurisdictions.

Concerns, however, remain that debtors could forum shop by changing their centres of main interest (COMI). However, the draft chapter safeguards the interests of the creditors by providing two assurances. Firstly, it is presumed that the registered office (RO) of the debtor is the COMI only if the RO has not been moved to another jurisdiction within three months prior to the commencement of insolvency proceedings. Secondly, the NCLT and the NCLAT must conduct an assessment in this respect in a manner that is transparent to third parties including creditors.

The Insolvency Law Committee then submitted its second report to the MCA and proposed that part Z in the draft chapter, based on the provisions of the Model Law, apply only to corporate debtors and that a court should refuse to take any action under the cross-border insolvency law if this would be manifestly contrary to public policy. A recent case on this point involved the courts in Singapore, a country that adopted a modified ML by enacting the Companies (Amendment) Act 2017. In the matter of, Re Zetta Jet Pte Ltd and Others (Asia Aviation Holdings Pte Ltd, intervener) the high court, in deciding the question of recognition of US proceedings that had continued despite there being in existence an injunction granted by another Singapore court, held that “In any event, the most important public policy consideration, in this case, is to ensure the orderly and efficient recovery of assets for the benefit of Zetta Jet Singapore’s creditors” and reinforced this finding by stating that public policy also required the court to have regard to the international basis of the ML and the promotion of its uniform application. Therefore, the court, in line with Singapore’s aspirations of becoming a leading centre for cross-border insolvency, held that the threshold for the application of public policy in the context of cross-border insolvencies in Singapore was lower than that provided in the ML. Singapore has even expanded the rights of foreign companies to make applications for debt restructuring in Singapore courts where such companies have agreed in commercial or financial contracts that Singapore law shall govern the transaction or that Singapore shall be the seat of dispute resolution when disputes arise.

The draft chapter appears to be a conservatively modified version of the Model law. However, the advances made by other regional jurisdictions in the fields of CBI frameworks and the provision of cross-border dispute resolution now requires MCA to focus on the details of the proposed provisions in order to bring about a robust cross-border framework. In view of the challenges already being faced by regulators and tribunals in this regard, it may be that the Jet Airways case should be seen as an example of the way in which CBI regulation should be strengthened and brought up to date.

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 a 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.

[1] Halliday, T.C. and Carruthers, B.G., 2007. The recursivity of law: Global norm making and national law-making in the globalization of corporate insolvency regimes. American Journal of Sociology, 112(4), pp.1135-1202

[2] Bogdan, M., 2000. Ian F. Fletcher, Insolvency in Private International Law: National and International Approaches. Nordic Journal of International Law, 69(4), pp.527-528


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