Cross-Border Insolvency with reference to the ‘Centre of Main Interest’ – By Archit Bhadani

Cross-Border Insolvency with reference to the ‘Centre of Main Interest’

– Authored by:
Archit Bhadani
Graduate Insolvency Programme at the Indian Institute of Corporate Affairs

The introduction of Insolvency and Bankruptcy Code, 2016 in India is being considered as the biggest insolvency reform where the objective of Insolvency and Bankruptcy Code (“IBC/Code”) is value maximization of assets of such person and also safeguard the principal of going concern.

What is Cross-border Insolvency?

The situation of cross-border insolvency arises when an insolvent debtor has creditor or assets in one or more jurisdiction or when different insolvency proceedings have been filed in multiple jurisdictions otherwise than India.

The Insolvency and Bankruptcy Code, 2016 was introduced as a landmark legislation of the recent times governing insolvency and bankruptcy in India and has harmonized the processes as well as the laws, however, it does not prescribe sufficient procedure for resolving and regulating the cross-border insolvency proceedings.

IBC provides for two provisions which deals with the cross-border insolvency disputes, i.e., Section 234 and Section 235.

Section 234 of the Code empowers the Central Government to enter into a bilateral agreement with the Government of any other country outside India for the purpose of enforcing the provisions of the Code.

Section 235 empowers the Adjudicating Authority to issue letter of request on the Courts of the country with which the bilateral agreement has been entered under Section 234 with an aim to address the concern regarding the assets of the corporate debtor which are located outside India.

In October 2018, the Insolvency Law Committee (ILC) submitted a report on cross-border insolvency to the Ministry of Corporate Affairs (MCA). The ILC Report recommended the adoption of UNCITRAL Model Law on Cross-Border Insolvency as a part of the IBC, with certain modifications. It also submitted a draft law, referred to as “Part Z”, which was to be incorporated as a separate part of IBC. ‘Part Z’ is intended to be the cross-border framework of the IBC, which will govern all applications seeking recognition of foreign insolvency proceedings as well as application seeking recognition of foreign insolvency proceedings as well as applications co-operation in such proceedings from the NCLT.

On 23rd January, 2020, the MCA constituted this Cross-Border Insolvency Rules/ Regulations Committee (CBIRC). Its original remit was to propose the rules and regulatory framework that would enable the implementation of Part Z of the IBC proposed by the ILC Report.

The CBIRC recommended that foreign representatives must be given access to the insolvency system and infrastructure in India for the purpose of cross-border insolvency proceedings.

The committee also recommended that foreign representatives acting in cross-border insolvency proceedings in India must undergo a minimalistic authorization process with the Insolvency and Bankruptcy Board of India.

Jet Airways Case: Judicial Pronouncement which desired the need of separate Cross-border Insolvency Framework in India

In 2019, Jet Airways (India) Limited became the first Indian company to get into cross-border insolvency ruling in India. Within the span of 2 years, corporate insolvency proceeding against Jet Airways commenced in 3 different courts.

An application under Section 7 of the IBC was filed by the State Bank of India against Jet Airways, on the admission of which Corporate Insolvency Resolution Process began on 20th June, 2019. The NCLT was aware of the commencement of insolvency proceedings against the Jet Airways in the Dutch District Court of the Netherlands with a bankruptcy administrator being appointed. The Bankruptcy Administrator moved to the NCLT (Mumbai Bench) praying the bench to recognize the insolvency proceedings which began in the Netherlands and to stay the insolvency proceeding in India against Jet Airways since a competent Court as per the Dutch Bankruptcy Act was adjudicating the matter in the Netherlands. It was highlighted that occurrence of two parallel insolvency proceedings in different jurisdiction would adversely affect the restructuring process and have a detrimental impact on the creditors involved.

The primary issue that was concerned was pertaining to the jurisdiction of the courts in Netherlands to adjudicate upon and pass suitable orders in the matter relating to the bankruptcy of Jet Airways which was registered and incorporated in India.

The NCLT however, refused to withhold the proceedings under the IBC stating that the Section 234 and 235 of IBC, deals with the Cross-border insolvency and they were not yet brought into effect.

Appeal before the NCLAT

The aggrieved Bankruptcy Administrator, filed for an appeal against the NCLT’s decision. The NCLAT allowed the appeal in the following manner:

  1. NCLAT set aside the order passed by the NCLT upon an assurance being provided by the Bankruptcy Administrator that it would not alienate any offshore asset of Jet Airways.
  2. NCLAT allowed the Bankruptcy Administrator to cooperate with the Resolution Professional as appointed under the Code and also to participate in the meetings of the Committee of Creditors, with only the right to observe.
  3. Appellate Tribunal ensured cooperation between the Indian parties and the Dutch counterpart in order to finalize a resolution plan that would be in the best interest of the Jet Airways and its stakeholders.

Pursuant to the direction of the NCLAT, the Resolution Professional under the Code and the Bankruptcy Administrator, which was appointed by the Dutch Court, mutually agreed upon a ‘cross-border insolvency protocol’ which was essentially construed on the basis of the principles provided in the UNCITRAL Model Law. India was recognized as the “Centre of Main interest” and the proceedings being held in Netherlands were taken as the “non-main interest proceedings”.

Centre of Main Interest (COMI)

The term “Centre of Main Interest” is a legal term introduced in the UNCITRAL Model Law on Cross-border insolvency. Here, the ‘Centre of main interest’ plays a vital role in determining as to where the judicial proceedings with regards to the insolvency resolution of the Corporate Debtor will be held and considered as the main proceeding. The ‘COMI’ of the Corporate Debtor is a place where the company carries out its functions or resides. In absence of the above-mentioned, the Registered Office shall be presumed to be the place where COMI is situated. However, this presumption would be applicable only when the registered office of the corporate debtor has not been moved to another state within three months prior to the commencement of insolvency proceeding in such State.

The “Centre of Main Interest” was very well recognized in the ‘Jet Airways Case’ when an appeal was filed before the NCLAT which led the case in an entirely new direction setting a precedent for introduction of cross-border mechanism in India.

Universality vis-à-vis Territoriality

 There are two prevalent model with respect to Insolvency that exist are universality and territoriality.

  • Universality argues that the assets of the debtor, no matter where they are located, should be collated into one combined estate and be governed under the rules of the jurisdiction where the debtor is domiciled.
  • Territoriality argues that the insolvency proceedings should be limited to the territorial extent of jurisdiction where the proceedings have been initiated.

COMI is a way between these two approaches to avoid conflict between Courts.

Factors to be considered while determining COMI

The Insolvency Law Committee recognized various factors for determination of COMI, to name some are:

  1. Presumption in favor of Registered Office: The existence of rebuttable presumption in favor that the location of registered office of Corporate Debtor as the COMI.
  2. An identifiable place of Central Administration: If the above presumption is rebuttable, then the place where the Corporate Debtor’s central administration takes place which is easily ascertainable by third part, including creditors. This place is referred as ‘identifiable place of central administration’.
  3. Other factors in delegated legislation: If it is not possible to ascertain the identifiable place of central administration, it has been recommended in the Report that the Adjudicating Authority must take into account the factors prescribed in the Rules to be framed by the Central Government, in the COMI determination exercise.

CBIRC after reviewing the points of the ILC recommended that the hierarchy suggested in the report wherein other factors are to be considered only after an identifiable place of central administration is rebutted is inappropriate. The CBIRC recommended that other factors such as the location of the Corporate Debtor’s assets, book of accounts, Directors and Senior Management, the Corporate Debtor’s creditors, etc shall be considered at par with the identifiable place of central administration and not be considered on a standalone basis.

Position of COMI in the European Union

The European Union (EU) was the first jurisdiction to adopt the principle of COMI when it was introduced in the European Insolvency Regulation (EIR) which was enforced in the year 2002. Over the years, the European Court of Justice and courts in various jurisdiction within the EU have contributed immensely to the development of the concept.

The European Court of Justice (ECJ) in the famous case of Re: Eurofoods, observed that the presumption of COMI shall be by default in the jurisdiction where the debtor maintains his registered corporate office. The ECJ, however, also ruled that such a presumption is rebuttable if evidence is provided that the registered office in the jurisdiction is no more than a letterbox address and the administration of the company along with a bulk of its economic activities are conducted elsewhere. Further, the Court also held that the onus of determining COMI shall be on the Court in which the insolvency proceedings are initiated.

CONCLUSION

The Insolvency and Bankruptcy Law is still in its nascent stage and a developing jurisprudence. Cross-border insolvency will be a major step towards the future of Insolvency and Bankruptcy in India which will increase the accessibility and improve the ease of doing business. UNCITRAL Model Law provides a fairly independent framework which allows the concerned jurisdiction to evaluate the best suited legal landscape for resolving the cross-border insolvency dispute. In this era of globalization, where there are no boundaries and minimum trade restrictions amongst countries, the need for cross-border insolvency framework is the need of the hour and being felt to remove the ambiguities and confusion.

 

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