Navigating International Boundaries: Unravelling Cross- Border Insolvency in India
Niharika Sharma
(Final Year Student at Faculty of Law, University of Delhi)
Abstract
India’s implementation of Insolvency and Bankruptcy Code (IBC) in 2016 marked transformative step in the country’s insolvency landscape. However, issue of cross-border insolvency and bankruptcy was initially overlooked, prompting Insolvency Law Committee (ILC) and the Cross-Border Insolvency Rules/Regulations Committee (CBIRC) to take action. Their objective is to introduce cross-border insolvency laws and integrate them into the IBC, acknowledging the need for a comprehensive approach to address this aspect.
The IBC extends beyond mere liquidation or winding up, encompassing restructuring and facilitating the development of resolutions that support the survival and growth of industries. Yet, the complexity of cross-border insolvency cases poses unique challenges. Simultaneous proceedings in multiple jurisdictions necessitate seamless coordination, cooperation, and communication between countries. Regrettably, India’s existing legal framework does not adequately tackle these intricacies.
Consequently, the ILC and CBIRC have taken the initiative to introduce appropriate laws and regulations to address cross-border insolvency in India. Their goal is to strengthen the legal framework and align it with international best practices.
While the IBC has introduced significant reforms to the insolvency landscape, cross-border insolvency remains a crucial area requiring attention. Ongoing efforts aim to develop a comprehensive framework capable of effectively handling cross-border insolvency cases. This framework will emphasize coordination and cooperation among jurisdictions while addressing the unique challenges that arise in cross-border insolvency scenarios. By doing so, India will establish itself as a jurisdiction that can effectively manage international insolvency matters.
Introduction
In 2016, India introduced IBC, replacing patchwork of existing legislations governing insolvency and bankruptcy. The new code aimed to revolutionize the country’s insolvency framework, providing a comprehensive and modernized approach.
With the growth of transnational companies and borderless business relationships, need for a overseas insolvency system became evident. Operating in multiple locations meant debtors and creditors were spread across borders, necessitating a robust framework to address these complexities.
To address this, ILC got established in the year 2018 by the Ministry of Corporate Affairs (MCA). The ILC recognized the importance of comprehensive legislation for cross-border insolvency in India. They emphasized a need to analyze international practices, particularly Model Law, to develop an effective framework.
ILC’s report recommended the drafting of a specific provision, known as Part Z, to handle cross-border insolvency cases. In 2020, Cross Border Insolvency Rules and Regulation Committee (CBIRC) was formed by the MCA to frame the rules and regulations for implementing Part Z.
While the CBIRC’s report was made available for public opinion in 2021, the legislation has not yet been implemented. The process of incorporating a overseas insolvency legislation in India remains ongoing, with aim of aligning with global best practices and addressing the complexities of cross-border insolvency cases.
Understanding Cross Border Insolvency and Its Need
Cross-border insolvency refers to scenario when a corporate debtor possesses assets and liabilities in abroad, in addition to its home country. This situation necessitates the consideration of not only domestic laws but also laws of the country where assets and liabilities are situated.[1] As conflicts may arise between the legal frameworks of two different nations in overseas insolvency cases, the importance of establishing a unified legal framework becomes apparent. Such a framework would help alleviate these conflicts and provide a streamlined approach to handling international proceedings.
Professor Ian Fletcher, a renowned scholar on aspects of commercial insolvency, proposes that “cross-border insolvency should be considered as a situation where an insolvency occurs in circumstances that transcend a single legal system. This means that a single set of domestic insolvency law provisions cannot be immediately and exclusively applied without considering the issues raised by the foreign elements of the case.”[2]
When determining forum for proceedings concerning corporate debtors, principle of center of main interest (COMI) plays a significant role. COMI is a legal term that refers to place where company resides or carries out significant functions. For corporate debtors, COMI is the place where the debtor performs daily administration of its interests, and this place is ascertainable to third parties.[3]
In Indian context, cross border insolvency may arise in following circumstances:
- Where the creditors of domestic debtors wants to assert their rights over assets of such debtor, such assets are located outside India.
- Where creditors of the foreign debtors, based in India, wants to exercise their rights over assets of such debtors.
- Where the Indian creditors wants to enforce their rights over the assets of foreign debtors located in international jurisdiction.[4]
The current framework for cross-border Insolvency in the IBC is not considered to be on par with the recent global standards. As a result, amendments have been proposed by the Ministry of Corporate Affairs and the Insolvency and Bankruptcy Board of India (IBBI) to address this gap. These proposed amendments are based on the UNCITRAL Model Law on Cross-Border Insolvency from 1997, which is a widely recognized international standard for dealing with cross-border insolvency cases. The aim of these amendments is to bring the Indian framework in line with global best practices and enhance the effectiveness of cross-border insolvency proceedings in India.[5]
UNCITRAL Model
United Nations Commission on International Trade Law proposed the UNCITRAL Model of Law on cross Border Insolvency in year 1997.[6] This model aimed at streamline insolvency proceedings when a debtor’s capital is located in multiple countries, in addition to its main business location. It is pertinent to note that the UNCITRAL Model does not constitute a comprehensive, unified insolvency law in itself.[7]
The model outlines four key principles for addressing Cross-Border Insolvency:
- Recognition of foreign proceedings, distinguishing between main proceedings and non-main proceedings conducted in other jurisdictions.
- Provision of access to courts in countries that adopt the model, allowing for effective resolution of cross-border insolvency cases.
- Promotion of coordination and cooperation among the courts overseeing the debtor’s assets and the courts managing concurrent proceedings.
- Ensuring uniform and equitable relief to facilitate fair and orderly resolution of cross-border insolvency cases.[8]
Additionally, the UNCITRAL model law introduces concept of determining Center of Main Interest (COMI), although it does not provide a specific definition for COMI. Instead, it suggests that objective and ascertainable factors can be considered by third parties, such as creditors and potential creditors, to determine the COMI. The registered office or place of incorporation of a company is considered conclusive evidence of its existence.[9]
The aforementioned principle of the UNCITRAL model will be integrated into the proposed amendments of the Code. However, certain adjustments and modifications will be made to the principle before its incorporation into the IBC. These adjustments and modifications are necessary to align the principle with the specific requirements and considerations of the Indian insolvency framework. , the amendments seek to enhance the effectiveness and applicability of cross-border insolvency proceedings in India.
Legal Provision in India
Currently, the IBC has only two provisions dedicated to handling cross-border insolvency cases. However, these provisions are of a general nature and do not offer specific procedures for the conduct of related proceedings. Their primary purpose is to provide assistance and guidance in addressing such issues:
Section 234 grants the central government the authority to establish bilateral agreements with foreign countries. It stipulates that the provisions of the code will be applicable to foreign countries where the assets of the corporate debtor are located, but only if the central government has entered into reciprocal agreements with those countries.[10]
On the other hand, Section 235 empowers adjudicating authority to issue a letter of request to a foreign country, provided there is a reciprocal agreement in place under Section 234. This letter of request is intended to facilitate the handling of assets belonging to the corporate debtor that are situated in that foreign country.[11]
However, it should be noted that these provisions do not cater a detailed structure for overseas transactions. Thus, ILC has recommended the introduction of draft rules for a distinct segment under present legislation known as Part Z. Part Z designed to serve as a dedicated cross-border framework within the Code. It will govern applications seeking foreign insolvency proceedings and requests for cooperation from the National Company Law Tribunal (NCLT) in relation to such proceedings.[12] In order to effectively implement Part Z, the CBIRC has also established certain rules and regulations. This will play a crucial role in guiding the resolution process of cross-border insolvency cases, providing clarity and facilitating smoother proceedings.[13]
The CBIRC’s recommendations outline a detailed framework for cross-border insolvency proceedings. It defines terms such as “Foreign Assets,” which include cash holdings, production capabilities, and intangible assets held in foreign countries. The recommendations also acknowledge the concept of “Foreign Operations,” encompassing both tangible and intangible assets, as well as customers and debt recovery from overseas jurisdictions. Moreover, the committee emphasizes the importance of strengthening institutional capacities of the NCLT and IBBI to effectively handle international insolvency matters. These recommendations provide clarity and guidance for conducting successful cross-border insolvency proceedings.[14]
Landmark Precedents
1. JET AIRWAYS:
The Jet Airways insolvency case[15] marked the first instance of cross-border insolvency in India. In 2019, Jet Airways professed insolvency proceedings by the NCLT. Interestingly, prior to this, a Dutch court had appointed a bankruptcy trustee based in the Netherlands to seize the assets of Jet Airways located there, as the Netherlands served as Jet’s territorial Centre for European operations. However, NCLT, Mumbai, firmly rejected the participation of Netherlands court in the Indian litigation process and announced the overseas suit as null and void.
Subsequently, NCLAT overruled the NCLT’s ruling and suggested parties involved to develop framework which will enable effective cooperation between the resolution professional in India, the Dutch administrator, and the Committee of Creditors (CoCs).[16] In response, parties established innovative cross-border insolvency protocol, ensuring international coordination and cooperation whilst respecting the sovereignty of their independent jurisdiction. The protocol adhered to principles of model law, designating India as the “center of main interest” and recognizing the Dutch proceedings as “non-main proceedings,” thus facilitating an ideal framework for resolving the cross-border insolvency matter.[17]
This case dealt with one of important aspect of cross border insolvency i.e. the distinct doctrinal perspectives. The Dutch Courts dealt the cross border Insolvency with “Universalist approach” while in the Indian court “territorialist approach” followed. The NCLAT strikes the “balance between the interests of those who may be impacted by the relief provided to the foreign representatives.”[18]
2. Videocon Group
The Videocon Group[19], a diversified Indian conglomerate, faced financial distress and initiated insolvency proceedings in India. This case recognizes the doctrine of “substantial consolidation”. This doctrine enables the adjudicating authority to combines the assets and liabilities of the individual corporate entities and proceeds with a common insolvency resolution and restructuring process in order to achieve a fair value for group companies’ stressed assets while keeping creditors’ interests in mind.[20]
This case involved significant cross-border complexities due to the group’s international operations and foreign creditors, requiring coordination with jurisdictions such as the United States, and thereby, questioned the extraterritorial applicability of IBC and procedure involved in combining the international subsidiary assets with those in India. Thus, it also highlighted the challenges regarding coordination theory in cross-border insolvency, as well as need for laws to manage the subject.
These cases highlight the challenges and complexities that can arise in cross-border insolvency matters, including coordination with multiple jurisdictions, recognition of foreign proceedings, and resolving disputes with international creditors. It is worth noting that the evolving nature of cross-border insolvency & laws ongoing development of jurisprudence in India may lead to further cases in the future that address this important area of law.
Conclusion
The ongoing discussions, call for a detailed legislation to address this complex issue. The existing provisions of the code have limitations in providing specific procedures and details for handling cross-border insolvency cases. However, the efforts made since 2019 and the incorporation of elements from the model law in the Jet Airway case demonstrate growing recognition of importance of addressing cross-border insolvency.
To effectively handle cross-border insolvency disputes and enhance coordination among states, the adoption of the draft provisions recommended by the Insolvency Law Committee (ILC) is crucial. Implementing a law aligned with the Model Law would not only strengthen the Insolvency and Bankruptcy Code but it will also attract foreign direct investment and promote a favorable business environment in India.
The comprehensive report by CBIRC provides valuable insights into simplifying procedures, clarifying processes, and resolving uncertainties associated with multi-jurisdictional insolvency cases. The proposed implementation of Draft Part Z of the IBC, supported by the CBIRC’s recommendations, has the potential to increase the value of distressed assets and facilitate the resolution of cross-border insolvency disputes in India.
It is utmost important to address the complexities of cross-border insolvency through an effective legal framework. By adopting the ILC’s recommendations and implementing the CBIRC’s proposed rules and regulations, India can enhance its position in the global business arena and foster a conducive environment for cross-border transactions.
Reference
[1] India: Cross-Border Insolvency: Understanding Centre Of Main Interest (COMI) by Apoorv sarvaria and Sanyam Mehdiratta < https://www.mondaq.com/india/insolvencybankruptcy/1197432/cross-border-insolvency-understanding-centre-of-main-interest-comi >
[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.
[3] Supra note 1
[4] Avin Tiwari , Cross Border Mergers in India in the IBC Era: A Legal Inquiry, Indian journal of law and justice vol.11
[5] India step towards cross border insolvency < https://taxguru.in/corporate-law/indias-step-cross-border-insolvency-cases.html >
[6] Introduction to cross border Insolvency < https://www.nishithdesai.com/fileadmin/user_upload/pdfs/Research_Papers/Introduction-to-Cross-Border-Insolvency.pdf >
[7] Supra note 4
[8] Supra note 7
[9] Ibid.
[10] Insolvency and bankruptcy code, 2016, Sec. 234.
[11] Insolvency and bankruptcy code,2016, Sec.235.
[12] Report of Insolvency Law Committee on cross border insolvency, October 2018.
[13] Report on the rules and regulations for cross-border insolvency resolution June 2020
[14]Varsha Aithala, Report of the Cross-Border Insolvency Committee, June 2020: A Primer. < https://www.nls.ac.in/blog/report-of-the-cross-border-insolvency-committee-june-2020-a-primer/ >
[15] SBI v. Jet Airways (India) Ltd., (2019) ibclaw.in 20 NCLT
[16] No. 707 of 2019
[17] Covid-19: Indian precedent case for cross-border insolvencies is now gaining importance <https://www.pinsentmasons.com/out-law/analysis/indian-precedent-case-for-cross-boder-insolvencies >
[18] Manisha Arora and Raushan Kumar, India’s tryst with cross-border insolvency law: How series of judicial pronouncements pave the way?< https://www.scconline.com/blog/post/2021/04/16/cross-border-insolvency-law/ >
[19] State Bank of India v. Videocon Industries Ltd., (2020) ibclaw.in 158 NCLT.
[20] Supra note 18
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