Reciprocity and Public Policy in Cross-Border Insolvency – An Indian Perspective – By Dhruv Chhajed and Devarsh Shah

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Reciprocity and Public Policy in Cross-Border Insolvency: An Indian Perspective

Introduction

In the wake of the global financial recession, insolvency is an inevitable threat to economies and multi-national corporates. Having a Cross Border legal framework for cooperative resolution of insolvency-related disputes is a necessity. By far, the propulsion of UNCITRAL Model Law on Cross Border Insolvency[i] into the legislations of few developed and developing economies has availed a steady defense. Having said so, we can still find no adoption of the UNCITRAL Model Law in India, even after the positive recommendations of Insolvency Law Committee on Cross Border Insolvency.[ii] However just adopting the model law is not sufficient, since there are numerous technical challenges yet to be overcome. Out of these many challenges, the two prominent ones which restrict the application of UNCITRAL Model Law on Cross Border Insolvency are principles of Legislative Reciprocity and Public Policy exception.

 

A – Legislative Reciprocity

Legislative Reciprocity signifies that a domestic court will enforce or recognize a foreign court’s judgment only if that particular foreign jurisdiction has adopted or enacted similar legislation governing its courts. To illustrate, Indian courts shall recognize or enforce a UK court’s judgment only if UK has enacted similar legislation or India and UK, both have adopted a convention to which they are signatories, in their domestic legal order. Reciprocity, in cases of cross border insolvency, may seem to be attractive but it has severe unwarranted implications complicating an already complex niche area of international law. UNCITRAL Model Law is a mere model framework which is not a binding legal instrument and hence there exists absolutely no restriction for the states to incorporate legislative reciprocity. South Africa, Mexico and Mauritius are some of the many nations which have incorporated reciprocity requirements in their laws implementing Model Law.

The Insolvency Law Committee of India in paragraph 1.8 [read with section 1 (4) of draft part Z] of its Committee Report[iii] has recommended the adoption of Model Law on a reciprocal basis in the inceptive phase. The committee further recommended doing away with the reciprocity provisions once India gains sufficient experience in dealing with the Model law and after India develops adequate infrastructure. Adding to the bunch of ambiguities already existing, no specific time limit was prescribed for keeping the reciprocity provisions as a part of India’s cross border insolvency framework.

Legislative Reciprocity: Why it is unfavorable for India?

South Africa’s example[iv] is best suited to elucidate the complexities with legislative reciprocity. The South African Cross Border Insolvency laws apply to only those jurisdictions which are designated by the ‘Minister of Justice’. It is shocking to note that till date there is no country which has been designated by the South African Minister of Justice whose insolvency court orders would be reciprocally recognized in South Africa. Practically, it binds the South African courts to outrightly decline to recognize the orders of a foreign court without looking into the merits. Hence, even though South Africa has implemented the model law in its domestic framework, it has no practical application.

Reciprocity provisions in draft Part Z (draft recommendations made by the Committee) are indeed not intended to function in the manner aforesaid. If the committee’s recommendations are accepted, then as per section 1 (4) of draft Part Z, India’s cross border insolvency framework will apply only to those countries which have implemented the UNCITRAL Model Law i.e. it shall be effective only against 48 out of 193 UN Member countries.[v] It curtails the discretion of the tribunal to consider an application on its merits. Legislative Reciprocity makes India’s framework practically inapplicable to the cross-border insolvency cases unless the application pertains to recognition of proceedings in a jurisdiction which has implemented the model law.

To illustrate, the NCLT would have been stripped off of any power in the Jet Airways case (first case of Cross Border Insolvency involving an Indian Company). An application was filed before the tribunal for the recognition of proceedings before the Netherlands court. Had the Model Law been implemented in India on a reciprocal basis, the NCLT would have no choice but to outrightly deny recognition, without even looking into the merits, because the Netherlands has not adopted the said law.  Not just Netherlands, but countries like China, France, Germany and many other nations with which India has a sound trade relationship are yet to adopt the model law.

A Possible Way Forward

If the recommendations of the committee are accepted and if model law is adopted on a reciprocal basis then the tribunal will be forced to deny recognition to the proceedings in a jurisdiction which has not adopted model law.

US, UK and Japan are among those few countries who have implemented the model law without any requirements of reciprocity. The reasons stated before and its implications make it imperative for India to embrace a broader outlook and introduce an expansive version of model law sans reciprocity. An adapted version of model law sans reciprocity would place the tribunal in a position to recognize the proceedings under Article 17 of the Model Law[vi] on merits thereby enabling enhanced cross border cooperation on such complex issues of law.

B – Examining the Scope of Public Policy

The provision of Public Policy in Cross Border Insolvency is incorporated into Article 6 of Model Law[vii] which reads as “Nothing in this Law prevents the court from refusing to take an action governed by this Law if the action would be manifestly contrary to the public policy of this State.” It is primarily an enabling provision authorizing the states to carve out an exception for the application of the Model Law. The biggest dilemma is the meaning and the scope of ‘public policy’. Neither the main text of the model law nor the guide annexed to it explicates upon the same.  In the Indian context, apart from cross border insolvency, the doctrine of public policy is incorporated into Section 34 of The Arbitration and Conciliation Act, 1996.[viii]

Practical Concerns

Public Policy in Cross Border Insolvency, prima facie, may not seem to be of substantial issue. However, its practical application warrants serious consideration for a broader application of the model law and strengthened cross border cooperation. The biggest concern, as stated above, is the scope of the exception and the resulting state of confusion. Since what is ‘manifestly contrary to public policy’ is not defined anywhere, different interpretation of the same in different jurisdictions is a highly probable outcome.

In addition to that, various countries have, in their respective domestic frameworks, incorporated the public policy doctrine with a very wide scope which was never the intention of the model law. The public policy exception, in terms of Article 6 of Model Law, can be invoked only if the action is manifestly contrary to the public policy. Several states have dropped the word manifestly from their frameworks.

Singapore is one of those many states which has dropped ‘manifestly’ in its legal framework. Further, the High Court of Republic of Singapore[ix] has held that “While the court’s power to refuse recognition under Article 6 of the Singapore Model Law is discretionary, it would be rare for the court not to refuse recognition where there has been non-compliance with a Singapore court order.” It in effect means, compliance of Singaporean Laws is a must or in other words conflict of laws shall be enough to trigger the public policy exception. Undisputedly, this was never the intention of the Model Law. Not only Singapore, but various other jurisdictions like Mexico, Romania and Canada also have similar provisions.

In International Law, it is very common that states have conflicting provisions of the law on the same issues. If that was to serve as a ground for denial of cooperation in cross border cases, then the purpose of Model Law is frustrated in its entirety. Article 6 was a safeguarding provision which unfortunately has been misused by states.

Indian Perspective and a way forward

The Committee Report suggested that Article 6 be implemented as it is without any modifications. This, however, does not solve all the problems. The scope of the public policy as an exception is still undetermined. In the absence of any guiding material, there will be a situation of vagueness and confusion. The question of whether the conflict of law amounts to a violation of public policy in India is still unanswered. It is therefore inevitable to have some amount of clarity on the said issue.

As far as ‘public policy’ under Arbitration Act, 1996 is concerned, Renusagar Power Mills v. General Electricals[x] is a leading case of the Indian Supreme Court which stated that public policy of India constitutes;

  1. fundamentals of Indian law
  2. interests of India and
  3. justice and morality.

In addition to the domestic interpretation of ‘public policy’ reference may be drawn to a celebrated US Court judgment in In Re Qimonda AG Bankruptcy Litigation [xi]wherein the court while summarizing the entire discussion on public policy gave the following principles

  1. Mere conflict of law cannot trigger the exception of public policy,
  2. the invocation may be allowed if the procedural fairness of the foreign proceeding is in doubt,
  3. Any recognition/non-recognition should not lead to severally impinge a US Constitutional or statutory right and frustrate the US Court’s ability to administer Insolvency Proceedings.

In addition to these, the invocation of public policy exception may be allowed if recognition will be detrimental to India’s economic and political interests. In comparison to the US, we are definitely lacking such precision and clarity. Having such clarity would only help us in speeding up the process of adjudication.

To Conclude

In light of the current state of law on insolvency, it is imperative that the principles of Legislative Reciprocity are eliminated and that of Public Policy particularized. With all due respect to the Committee’s recommendation, looking at the Developed nations and implementing the model law without the requirements of Reciprocity can be a possible solution in lubricating the insolvency proceedings. At the same time, some threshold or benchmark of public policy must be provided with respect to the constitution and statutory laws in India. When the purpose of recognizing foreign proceedings is to enable a more cross-border complementary effort, making some adjustments keeping in mind the natural laws and fundamental principles of other nations is not always harmful.

Reference:

[i] UNCITRAL Model Law on Cross Border Insolvency

https://www.uncitral.org/pdf/english/texts/insolven/05-80722_Ebook.pdf

[ii] Report of Insolvency Law Committee on Cross Border Insolvency, 16th October 2018.

https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf

[iii] Ibid at ii

[iv] MOHAN, S. Chandra. Cross-border Insolvency Problems: Is the UNCITRAL Model Law the Answer?. (2012). International Insolvency Review. 21, (3), 199-223. Research Collection School Of Law

https://ink.library.smu.edu.sg/cgi/viewcontent.cgi?article=3097&context=sol_research

[v] Status: UNCITRAL Model Law on Cross Border Insolvency (1997)

https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency/status

[vi] Ibid at i.

[vii] Ibid at i.

[viii] The Arbitration and Conciliation Act. 1996, § 34, No. 26, Acts of Parliament, 1996 (India).

[ix] Re: Zetta Jet Pte Ltd and Others, [2018] SGHC 16.

[x] Renusagar Power Co. Ltd v. General Electric Co, 1994 AIR 860.

[xi] In Re Qimonda AG Bankruptcy Litigation, 433 B.R. 547 (E.D. Va. 2010).

 

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