DESIDERATUM FOR CROSS BORDER INSOLVENCY UNDER IBC, 2016

INTRODUCTION

In the wake of rapid globalization in consonance with the introduction of futuristic communication technologies, cross-border commerce and investment have made national economies more reliant on each other. A globalized market economy like the one we live in has exacerbated the effects of corporate failure over national boundaries. Hence, insolvency rules ought to be flexible enough to deal with both domestic and cross-border situations. Laws governing the insolvency process, for example, establish the prerogative of the stakeholders in the firm and prescribe techniques for governance at a domestic level.

When a bankrupt debtor has assets and/or creditors in multiple jurisdictions cross-border insolvency comes into relevance. The cross-border insolvency mechanism, therefore, is largely focused on regulating insolvency proceedings outside the scope and limits of the home jurisdiction. In cross-border insolvency, the following issues are to be addressed essentially Equal protection of local and foreign creditors’ rights; Protecting the value of a debtor’s assets that span multiple jurisdictions; Assuring uniformity in insolvency laws and practices through coordination and collaboration among courts and judicial bodies throughout the world. Several jurisdictions have been involved in many corporate collapses of recent years, making multinational insolvencies a common occurrence, rather than an unusual one.

BACKGROUND

As an example of the scope, complexity, and financial impact of cross-border insolvency, Lehman Brothers’ collapse in September 2008[1], a company that did business across forty countries via 650 legal organizations outside the United States, stands out as the most notable. As a result of this circumstance, there are conflicts among competing national laws pertaining to matters such as the recognition of security interests, the disbursement of assets, and different policies regarding the protection of different types of creditors. As a result of the absence of a synchronized structure for cross-border insolvency resolution, several issues remain unresolved and ambiguous. How are assets protected against a parallel proceeding in a foreign jurisdiction, for example, if bankruptcy proceedings have been initiated in India for a specific debtor with assets abroad is a conundrum worth addressing?

By introducing the Insolvency and Bankruptcy Code, 2016, India changed its previous insolvency framework. Among other things, it consolidates the rules in conformity to the insolvency of corporate entities, individuals, partnership businesses, and now MSMEs. The first proposal of the Insolvency and Bankruptcy Bill omitted to cover cross-border insolvency. Thereafter, two provisions – Sections 234 and 235 of the IBC – were inserted into the Draft Bill to govern cross-border insolvency problems. Wherein;

  1. According to Section 234[2], the Central Government is empowered to enter into bilateral insolvency agreements with foreign countries.
  2. Under Section 235[3], the Adjudicating Authority (“AA”) may request that a court in a nation with which a Section 234 agreement has been reached handle assets located there.

The prevalent two articles of the Code (S. 234 and S. 235) were concluded to be not comprehensive enough for cross-border insolvency, according to a report by the Insolvency Law Committee of the Ministry of Corporate Affairs. Therefore, it was resolved to undertake measures to frame a comprehensive framework found on the UNCITRAL model law on cross-border insolvency that can be encompassed into the Code by adding a separate chapter.

THE UNCITRAL MODEL

The UNCITRAL Model Law on Cross Border Insolvency, 1997 was proposed by the UN Commission on International Trade Law. The Model Law was adopted by UNCITRAL n, held in Vienna in the year 1997. For cross-border insolvency coordination and resolution, states can incorporate the Model Law among domestic legislations. Several states have adopted the Model Law including it among their legal systems after incorporating the variations they determine are appropriate to their jurisdictions.[4]

Model Law recognizes two types of foreign procedures: main proceedings and non-main proceedings. A foreign proceeding essentially implies any court or administrative action taken in a foreign nation to enforce bankruptcy laws. During a foreign liquidation or restructuring procedure, the assets and management of the corporation are brought within the supervision of a court beyond domestic jurisdiction.

  1. In foreign main proceedings, the court begins in the jurisdiction where the corporation’s principal place of business (“COMI”) is located.
  2. “Foreign non-main procedures” may be initiated in nations where the debtor has an entity. The procedure is initiated in the country in which the corporate debtor has an entity, but it is not a foreign main proceeding.

For foreign insolvency officials and foreign creditors, the Model Law provides direct access to domestic courts. In addition, it provides the potential to partake in and initiate domestic insolvency proceedings against debtors. It also provides the foundation for cooperation between domestic and foreign courts, and between domestic and foreign insolvency professionals.

CROSS BORDER INSOLVENCY IN INDIA

Cross-border insolvency in the Indian scenario began with Macfadyen & Co. in 1908. The case concerned the dissolution of an Anglo-Indian partnership after one of its members died. The trustees in London and Madras agreed on admissible claims, which were validated by courts in both jurisdictions, and pledged to transfer excess funds to the other process to benefit a global distribution. According to the British Court’s verdict, the arrangement was “clearly a proper and common sense business arrangement” which was “manifestly in everyone’s interest.”[5]

As provided by Section 45[6] of the CPC, the decrees of Indian courts may be carried out outside of India if the Central Government establishes a transferee court in the foreign country, including the State Government, notifies the foreign court that the decree applies to it. Under Section 51[7], a debtor may surrender or sell the property to settle a debt. A receiver may be appointed, and the debtor may be arrested and detained. This will allow him a reasonable opportunity to present his case to a judge. Despite the vast disparities in the interpretation given by Indian courts when it comes to foreign decisions, these parts are still in use. Incomprehension of intricate foreign regulations and the exigency for legal assistance in one or more jurisdictions will further limit the use of these provisions for cross-border bankruptcy situations (foreign creditors in India and vice versa).

Accordingly, the Insolvency Law Committee issued a report on October 16, 2018, recommending the Model Law (“Draft Provisions”) to be encompassed in the Code. The Draft Provisions include several modifications and variations to the Model Law that the Committee believes are pertinent to the Indian context of insolvency along with the CBIRC Report on the Rules and Regulations for Cross-Border Insolvency Resolution.

The Model Law is applicable for both persons along with the corporations. If an instance of insolvency proceeding is brought before the National Company Law Tribunal, cross-border applications for the guarantors can be applied before the National Company Law Tribunal rather than before the Debt Recovery Tribunal.

A pre-packaged insolvency resolution procedure (“pre-pack process”) was later included in the Code for MSMEs, and it is excluded from the Model Law (“Draft Provisions”) since it is a faster and easier resolution method for MSME business debtors. 

According to the Model Law, enterprises whose resolution is governed by a special law and not generic law or whose insolvency crucially impacts public interests may be exempt from cross-border insolvency law. Additionally, all benches of the NCLT and DRT would have been conferred with the jurisdiction to consider the petitions. According to Article 21 of the Model Law, distinct discretionary relief may be allowed for the recognition of either a foreign main or non-main proceeding.

ANALYSIS FOR THE DEMAND FOR CROSS BORDER INSOLVENCY IN INDIA

Under these Draft Provisions, all arbitration and litigation proceedings in India against corporate debtors (including their initiation or continuation) will be subject to an automatic moratorium if the NCLT dictates the fact that a proceeding is a foreign main proceeding. Also, in the instance Tribunal determines that a case is a foreign non-main proceeding, the NCLT is conferred with the authority to impose a moratorium on litigation as well as arbitration proceedings against a corporate debtor in the country. Under Draft Provisions, the NCLT can refuse to take any action that is detrimental to India’s public policy, however, fail to refer to public policy. Central Government and the IBBI left plenty of material for subordinate legislation in the Draft Provisions.

Cross-border judicial and legal collaboration under the Civil Procedure Code does not necessitate any additional legislation or approvals; however, it lacks the pliability needed to facilitate cooperation in insolvency proceedings[8]. Although delegates from all jurisdictions are welcome to participate, the process depends on an already overburdened Indian judiciary, and the system’s limitations apply. Those jurisdictions that have already embraced the Law will have easier access to Indian proceedings and recognize them.

CONCLUSION

Those jurisdictions that have already embraced the Law will have easier access to Indian proceedings and recognize them. A progressive, forward-thinking market shift is possible with the Model Law’s adoption and through the enactment of effective cross-border insolvency law; creditors and investors from abroad would invest in the country due to the predictability of the investment framework. Likewise, the regulations need to be rewritten, and stakeholder education will be crucial to their successful implementation. Moreover, to effectively adopt and implement the draft chapter, a lot of procedural and legal challenges would have to be addressed.

Author(s) Name: Aathira Pillai (University of Mumbai)

References:

[1] Amadeo, K., 2021. How the 2008 Lehman Brothers Collapse Affects You Today. The Balance <https://www.thebalance.com/lehman-brothers-collapse-causes-impact-4842338> Accessed 8 December 2021

[2] Insolvency and Bankruptcy Code, 2016, s 234

[3] Insolvency and Bankruptcy Code, 2016, s 235

[4] Prsindia.org. 2021,  ‘Invitation of comments from public on Cross-Border Insolvency under Insolvency and Bankruptcy Code, 2016’  <https://prsindia.org/files/parliamentry-announcement/2021-12-15/Cross-Border%20Insolvency%20under%20IBC.pdf> Accessed 8 December 2021

[5] In re: P. Macfadyen & Co. Ex parte Vizianagaram Co., Ltd. [1908] 1 K.B. 67

[6] Civil Procedure Code, 1908, s 45

[7] Civil Procedure Code, s 51

[8] Shukla, S. and Jayaram, K., 2021. Cross Border Insolvency. A Case to Cross the Border Beyond the UNCITRAL <https://ibbi.gov.in/uploads/resources/c3593c9f41984c6f31f278974de3cf37.pdf>  Accessed 8 December 2021

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