The rapid growth of technology, trade, and the corporate world has resulted in the rising number of multinational entities eventually creating a borderless relation among countries and businesses.
In the present times, almost every country has trade relations extending beyond one jurisdiction. Having a presence in various jurisdictions also results in having creditors and debtors situated at various such locations. This makes the insolvency process including overlapping of different laws and proceedings, a complicated process.
However, the extent to which the domestic laws coincide with the foreign regulation pertaining to insolvency is a question open for consideration.
What is cross- border insolvency?
When an insolvent debtor has credit and/or debtors in more than one jurisdiction i.e. in different countries, this circumstance is referred to as cross-border insolvency or international insolvency.
In instances of domestic insolvency proceedings, different stages such as identification of the assets of the debtor, identification of credits and the due payable to them are done by the Insolvency Professional whereby, based on the priority rule, the claims are settled post the approval from the Adjudicatory Authority.
The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced as the primary legislation governing insolvency and bankruptcy in India. Even though IBC has made progress in the harmonization of the insolvency process in India, it does not stipulate sufficient procedure for the regulation of cross-border insolvency proceedings.
In the meanwhile, the Ministry of Corporate Affairs (MCA) through its Insolvency Law Committee on Cross-Border Insolvency (ILC) assessed the implementation of the Code. Since the current insolvency framework is not at par with the Global Standards, the ILC in its report suggested re-evaluating the current insolvency framework and adopting the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, 1997 (Model Law) to resolve the concerns relating to cross-border insolvency in India.
LEGAL FRAMEWORK GOVERNING CROSS- BORDER INSOLVENCY IN INDIA
The process pertaining to cross-border insolvency is primarily focused on regulating the insolvency proceedings that operate beyond the ambit of domestic jurisdiction and the constraints involved in the same.
The following are the aspects involved in cross-border insolvency:
- Protection of interests of the domestic and foreign creditors to be at par;
- Value of the assets of a debtor located in different jurisdictions to be safeguarded;
- Uniformity in the insolvency law and practices of different jurisdictions;
- Coordination and cooperation amongst Courts and other Judicial Authorities in various jurisdictions and the domestic laws applicable therein.
Section 234 and 235 of IBC
IBC provides two provisions that assist in cross-border insolvency disputes i.e. Section 234 and Section 235.
Section 234 of the IBC empowers the Central Government to enter into bilateral agreements with foreign jurisdiction in order to resolve the issues of cross-border insolvency.
Section 235 on the other hand, empowers the Adjudicating Authority to issue letters of request on Courts of the country with which the bilateral agreement has been entered into under Section 234 with an aim to address the fate of assets of the corporate debtors which are located outside India.
Although bilateral agreements are a time-consuming, expensive, and not conclusive source of reliance due to the multiple layers of negotiation involved, these provisions at least shine a light on the issue of cross-border insolvency in IBC.
Balancing competing clauses of different treaties entered into with separate jurisdictions due to the presence of assets of the corporate debtor’s assets in multiple locations could be one of the most cumbersome issues to be addressed by the adjudicating authority.
Through its Report in March 2018, the ILC accepted the fact that the present provisions i.e. Section 234 and 235 of the IBC fail to provide a comprehensive framework to address cross-border issues.
Hence, adopting the base from the Model law seems to be a fair solution since the complexities involved in the cross-border regime required in-depth study for adopting the Model law in India as well.
UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY, 1997
The Model Law stipulates the legislative guidance for states on cross-border insolvency. The UNCITRAL Model Law has been strongly recommended for providing a wide-ranging solution for resolving cross-border insolvency issues. The World Bank has acknowledged the international aspects of insolvency proceedings and has observed that the laws for international insolvency should provide for rules of with respect to choice of law, jurisdiction, recognition of foreign judgments and cooperation among the Courts of various countries.
The International Monetary Fund (IMF) is another body that encourages the adoption of the Model Law in order to provide for an effective means of reducing the difficulties faced in cross-border disputes thereby achieving cooperation and coordination amongst Courts and concerned authorities in different jurisdictions.
The Model Law is governed by the following four principles:
The objective of the Model Law is to provide direct access to domestic courts to the foreign creditors and/or professionals thereby enabling them to participate in or commence the insolvency proceedings against any concerned debtor.
The Model Law provides recognition of foreign proceedings in Domestic Courts of any country and enables the Domestic Courts to determine the relief to be granted in accordance with the foreign proceedings.
Another objective of the Model Law is to provide for bringing about effective cooperation between Insolvency Professionals and Courts of various jurisdictions and to ensure coordination so as to efficiently manage the conduct of concurrent proceedings in different jurisdictions.
The aim of the Model Law seems to be to assist countries to mold their insolvency laws in a modern, harmonized and fair framework so as to address the instances of cross-border insolvency more effectively. However, the Model Law respects the differences in domestic laws and primarily focuses on improving cooperation and coordination between countries, instead of attempting to unify the domestic laws.
DRAFT PART Z
With an aim to address the limitations of the prevailing cross-border insolvency mechanism, or the lack thereof, India has released a set of draft guidelines containing a specific chapter i.e. Part Z (the Draft chapter) on cross-border insolvency.
The Model Law is the basis of the Draft. The Draft guidelines were recommended by the ILC vide its Report submitted on 16.10.2018.
Once the need for adopting the Model law was felt, blending the provisions of the legislation along with the Indian framework began and resulted into the birth of Draft Part Z subordinate legislation of which was recommended by the Cross-border Insolvency Rules/ Regulation Committee (CBIRC).
Highlights of the Draft Chapter:
- The Draft Chapter is applicable only to the corporate debtors and is not extended to personal insolvency or individual debtors.
- The Draft Chapter is applicable only to those countries who have adopted the Model Law in their domestic legislation.
- The Draft Chapter determines the Centre of Main Interests (COMI). According to Section 14 of the Draft Chapter, it is presumed that the COMI for a corporate debtor is in its registered office subject to the condition that the registered office the corporate debtor has not been moved to another jurisdiction within three months prior to the commencement of the insolvency proceedings.
- The Draft Chapter provides for two types of foreign proceedings i.e. Foreign Main Proceedings and Foreign Non-main Proceedings.
“Foreign main proceeding refers to a foreign proceeding taking place in the State where the corporate debtor has the centre of its main interests. Whereas, a foreign non-main proceeding means a foreign proceeding, other than a foreign main proceeding, which takes place in a State where the corporate debtor has an establishment.”
JUDICIAL RECOGNITION- JET AIRWAYS DISPUTE [State Bank of India v. Jet Airways (India) Ltd.]
In 2019, Jet Airways became the first Indian company to be involved in a cross-border ruling in India. With the direction to conduct a “Joint Corporate Insolvency Resolution Process”, the National Company Law Tribunal (NCLT) set a leading precedent for the coming cross-border insolvency disputes.
An application under Section 7 of the IBC was filed by the State Bank of India against Jet Airways, on the admission of which, the corporate insolvency resolution process began on 20.06.2019. The NCLT was aware of the commencement of insolvency proceedings against Jet Airways in the Dutch Court with a bankruptcy administrator being appointed in the Netherland for deciding the fate of assets of the Jet Airways located in The Netherlands. The Dutch proceedings began when two European creditors filed a bankruptcy petition against Jet Airways with a claim of unpaid dues amounting to INR 280 crores.
The Bankruptcy Administrator appointed by the Dutch Court moved the Mumbai Bench of NCLT praying the Bench to recognize the insolvency proceedings which had commenced in The Netherlands and stay the insolvency proceeding in India against Jet Airways since a competent Court as per Article 2(4) of the Dutch Bankruptcy Act was adjudicating the matter in The Netherlands.
Parallel proceedings in separate jurisdictions would detriment the interest of the creditors and have a bearing on the restructuring of the assets and claims against the corporate debtor. The NCLT, however, refused to stay the proceedings since Section 234 and 235 of the IBC which covered cross-border insolvency had not been into effect, thereby barring the Bankruptcy Administrator from participating in the Indian insolvency proceedings. The NCLT also refused to recognize the proceedings which had commenced in The Netherlands and declared them void.
On an Appeal before the National Company Law Appellate Tribunal (NCLAT) filed by the Bankruptcy Advisor, the Order passed by the NCLT was set aside on an assurance that alienation of any offshore assets of Jet Airways shall not happen by the Bankruptcy Administrator.
Further, cooperation between the Bankruptcy Administrator and Resolution Professional was directed by the NCLAT whereby the Bankruptcy Administrator shall be allowed to participate in the meetings of the committee of creditors as well as an observer solely.
Pursuant to the decision, a cross-border insolvency protocol was devised by the Resolution Professional and the Bankruptcy Administrator having considered the principles of the Model Law. India was identified as the COMI and the Dutch proceedings happened as non-main centre proceedings.
The need for having a robust framework addressing all niche issues pertaining to cross-border insolvency was long felt. Although various committees have presented their reports on cross-border insolvency, the present framework comprising of Section 234 and 235 IBC are inadequate to cover all aspects of insolvency.
The Model Law is a constructive step taken towards building such a mechanism but it is also not independent of its own shortcomings. In the Indian perspective, reciprocity is one of the biggest concerns amongst all apart from infrastructural inefficiencies in India for the implementation and adoption of the Model Law.
However, subsequent to overcoming the obstacles and shortcomings, the Model Law may be able to assure collaboration and communication across different jurisdictions, as well as successfully resolve cross-border conflicts involving India.
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