The wave of Globalization has led business enterprises to expand their reach across geographical boundaries into foreign markets. Globalization has assisted in improving the International Trade drastically. This has however, created a new set of legal issues which need immediate attention. One of these issues is the protection of the rights of the creditors during the insolvency of the business entity when it has assets spread over two or more countries. This is where the concept of Cross Border Insolvency comes into picture.
Cross-border insolvency refers to a situation wherein the assets of the insolvent debtor are present in more than one countries or where some of the creditors of the insolvent debtor are present outside the jurisdiction where the proceeding for insolvency has been initiated. In case of cross-border insolvency, it is important to ascertain the law which has to be applied, which country will have jurisdiction over the matter and how the order regarding the assets would be enforced in various jurisdictions.
NEED FOR CROSS BORDER INSOLVENCY PROVISIONS - JET AIRWAYS INSOLVENCY CASE
In the recent insolvency proceedings of Jet Airways (India) Pvt. Ltd.[i], wherein concurrent proceedings for insolvency were going on in Indian and Netherlands. Dutch Court appointed administrator had applied to NCLT (National Company Law Tribunal) for recognizing the Foreign Proceeding. NCLT denied the request and an appeal was filed with NCLAT.
NCLAT while recognizing the rights of a Foreign Representative of Dutch Court to approach NCLT, also recognized the Dutch proceedings as Foreign Non-Main Proceedings and India as ‘Centre of Main Interest’. Further, Resolution Professional and the Dutch Administrator were encouraged to enter into Cross border Insolvency Protocol to lay down guidelines to ensure cooperation in the insolvency proceedings. NCLAT also granted the right to the Dutch Administrator to attend the meeting of Committee of Creditors but with no voting rights, just to ensure no overlapping of powers takes place.
Though the NCALT did its best to ensure smooth functioning of the proceedings within the framework of the existing provisions, this case is only one case of many such cases which clearly exemplifies the need to have a proper insolvency regime in place in order to facilitate cross-border insolvency proceedings smoothly between two or more countries.
THE CURRENT LEGAL FRAMEWORK WIHICH DEAL CROSS-BORDER INSOLVENCY IN INDIA
Indian Parliament introduced the Insolvency and Bankruptcy Code, 2016 (“the Code”) to resolve the long lasting issue of the obsolete Insolvency laws in India that were scattered over various acts.
Under the present Code, cross-border insolvency has been dealt with under two sections, section 234 and 235 of the Code. Section 234[ii] confers power on the Central Government to enter into bilateral agreements with other countries for the purpose of enforcing the code. Further, section 235[iii] empowers the adjudicating authority to issue a letter of request to an authority in another countries with whom the central government has entered into an agreement under section 234 of the Code, in case the assets of the corporate debtor which have to be accounted for in the proceedings are present in that country.
The given provisions are however, inadequate to deal with a complex case of cross-border insolvency. In case of bilateral agreements, India would have to enter into a different agreement with different countries in line with their domestic laws making each case different and complex to handle. Also, this would not solve the cases where the assets of a debtor are present in more than two countries.
Therefore, there is a need for model and common approach to be adapted uniformly by all countries in order to ensure a hassle free process. Recently, Insolvency Law Committee came out a with a report (“Draft Provisions”) in October, 2018 led by Shri. Injeti Srinivas, proposing to inculcate the provisions of the UNCITRAL Model Law on Cross Border Insolvency (“Model Law”) into the Code to deal with Cross-Border Insolvency.
The Draft Provisions are primary based on the Model Law with certain modifications and amendments to meet the domestic requirement in India. The draft just like the Code only extends to corporate debtors as the provisions for Partnership and Individuals are yet to be notified under the Code. The key features of the Draft Provisions can be discussed in four points as follows:
1) ACCESS TO FOREIGNERS
The Draft Provisions confers the power on a foreign representative to apply to the Adjudicating Authority to recognize a Foreign Proceeding.[iv] Once the Foreign Proceedings has been recognized, the Foreign Representative has the right to be a part of the insolvency proceedings[v]. Foreign Creditors are also entitled to the same rights as an Indian Creditor including the right to receive notices.[vi]
2) RECOGNITION OF FOREIGN PROCEEDINGS
Draft Provisions identifies two types of Foreign Proceedings namely, Foreign Main Proceedings and Foreign Non-Main Proceedings.[vii] Foreign Main Proceedings was those which are initiated in the jurisdiction where the corporate debtor has the Centre of Main Interest (“COMI”). Further, proceedings in any other jurisdiction other than where the corporate debtor has COMI but has an “establishment’, it would be considered as Foreign Non-Main proceedings. The place where the debtor has its registered office is presumed to be the COMI.[viii]
The Draft Provisions provides for Cooperation between Foreign Courts and Foreign Representatives either through the NCLT or the Resolution Professional or the Liquidator, as the case may be.[ix]
4) CONCURRENT PROCEEDINGS
Post the recognition of a Foreign Proceeding in India, a proceedings under the Code can also be initiated in cases where the corporate debtor has assets in India, and the same can only extend to such assets. The Code also allows the recognition of a Foreign Proceedings after commencement of proceedings under the Code. [x]
SHORTCOMING OF THE DRAFT PROVISIONS
Though the Draft Provisions seem to a comprehensive set of rules to govern Cross Border Insolvency, it leaves certain crucial questions unanswered. Few of the grey areas of the Draft Provisions are as follows:
1) Draft Provisions delegates a great amount of power to the subordinate legislature. This includes certain key decisions like the factors to be considered to determine COMI and the guidelines for cooperation. It is important to ensure that such promulgations of rules and regulations coincide with the purpose of the law and are effected in a timely manner.
2) One of the key feature of the Code is its strict timeline. The Draft Provision fails to state whether such timeline is also applicable to Cross Border insolvency and if yes, what are the steps to be taken to ensure the adherence in case of multiple proceedings.
3) The Draft Provisions basis the applicability on reciprocal adoption of the Model Laws into the Domestic Laws. This would limit the applicability of the Indian Cross Border Insolvency Laws to countries who have similar legislation or through bilateral agreement.
4) Draft Provisions confers power on the Adjudication Authority to refuse to take any action in case it is of the opinion that it would be manifestly against public policy. Without any guidelines to exercise this discretion, the same is very vague and gives a wide discretionary power.
5) Determination of COMI plays a prime role in cross-border Insolvency as it determines the place for Foreign Main Proceedings. As per the Draft Provisions, COMI is decided on the basis of the registered office of the Company. This criteria itself would be ineffective in case of MNC’s which have more than one registered office. Therefore, certain subsidiary criteria should be laid down to tackle and avoid confusion in cases of MNC’s or corporate entities with registered office in more than one country.
The current Indian Cross Border Insolvency Framework is highly futile and fails to protect the right of domestic as well as foreign creditors in case of cross-border insolvency proceedings. Owing to the fact that the issue of cross-border insolvency has to be dealt with the cooperation of two or more jurisdictions, there is a pressing need for formulating a standard and uniform framework to deal with such cases on global scale. The Model Laws lays down a strong ground to build up the required domestic laws and ensure uniformity.
The Draft Provisions which are largely based on the Model Laws, lays down a comprehensive legal framework to deal with cross-border insolvency. Though the cooperation between the jurisdictions and the adjudication authorities would play a key role in ensuring efficient implementation of the provisions. Despite all the grey areas, if incorporated in the Code through an Amendment, the Draft Provisions would present a gigantic leap in the legal framework in India, and would to a large extent ensure a smooth and efficient cross-border insolvency in India.
Legislature before incorporating the provisions, should be mindful of the loopholes and hurdles in the Draft Provisions, while also considering the provisions of different countries. Once notified, the India Judiciary can do its part by bringing in some consistency with the interpretation of the given provisions
[i] State Bank of India v. Jet Airways (India) Ltd., CP 2205 (IB)/ MB/2019. [ii] Insolvency and Bankruptcy Code, 2016, § 234, No. 31, Acts of Parliament, 2016 (India). [iii] Insolvency and Bankruptcy Code, 2016, § 235 No. 31, Acts of Parliament, 2016 (India). [iv] Report of Insolvency Law Committee on Cross Border Insolvency, Draft Part Z, § 7. [v] Report of Insolvency Law Committee on Cross Border Insolvency, Draft Part Z, § 9. [vi] Report of Insolvency Law Committee on Cross Border Insolvency, Draft Part Z, § 10-11. [vii] Report of Insolvency Law Committee on Cross Border Insolvency, Draft Part Z, § 15. [viii] Report of Insolvency Law Committee on Cross Border Insolvency, Draft Part Z, § 14. [ix] Report of Insolvency Law Committee on Cross Border Insolvency, Draft Part Z, § 21. [x] Report of Insolvency Law Committee on Cross Border Insolvency, Draft Part Z, § 25.
Student at Symbiosis Law School, Pune.