I. Introduction
Cross-border insolvency can be construed as those insolvency matters where a debtor who has declared himself to be as insolvent has assets in more than one jurisdiction or country, and its creditors, too, reside overseas. And, therefore, it could also be termed as an international insolvency.
Cross-border insolvency is a fairly new concept that did not garner, much attention, in India, until the advent of the case of Jet Airways. Jet Airways is deemed to be the foundation stone that familiarized the Indian Judiciary with the need for a robust regulatory framework for dealing with matters concerning cross-border insolvency.
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II. History & Evolution of Cross-Border Insolvency in India
Ever since, the famous LPG policy, i.e., Liberalization, Privatization, and Globalisation was introduced in India, in 1991, international trade because of rapid growth, new trade policies, and freedom, grew rapidly, which led to several business transactions of foreign companies with the domestic ones. Consequently; it led to cross-border mergers & acquisitions and cross-border insolvency.
While India brought into force an Insolvency and Bankruptcy Code in 2016, thanks to several committees that were set up, it was the BLRC, short for Bankruptcy Law Reforms Committee, also known as the Vishwanathan Committee, set up in 2014, whose recommendations were finally implemented in the form of an Act, aforementioned.
III. Understanding the UNCITRAL Model Law
The model law on Cross-Border Insolvency was adopted by UNCITRAL in the year 1997. The UNCITRAL Model Law, in its Preamble, expressly states that it focuses on the legislative framework required to facilitate cooperation and coordination in cross-border insolvency cases. The general objectives as stated in the Preamble are:
a) Cooperation between the Courts and other competent authorities of this State and foreign States involved in cases of cross-border insolvency;
b) Greater legal certainty for trade and investment;
c) Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
d) Protection and maximization of the value of the debtor’s assets; and
e) Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.
There are four essential features that the Model Law identifies as utterly significant, namely:
- Access to local Courts for representatives of foreign insolvency proceedings and for creditors and authorization for representatives of local proceedings to seek assistance elsewhere;
- Recognition of certain orders issued by foreign Courts;
- Relief to assist foreign proceedings; and
- Cooperation among the Courts of States where the debtor’s assets are located and coordination of concurrent proceedings.
All these features are self-explanatory. However, for a quick understanding, they could respectively, be explained as, unrestricted access or barrier-free entry to the representatives of the foreign insolvency proceedings and creditors to the State where proceedings are going on.
Foreign precedent, if any, related to similar circumstances, be given due weightage, and consideration, and qualifying foreign proceedings be recognized as a foreign main proceedings.
Relief is something that is of utmost importance for the orderly and fair conduct of proceedings, and, it could either be mandatory relief or discretionary relief. While the former is only granted in cases of foreign main proceedings, the latter could be granted in both, foreign main or foreign non-main proceedings.
Last but not least, there must be cooperation and coordination amongst the countries that signed the UNCITRAL Model Law, so that the assets of the debtor, despite being situated in a foreign jurisdiction, would be given unrestricted access to inspection, if any such requirement arises. The cooperation and coordination will ensure that the particular country in which they are provides them a barrier-free entry.
This Model Law was negotiated by an intergovernmental group, which included representatives from about 72 countries, 7 intergovernmental organizations, and 10 non-governmental organizations between 1995 and 1997.
More than 41 countries including the US and the UK, with or without making enhancements, have adopted the UNCITRAL Model Law.
IV. Cross-Border Insolvency’s Legal Framework in India
Indian legal regime on cross-border insolvency is provided under IBC 2016 in two sections, namely, 234 and 235. The sections are interpreted as follows:
Section 234: Agreements with Foreign Countries- According to sub-section (1) of this section, the central government, i.e., the Government of India is empowered to enter into agreements with the government of another nation, for the purpose of enforcing the provisions of this Code.
Furthermore, in its sub-section (2), the Central Government, by notifying in the official gazette, directs that the applications of this Code’s provisions about the assets and or property of the corporate debtor or debtor, which also includes the personal guarantor of a corporate debtor, depending upon the case, even though are situated outside India in the places with which the reciprocal arrangements have been made, shall be subjected to such conditions, as may be specified.
Additionally, it must be noted, that when it comes to reciprocal agreements, the experience of India has not been all rainbows and sunshine. Even though sections 13 and 44-A of the Civil Procedure Code, 1908 are expressly provided to deal with foreign judgments and proceedings’ recognition and the execution of decrees, getting the Indian judiciary to recognize the same and uphold their validity is not a piece of cake. Merely, because a bilateral treaty exists does not necessarily guarantee that the parties are going to abide by it and ensure cooperation.
Section 235: Letter of Request to a country outside India in certain cases- As per sub-section (1), of this section, anything that has been provided under this Code or any other law for the time being in force, is to be completely disregarded, if, during the period of an insolvency resolution process, or liquidation or bankruptcy proceedings, either the resolution professional, or the liquidator or the bankruptcy trustee believes that the assets of the corporate debtor or debtor, the personal guarantor being included under it as well, are located outside India, in a country with which India has reciprocal arrangements under the section 234, the said corporate debtor, or debtor, or personal guarantor may file an application with the adjudicating authority, i.e., NCLT. The application may be filed in relation to the assets which might be required as either evidence or any action against them is sought to be set out for the effective conduct of the process or proceeding.
Furthermore, in its sub-section (2), on the receipt of an application under the sub-section (1), the NCLT, may, provided that it is satisfied with the evidence or action relating to assets is required claim as given in the application, issue a letter of request to a Court or an authority of such country which is competent to deal with the request so made.
However, these two provisions have time and again proven that these are not sufficient enough to deal with the dynamic nature of international trade and business environment. These fail to provide a comprehensive legal framework that is necessary to address cross-border insolvency issues.
V. Draft Chapter
In November 2017, a committee named “Insolvency Law Committee” was formed by the Ministry of Corporate Affairs whose first report was submitted in March 2018 where it suggested various amendments to the Code of 2016. For the “Cross-Border Insolvency”, the same committee submitted its report separately, after considering the perplexing nature of the subject matter and the in-depth research which would be a requisite for the seamless adoption of the UNCITRAL Model Law in India. It was 16th October 2018, when the committee finally submitted the second part of the report (concerning Cross-Border insolvency) to the Ministry of Corporate Affairs.
This chapter commonly known as Draft Part Z, was essentially designed so that there could be an effortless blending of the provisions enlisted in the UNCITRAL Model Law with the Indian regulatory framework. It was recommended by the Cross Border Insolvency/ Regulations Committee (CBIRC).
Draft Part Z, also known as Draft Chapter is a set of draft guidelines containing a chapter that especially caters to the limitations of the prevailing cross-border insolvency mechanism, or the lack thereof. The Model Law has been kept as the basis of this draft.
The draft consists of 29 sections, which primarily include the general provisions and public policy exception, access of foreign representatives and creditors to the adjudicating authority, recognition of a foreign proceeding and relief, cooperation with foreign courts and foreign representatives, concurrent proceedings, and some miscellaneous provisions. Some of the notable features are as follows:
1. Applicability- The draft chapter only applies to corporate debtors, which also includes foreign companies established under section 234 of the Companies Act, 2013, provided that it shall not be extended to individual debtors or personal insolvency and partnership firms. The rationale behind the limited applicability is deemed to be a cautious approach. It is believed that the legislature might want to observe the consequences or obstacles first, if any, faced by the corporate debtors before it extends the same treatment to the individual debtors and the partnership firms.
2. Reciprocity- Part Z aims for legislative reciprocity which could be elucidated as the recognition and enforcement of the foreign court’s judgment in the domestic Court, if the foreign jurisdiction has implemented similar kinds of laws, as well. Therefore, it would only come into the picture when the foreign State with which India is dealing in cross-border insolvency issues has already adopted the UNCITRAL Model Law in its regulatory framework and the Central Government of India, too agreed in section 234 of the Code.
3. Distinction between proceedings and determination of COMI- The Draft chapter, classified proceedings into two broad categories: foreign main proceedings and foreign non-main proceedings. This distinguishment was done on the basis of COMI, which is expandable to the “Centre of Main Interest”. COMI refers to the jurisdiction where the registered office of the corporate debtor is situated. The COMI may be ascertained by the NCLT by conducting an assessment depending upon the requirement.
Foreign main proceedings are, therefore, those proceedings that take place where the COMI is, while the foreign non-main proceedings are those where the corporate debtor has an establishment and not a registered office.
An “establishment” is a place from where the corporate debtor carries off his non-economic transitory activities with the help of human means and goods or services.
This distinction is utterly significant to determine and demarcate the level of control that would be exercised by the foreign courts during the period when the insolvency resolution process is being carried on, and will further help in circumscribing and understanding the type of relief that would be granted by the adjudicating authority. Hence, it could be deduced that COMI will ultimately be the deciding factor in determining the type of proceedings which will take place, in case of cross-border insolvency issues.
4. Rights of Foreign Creditors- All the foreign creditors of the corporate debtor are vested with few rights, as per the Draft chapter. These rights are regarding the commencement of, and participation in, a proceeding. Moreover, when a notice is served to the creditor in India, a similar notice is to be served to a foreign creditor as well, to ensure transparency and orderly conduct of proceedings.
5. Appeals and Appellate Authorities- Any appeal made against the order of the adjudicating authority (NCLT) shall be made to the NCLAT, within 30 days of the date of receipt of such order. However, if the appeal, because of reasonable and sufficient causes wasn’t filed within the prescribed time limit, an extension of 15 days may be provided by the NCLAT.
Similarly, if the appeal is made against the order of NCLAT, and it involves a question of law, it shall be made to the apex court within 45 days of the date of receipt of such order. Additionally, if the appeal wasn’t made in the allotted time, the period may be extended to 15 days, only if it is proved that there existed a sufficient and reasonable cause that prevented the filing of an appeal within the prescribed time frame.
VI. The Jet Airways Case: A Remarkable Instance of Indian Judiciary Dealing with Cross-Border Insolvency Disputes
The NCLAT in 2019, gave a ruling, which resulted in Jet Airways (India) Limited becoming the first Indian company to be exposed to cross-border insolvency. The NCLAT in this case blatantly disregarded the precedent in the dynamic insolvency law in India and ordered the conduct of a “Joint Corporate Insolvency Resolution Process” under the regime.
The origin of this case could be traced back to 2019. On 20 June 2019, the State Bank of India applied against Jet Airways, under section 7 of the Code, and thus, began the “Corporate Insolvency Resolution Process” (hereinafter referred to as CIRP). The adjudicating authority was very well aware of what was going around in the Dutch courts, as well, since, Jet Airways had insolvency proceedings going on in there, too. The European creditors had an unpaid debt of approximately INR 280 crores, for which there was a Bankruptcy Administrator appointed in the Netherlands, so that the assets of Jet Airways’ located therein, could be taken care of. The European creditors wanted the seizure of one of Jet Airways’ Boeing 777 aircraft for which they got it parked in the Schiphol Airport in Amsterdam.
When Jet Airways’ CIRP began in India, the Dutch Bankruptcy Administrator moved the NCLT’s Mumbai Branch with the primary motive of the recognition of the insolvency proceedings in the Netherlands in India. It was also requested by the Administrator to withhold the CIRP in India, because of the reason that similar proceedings were going on in the Dutch court as well and it received its jurisdiction under Article 2(4) of the Dutch Bankruptcy Act. It was accentuated, that the occurrence of parallel proceedings in different jurisdictions might have an adverse effect and that it could probably have an altering impact on the restricting process along with the creditors involved.
The foremost issue in this case was regarding the jurisdiction. The company, Jet Airways was registered and incorporated in India, however, the courts in the Netherlands were trying to adjudicate upon and pass appropriate orders about the bankruptcy.
NCLT decided to not withhold the insolvency proceedings, and the reason for the same was sections 234 and 235 of the Code. Although these two sections were there and dealt with cross-border insolvency, they were not implemented yet, and hence, their dormant state empowered the NCLT to deal with the case, as they desired. NCLT held, that because of the absence of a law governing cross-border insolvency, the Dutch Bankruptcy Administrator cannot be allowed to participate in the Indian Insolvency Proceedings, therefore rendering the Netherlands’ proceedings null and void.
On being aggrieved by the NCLT’s decision, the Bankruptcy Administrator approached the NCLAT and moved an appeal there against the order of NCLT. The NCLAT allowed the appeal in the following contexts:
- Upon an assurance being provided by the Bankruptcy Administrator that it would not be alienating any offshore assets of Jet Airways, NCLAT set aside the order passed by the NCLT.
- The Bankruptcy Administrator was allowed by the NCLAT to cooperate with the Indian Resolution Professional as appointed under the Code. Moreover, permission to participate in the meetings of the Committee of Creditors was also provided. However, this power was only limited to the extent of observation and prevention of any violation of powers.
- Lastly, the NCLAT ensured cooperation between the Indian and Dutch parties for finalizing a resolution plan that would best suit the interests of Jet Airways and all its stakeholders.
Consequent to the directions issued by the NCLAT, the Resolution Professional appointed under the Code and the Dutch Bankruptcy Administrator, mutually agreed upon a “cross-border insolvency protocol”, whose foundation was laid down on the principles of UNCITRAL Model Law.
India was held to be as the COMI, and the proceedings held in the Netherlands, were held to as the “foreign non-main proceedings”.
VII. Conclusion
Cross-border insolvency is an up-and-coming legal domain, which has an abundance of scope if an appropriate regulatory framework is implemented. India which had a face-off with a major cross-border insolvency dispute in 2019, has already the expertise and guidance of experts who have drafted a chapter, popularly known as “Draft Chapter” or “Draft ‘Part Z’ ”, which is as per the guiding principles of the UNCITAL Model Law of 1997. The implementation of the Chapter in the Code will help in tackling any future case that comes before the Indian Judiciary, quite easily, and would consequently lead to, several benefits such as economic benefits, flexibility, and protection of domestic interest. Moreover, domestic insolvency proceedings would be given precedence, and procuring a remedy in jurisdictions with reciprocity would become easier, too. Along with these, cooperation and coordination would increase manifolds between domestic and foreign jurisdictions, leading to amicability and better international relations.
Although, at the initial stage, difficulties would undoubtedly be there, the long-run benefits will surely outweigh the hard work and hurdles that would be faced by the policymakers in the implementation and effective adaptation of the Draft Chapter into the Indian legal framework. This chapter is drafted in such a manner, that once, brought into force with the help of amendments would successfully be able to address the disputes of Cross-border insolvency, in the Indian legal landscape.
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