I. ABSTRACT
After six years of implementation of IBC 2016, India doesn’t have uniform law on Cross border insolvency matters. The domestic laws of countries are restrictive and complex so to protect the interest of creditors and to pool out the assets of such insolvent debtors together to bring out an effective resolution plan and maximise the value of assets, uniform legislation is required.
The article provides an analytical study and prospect of Draft Part Z of the proposed framework based on UNICTRAL Model Law on Cross border Insolvency 1997 and also highlights major recommendations of CBIRC “Cross Border Insolvency Rules/ Regulations Committee” which need to be incorporated while implementing the draft proposal. The article highlighted major case laws based on cross-border insolvency disputes in India and judgement thereon. The study highlights the necessity of having a competitive framework of rules and regulations related to cross-border insolvency in India, to provide for a globalised niche in matters relating to cross-border insolvency rules based on reciprocity to create an optimistic creditor-debtor ecosystem which will rule out all the possible impasse of rigid legal framework.
II. INTRODUCTION
After the implementation of Liberalization, Globalization and privatization policy in the Indian Economy, the economy of India emerged as one of the fastest growing economies. Due to Globalization, major Corporate Giants mark their presence in India and many Indian Companies have also expanded their business practices outside India. In the Business world, it is possible sometimes, that businesses suffer losses and are unable to repay their debt. The creditor of such a corporate debtor is left only with the option of instituting Insolvency and bankruptcy proceedings against the debtor to get their money. The major hurdle arises when such debtor has their asset in more than one country which leads to conflicts of national laws of such nation.
In 2016, the Insolvency and Bankruptcy Code in India was implemented to govern the matter related to Insolvency and Bankruptcy proceedings in India as well as outside India. But still, the situation of Cross border Insolvency disputes is unsolved as some parts of the code are yet to be notified after six years of Implementation which arose the need for a globally recognised framework for Cross border Insolvency disputes which India must adopt for a better financial administration of the economy.
The Economic survey report for 2021-22 observed that at present Indian Insolvency law provides no standard for restructuring corporate debtors having cross-border practices and does not recognise foreign proceedings automatically (Chapter 04 – Monetary Management and Financial Intermediation, 2021-22). Recently, the current Finance minister of India in the budget speech of 2022-23 said that necessary amendments shall be made to recognise the cross-border insolvency proceeding (Speech of Hon’ble Smt. Nirmala Sitharaman, 2021-22).
III. ANALYSIS OF CROSS BORDER PROVISION UNDER THE CURRENT CODE,2016
The term Cross border Insolvency is nowhere defined as. Cross-border insolvency is a situation when the insolvent debtor has their asset in more than one nation.
The IBC code of 2016 (Insolvency and Bankruptcy code 2016 (31 of 2016)) under Part V made an attempt to cover the aspect of cross-border insolvency by providing the provision under Sections 234 and 235 of the code whereby it tries to cover the aspect when some asset of the corporate debtor is outside Indian territories.
Section 234 of the code provides for an agreement between the Indian government and the foreign government to extend the provision of this code. Section 235 of the code provides that Resolution professional upon his satisfaction that some asset corporate debtor is situated outside India, then Resolution professional makes an application to adjudicating authority to issue a letter of request to the foreign country where such assets are situated with a prior condition that there exists an agreement between government under Section 234 of the Code.
IV. NEED FOR UNIFIED CROSS BORDER INSOLVANCY LAW
The above mention section under the present code made an unfruitful attempt to resolve the cross-border dispute as the proper analysis of these section provide that to initiate the cross-border proceeding the “government must have prior agreement related to this”. The process of mutual agreement between two countries takes a considerable time and depended upon various factors like the relations between the nation, economic condition, negotiable terms and treaties etc. The government has to individually sign a bilateral treaty or MOU with each country to initiate a proceeding in those nations as there was no international framework to provide multilateral platform to set out rights and obligations of the countries in respect of cross border insolvency which India is part of. As of now, after six years of implementation, no such agreement with any country is made out.
The current provision lacks unified law covering all the nations of the world. Moreover, the provision also failed to cover the situation where no such agreement is signed between the countries. These ambiguous provisions can hamper the process of insolvency when the assets of the corporate debtor or the personal guarantor are situated in a foreign nation and also failed to specify the process during cross-border disputes.
Some of the following needs for having unified cross border insolvency in India are
- International Trade and FDI- The major advantage of having a cross-border insolvency law is that it will promote international trade and encourage foreign investors to invest in the country as such law will provide a framework for resolving insolvency disputes where foreign creditors and foreign assets are involved. Moreover, India is witnessing an upsurge in Foreign Direct Investment (FDI) (figure 1) which may result in a higher occurrence of cross-border insolvency cases owing to a company’s expanded business operations and a global outreach through its investments. Nonetheless, robust cross-border insolvency frameworks can promote FDI by safeguarding investors’ interests and guaranteeing their ability to recoup their investments if an insolvency situation arises.
Source- Economy Survey 2022-23.
Figure 1: Inflow of FDI in India
- Issue of multiple jurisdictions: Cross-border insolvency dispute is complex and involves multiple jurisdictions because of the fact that the assets of debtors in such cases lie in a different jurisdiction and also a creditor of multiple jurisdictions has a claim upon such assets. The adoption of a unified cross-border insolvency regime will resolve the situation by providing a framework relating to the admission of claims and cooperation between courts of multiple jurisdictions
- Protection of creditors’ rights: The cases of cross-border insolvency regimes involve creditors from different jurisdictions as well. The cross-border insolvency regime will provide the framework for the protection of such creditors’ interests by the way providing a mechanism for the recognition and enforcement of foreign decrees in the Indian court. Further, such law will ensure equal treatment of creditors irrespective of nationality.
- Fulfilling international obligations: Since India is a signatory to various international multilateral treaties and conventions such as UNCTRAL Laws, therefore it is under obligation to fulfil its international obligation and the adoption of a common cross-border insolvency framework will help in fulfilling such obligation.
- Complex nature of procedure – The proceedings of cross-border insolvency case involves complex nature of assessments, and due diligence and also involves multiple stakeholders from multiple jurisdictions such as creditors, Insolvency professionals of different entities of the same group etc., Such complexity in absence of any unified law makes the proceedings very complex and difficult for adjudicating authorities to coordinate and enforce such orders or decisions in a different jurisdiction.
V. STEPS TOWARDS UNIFIED CROSS BORDER INSOLVENCY LAW
The lacuna of the 2016 code made the Central Government to reconsider the provisions and difficulties arising out of such provisions. To tackle such problems and to find out solutions for these, the Ministry of Corporative Affairs constituted a committee i.e., ILC “Insolvency Law Committee” under the chairmanship of Shri Injeti Srinivas on 16th November 2017 with the objective to resolve Cross border disputes through the adoption of the UNCITRAL Model Law on Cross-Border Insolvency, 1997 which is based on four pillars, i.e.-
i. Access: Model Law provides direct access to foreign representatives/ creditor and allows participation in domestic court proceedings.
ii. Recognition: Model Law seeks to recognise foreign proceedings by the domestic court and provide provisions for enforcing relief.
iii. Coorporation: Model law seeks to establish a corporation between a foreign court/representative and a domestic court or the resolution professional.
iv. Coordination: In the case of concurrent proceedings in two or more nations against same debtor, the UNICTRAL Model law seeks to establish direct coordination among such nations so as to protect the interest of the creditor.
The ILC committee submitted its first report on 26th March 2018 where the committee was of the view that the provisions of Section 234 and 235 of the code, 2016 are inefficient to deal with Cross border dispute as it lacks comprehensive framework (Report of the Insolvency Law Committee). The Committee submitted its second report on 16th October 2018 wherein the committee made an effort to provide a comprehensive framework for cross border dispute which was based on UNCITRAL Model Law on Cross-Border Insolvency, 1997. The committee also suggested making this framework a part of IBC code 2016 by adding a separate part regarding this matter.
The reason why the framework was based on the Model law was because the Model law is widely accepted in various nation and recognise domestic insolvency proceeding of countries and allow denial of relief under the model law in case such relief sought is against the public policy of the country adopting it.
Hence, the adoption of a committee framework on cross border dispute is the only way to resolve the such problem as it is on line of the UNICTRAL Model law which has wide acceptability and credibility.
VI. OVERVIEW OF PROPOSED DRAFT PART Z
The proposed draft law contained 31 sections under VI chapters and a schedule having two parts (Annexure II, Draft Z, October 2018):
a. Chapter I: “GENERAL PROVISION” (Clause 1 to Clause 7)
This chapter provides for purpose, scope and application of the draft law. The draft law provides that this code shall be applicable to the corporate debtor against whom proceedings are initiated in a foreign court or assistance has been sought by a foreign court or foreign representative in India or against whom a concurrent proceeding has been initiated in India as well as in foreign court or foreign creditor has an interest in proceedings against the corporate debtor in India. Further, the draft also classified the application of this code in two parts based on nation under Part 1 & Part 2 of Schedule 1 of the draft code, whereas part 1 shall contain a list of countries adopting UNICTRAL Model law to whom this code will be applicable at first instance and part 2 will contain list of countries with whom central government will have agreement. This chapter also provides definition for certain terms and limitation on application based on public policy.
b. Chapter II- “ACCESS OF FOREIGN REPRESENTATIVES & CREDITORS TO THE ADJUDICATING AUTHORITY” (Clause7- Clause 11)
This chapter provides foreign representatives, a right to access by applying to Adjudicating authority and allowed the foreign representative to participate in proceeding under this code.
The draft code also provides provision for contravention of this code by way of penalty. The draft code recognises the interest of the foreign creditor and provides provision for access and intimation by way of notice to the foreign creditor when proceedings are initiated under this code.
c. Chapter III: “RECOGNITION OF FOREIGN PROCEEDING & RELIEF” (Clause 12- Clause 20)
This chapter covers the most debatable topic i.e., recognition of foreign proceedings by the way of application to adjudicating authority by a foreign representative. This chapter also defines COMI (Centre of main interest) for the application of this code i.e., registered office of the corporate debtor. Further, the chapter categorises foreign proceedings in two parts, i.e., Foreign main proceedings and Foreign non-main proceedings. In both proceedings relief shall be given and a moratorium shall be issued to protect the interest of the creditor and certain other reliefs but the only difference is that in Foreign non-main proceedings, the relief shall be given on the request of the foreign representative.
d. Chapter IV: “COORPORATION WITH FOREIGN COURTS & FOREIGN REPRESENTATIVE” (Clause 21- Clause 23)
This chapter seeks to facilitate proper communication between Adjudicating authority and foreign court or representative for which the central government will frame guidelines. The draft provision under the chapter also facilitates direct communication between resolution professionals/liquidators & foreign courts/representatives.
e. Chapter V: “CONCURRENT PROCEEDINGS” (Clause 24- Clause 28)
This chapter recognises concurrent proceedings which mean simultaneous proceedings and provides provisions to deal with such proceedings by the way of coordination and cooperation. The draft provision under the chapter shall presume corporate debtor as defaulter once foreign main proceedings are recognised. This chapter also provides for the rule of payment in case of concurrent proceedings.
f. Chapter VI: “MISCELLANEOUS” (Clause 29- Clause 31)
This chapter provides provisions relating to appeals in the NCLT and Supreme Court in case of any person aggrieved by any order.
VII. ANALYSIS OF PROPOSED DRAFT Z
The committee submitted a report in October 2018 wherein it suggested the adoption of the UNICTRAL Model Law on Cross border insolvency 1997 to address the problem of cross-border insolvency disputes. The committee customise the model law accordingly to suit the Indian context and drafted part Z. Although the committee covers major portions in the draft but it left out several aspects for the Central Government to be notified in future and certain aspect was totally neglected. The draft law only covers individual company and enterprise group is not covered. The application of the draft provision is not extended to partnerships and individual debtors. Moreover, the IBC committee took a narrow approach in defining “foreign proceedings” as compared to US and Singapore. The draft provision is also silent for deciding COMI in the case when a company has several registered offices in various jurisdictions.
In order to successfully implement the draft Part Z and to resolve the defect in the proposed draft, the Ministry of Corporate Affairs, on 23rd January 2020, Constituted CBIRC “Cross-Border Insolvency Rules/ Regulations Committee” with the objective to prepare rules and regulations for the implementation of draft part Z but later on the Committee objective was widen to cover the aspect of Group Enterprises and suggest recommendation in the proposed draft.
VIII. MAJOR RECOMMENDATION OF CBIRC (“CROSS BORDER INSOLVENCY RULES/ REGULATIONS COMMITTEE”)
1. The committee suggested the applicability of proposed Part Z to certain types of Indian companies i.e.; Financial Service Providers (FSPs), utility companies and critical infrastructure, with certain exceptions(Report on the rules and regulations for cross-border insolvency resolution, , June 2020, p. Box 2).
2. The committee also recommended to the extent the scope of draft Part Z to foreign LLP which are operating in India. For which the committee suggest amendments in LLP Act, 2018 and Companies act 2013(Report on the rules and regulations for cross-border insolvency resolution, , June 2020, p. Box 1).
3. The Committee recommended allowing all the benches of NCLT to deal with the application of cross borders under Part Z(Report on the rules and regulations for cross-border insolvency resolution, , June 2020, p. Box 3).
4. The committee provides a broad framework for accessing Foreign representative in domestic proceedings under the code and also provide the framework for Indian Professionals to access foreign proceedings(Report on the rules and regulations for cross-border insolvency resolution, , June 2020, pp. Box 4-6).
5. The committee suggests that in case non-possibility to give notice about proceeding to the foreign creditor, the notice must be published on the website of Corporate debtor and on the designated website of IBBI(Report on the rules and regulations for cross-border insolvency resolution, , June 2020, p. Box 8).
6. The committee recommended putting the Identifiable place of central administration on equal footing with other factors(Report on the rules and regulations for cross-border insolvency resolution, , June 2020, p. Box 9).
7. The committee also recommend that the effective date of COMI shall be determined as per local law of the such jurisdiction where proceedings is initiated(Report on the rules and regulations for cross-border insolvency resolution, , June 2020, p. Box 10).
8. The committee provides enlarge list of reliefs which Adjudicating Authority may grant(Report on the rules and regulations for cross-border insolvency resolution, , June 2020, p. Box 12).
9. The committee suggested adopting JIN Guidelines for Cooperation and communication(Report on the rules and regulations for cross-border insolvency resolution, , June 2020) (Report on the rules and regulations for cross-border insolvency resolution, , June 2020, p. Box 13).
IX. JUDICIAL APPROACH TOWARDS CROSS BORDER DISPUTE
The Indian Judiciary has also played a crucial role in the development of cross-border insolvency law while deciding on certain cases.
In the case of SBI v. Jet airways (SBI v. Jet Airways (India) Ltd.,), for the first time, the issue of cross border arises. In the instant case, the State bank of India led a consortium of creditors to institute insolvency proceedings against jet airways by filing an application in NCLT for initiation of CIRP and transfer of asset u/s 14 of the code. The application was allowed by NCLT and CIRP process was instituted in India and a moratorium was declared. Subsequently, after the institution of the CIRP, the NCLT bench become aware of the fact that in Noord Holland District court of Netherland, Jet airways was already facing insolvency proceedings and the Dutch Administrator has filed an application for recognition of such proceedings in India under NCLT. The NCLT did not allow the application on the ground that the provision of part V of IBC is not operative as of now. The tribunal addressed it concern on absence of standardise cross border law by stating that even though foreign proceeding found to be true but there exist no provision in the current law to recognise it. Aggrieved by the order of NCLT Mumbai, the Dutch administrator approaches NCLAT for recognition of proceedings. The NCLAT for the first time recognised the foreign proceedings and allowed the application on the assurance of Dutch administrator that no foreign assets would be alienated. Further, NCLAT allowed Dutch administrator to corporate with Resolution professional in India and allowed coorporation between Indian creditors and European creditors.
This was the first case where NCLAT recognises cross-border insolvency proceedings and allowed corporation and coordination between two proceedings on the basis of UNICTRAL Model Law.
Another case was of the Videocon group (State Bank of India v. Videocon Industries Ltd., ), where for the time NCLAT allowed group insolvency of individual group entities. In the instant case, an insolvency proceeding was instituted against various entities of the Videocon group. CIRP for each entity failed to attract any attractive bid. So, the application was filled in NCLT Mumbai to recognise the “principle of substantial consolidation”. The NCLT bench allowed consolidation proceedings of 13 entities out of 15. Further in February 2020 (State Bank of India v. Videocon Industries Ltd.,), the NCLT allowed the consolidation of foreign based companies of Videocon and extend the moratorium to foreign companies also. In this case, the tribunal felt the need of uniform law on Cross border insolvency law.
Recently, the Delhi court in the case of Toshiaki AIBA v. Vipan Kumar Sharma and Anr. (Toshiaki AIBA vs. Vipan Kumar Sharma and Anr.,), order for the preservation of Personal guarantor Assets in India against whom bankruptcy proceedings were instituted in Japan. In the instant case. Vipan was the personal guarantor of a Japanese shipping company against the loan advance by the bank. On default of repayment of the loan by the company and the personal guarantor, a bankruptcy proceeding was initiated in Japan against Vipan. An investigation reveal that on the expectation of such proceedings, Vipan had transferred his two immovable properties that he owns in India, to his brothers. The administrator of Japan filed a petition in the Delhi High court to declare such transfer void and to recognise the administrator’s right to administer Indian assets as part of proceedings.
The High court allowed the petition of the Japanese administrator and rejected the contention of the defendant that execution is bared by section 44-A of the Code of Civil Procedure 1908. The Court also observed the importance of recognising such foreign proceedings and co-orporation with foreign courts with the view of treating Indian and foreign creditors equally.
Recognition of Indian Proceeding in Foreign Courts/Tribunals
United State Bankruptcy Court recognises recognised the proceedings of NCLT Chandigarh in the case of SBI v. SEL Mfg. Co. Ltd. (SBI v. SEL Mfg. Co. Ltd,) as foreign main proceedings in the US as per section 1502(4) of the US Bankruptcy code (Sec 1502(4) US Bankruptcy Code, 1978) as US bankruptcy court considered India as “Centre of main interests” of the debtor.
X. CONCLUSION
It has been six years of the implementation of IBC code 2016, and still, India lacks a proper framework for dealing with the matter involving cross-border insolvency issues which raises several concerns such as-
a. Extent to which domestic insolvency professionals allow to obtain access to assets of the foreign country.
b. In a matter of payment, to whom to give priority local creditor or foreign creditor in payment.
c. Recognition of proceeding in domestic proceedings in a foreign court or vice versa
The judiciary has adopted a positive approach to recognising cross-border proceedings and calls for an effective framework on the same subject matter. Although the Insolvency Law committee has submitted proposed Draft Part Z to deal with cross-border disputes based on UNICTRAL Model Law which is already adopted in 49 countries (Chapter 04 – Monetary Management and Financial Intermediation, 2021-22) and later CBIRC also recommended certain suggestions in the said draft but still, the proposed draft is Impasse and the problem of cross-border insolvency continue to exist.
The provision of Section 234 in IBC provides a complex and lengthy procedure for cross-border disputes. India is desperately in need of an effective legal framework on cross-border insolvency and the adoption of draft Part Z with recommendations would solve the problem and provide a coordinated and cooperative way of dealing with such problems.
India is on the peak phase where its already has achieved a milestone of becoming World’s Fifth largest economy while surpassing UK and is Expected to surpass Germany and Japan to become the Third largest Economy of the world by 2030. It is thus important to have a sound and effective mode of Cross Border Insolvency Rules which attracts a safe entry and exit of the Corporations following a proper legal framework and this set of rules will help India achieve a positive trade ecosystem and will bridge the rift caused due the juggernaut of rigid legal framework.
BIBLIOGRAPHY
1. (October 2018). Insolvency Law Committee Report . Retrieved from http://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf
2. Budget Specch. (2021-22). Retrieved August 30, 2022, from Indian Budget : https://www.indiabudget.gov.in/doc/Budget_Speech.pdf
3. Economic Survey. (2021-22). Retrieved August 30, 2022, from Indian Budget: https://www.indiabudget.gov.in/economicsurvey/
4. Insolvency and Bankruptcy code 2016 (31 of 2016).
5. Report of the Insolvency Law Committee. , Ministry of Corporate Affairs, Government of India. Retrieved August 29, 2022, from http://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf
6. (June 2020). Report on the rules and regulations for cross-border insolvency resolution, . Retrieved August 31, 2022, from https://ibbi.gov.in/uploads/resources/47fe7576712190d5554e2e50ce646e2f.pdf
7. SBI v. Jet Airways (India) Ltd.,, CP 2205 (IB)/MB/2019..
8. SBI v. SEL Mfg. Co. Ltd,, 26 CP (IB) No. 114/Chd/Pb/2017.
9. Sec 1502(4) US Bankruptcy Code, 1978. (n.d.).
10. State Bank of India v. Videocon Industries Ltd., MA 2385/2019 in C.P.(IB)-02/MB/2018, decided on 12-2-2020.
11. State Bank of India v. Videocon Industries Ltd., , 2019 SCC Online NCLT 745.
12. Toshiaki AIBA vs. Vipan Kumar Sharma and Anr., 2022 SCC OnLine Del. 1260.
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Mr. Krishna Nigam, final year, B.B.A.LL.B. (Hons.) Student at Law College Dehradun, Uttaranchal University. The author can be contacted at [email protected]
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