[Aakanksha Singh is a fourth-year student of B.A. LL.B.(Hons.) program at Jindal Global Law School, India]
INTRODUCTION
The turn of the 20th century witnessed a rapid spread of globalisation and subsequent increase in trade and investment transactions, which led to a phenomenal growth of International businesses. As businesses began to rely on the growing transnational commercial activity to collect assets and debtors in different countries, they contributed to the formation of a global network of branches and subsidiaries. Inadvertently, there was a rise in matters that concerned insolvent debtors that had assets and creditors in multiple jurisdictions, leading to a need for the initiation of multiple insolvency proceedings in each jurisdiction. The complexities of resolving cross-border insolvency and winding-up procedures of transnational corporations highlighted the inadequacies of domestic legal procedures on the issue. Domestic insolvency laws alienated foreign creditors in the winding-up procedure and it became evident that imposing national solutions on international companies was ineffective.
When multinational companies become insolvent, it consequently results in a conflict between competing domestic laws on questions of disbursement of assets and policies on recognition and protection of creditor interest. This leads to numerous uncoordinated parallel proceedings in multiple jurisdictions, which generally grant varied relief to similarly placed creditors. This paper critically analyses the current regime of cross-border insolvency in India.
UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY
The UNCITRAL Model Law on Cross-Border Insolvency (Model Law) was drafted as a reaction to the need for a robust system to address increasing issues on cross-border insolvency. It was drafted to ensure that state legislations could incorporate the Model Law into their domestic legislation on insolvency in order to resolve complicated cross-border insolvency issues. A majority of the international community has accepted the blueprint to effectively address cross-border insolvency by ensuring that the matter is resolved with minimal interference to domestic insolvency and bankruptcy laws. The Model Law incorporates a set of uniform rules that promote modified universalism norms through access to courts and foreign representatives, recognition of foreign proceedings, the extent of relief that can be granted, and cooperation between foreign courts and representatives in any proceedings. It allows the state to build a system of cooperation by allowing enforcement of other laws alongside the domestic law, where one jurisdiction hosts primary insolvency proceedings and other jurisdictions carry out the ancillary or secondary proceedings. It recognizes two types of foreign proceedings, namely main and non-main proceedings under Article 17. The main proceedings are carried out in the jurisdiction where the insolvent debtor has the centre of its main interest, while the non-main proceedings are organized in jurisdictions where the insolvent debtor has an establishment.
THE INDIAN LAW PERSPECTIVE
Indian jurisprudence on insolvency was recently transformed through the implementation of the Insolvency and Bankruptcy Code, 2016 (The Code) which consolidated laws on the resolution of insolvency of corporate persons. Two provisions, i.e. Sections 234 and 235, address cross-border insolvency under the Code. Section 234 allows the Central Government to agree upon the enforcement of the provision of the Code in an insolvency matter. The reciprocal agreement allows the Centre to implement the provision of the code on the disposal of the assets of an insolvent corporate debtor or its representatives which are situated in a foreign jurisdiction. Moreover, Section 235 of the Code enables the appointed resolution professional to make an application to the National Company Law Tribunal regarding the issuance of a letter of request to a court or foreign representative of a country to enter into a reciprocal agreement, where a piece of evidence or action relating to the asset of the insolvent debtor is required for any proceedings. The purpose of including these two provisions was to facilitate cross-border insolvency resolutions. However, it is evident that the provisions have not sufficiently addressed the complexities of cross-border insolvency. There is a lack of clarity on how courts can resolve a situation where the foreign and domestic courts are at an impasse.
1. The Jet Airways Saga: A step in the right direction
In the 2019 case of State Bank of India v. Jet Airways (India) Private Ltd, the Bankruptcy Administrator that was appointed by the Dutch Court moved the Mumbai Bench (NCLT) praying for recognition of the parallel insolvency proceedings in the Netherlands. The NCLT categorically held that there was provision in the Code that allows for the recognition of the decision of a court of a foreign jurisdiction and held the proceedings in Netherlands as null and void. At the time of the decision, Section 234 and 235 of the Code were not yet brought into effect. The Bankruptcy Administrator moved an appeal against the order in the NCLAT where it was allowed and the order passed by NCLT was set aside. Pursuant to the decision of the NCLAT, the Resolution Professional appointed under the Code, and the Bankruptcy Administrator established a cross-border insolvency protocol on the basis of the principles of the Model Law. India and Netherlands were recognised as the centre of main interest and the non-main insolvency proceedings respectively. While the case study of Jet Airways underscores the positive efforts of the Indian judiciary in dealing with matters of cross-border insolvency, such orders are very rare and are issued on a case-to-case basis due to the lack of a consolidated cross-border insolvency framework
2. Draft Part Z
In 2018, the Insolvency Law Committee presented a report that discussed the incorporation of the UNCITRAL Model Law into the Code. Modifications and variations were made to Model Law in the draft provisions suggested by the Committee to ensure that the laws were appropriate in the Indian Context. Draft Part Z (Draft Z) will apply to all corporate debtors that have assets and creditors located in more than one jurisdiction. As per Section 234 and 235, foreign creditors can request participation in a domestic insolvency proceeding, which the court can allow based on a reciprocal agreement with the State of the foreign creditor. The draft aims to ameliorate the inadequate provisions in the present Code by implementing provisions that allow access to assets of a foreign debtor to creditors in India through the liquidator or other resolution professionals under Clause 3. The draft also explicates guiding rules to determine the centre of main interest under Clause 14 and establishment as defined under Clause 2(c) of the debtor in order to determine which jurisdiction will be carrying out the main and the non-main insolvency proceedings. The exception of ground of public policy has also been added in the draft under Clause 4 as a fail-safe that allows the adjudicating authority to refuse an application for recognition of a foreign proceeding. Furthermore, some provisions address the limited jurisdiction of the Indian Courts, the participation of foreign representatives in the domestic proceedings, the recognition of foreign proceedings, and the grant of mandatory and non-mandatory relief, among other provisions.
3. Critical analysis of The Code and Draft Part Z
The bilateral reciprocal agreements prescribed under Section 234 do not appear to be practically feasible. India has not yet signed any reciprocal agreement, possibly due to complicated and time-consuming nature of the procedure. Even if such an agreement is formulated between India and the foreign jurisdiction in the future, it will be pertinent for the inclusion of clauses that address the applicability of automatic reliefs such as stay or moratorium on domestic proceedings in relation to the debtor. Finally, it will also have to suggest a manner in which the foreign courts and domestic courts can resolve deadlock as an ambiguous agreement may be ineffective in providing an absolute resolution in matters where a corporate debtor has assets and creditors in more than one jurisdiction, as each jurisdiction would invoke their separate bilateral agreements to raise claims before the Indian Courts. Since, Section 235 lacks the support of subordinate legislation that can delineate the complete procedure for the concurrent proceedings in relation with the domestic and foreign authorities, the agreements will have to specify such procedures to ensure clarity and fairness.
While Draft Z seems to be a step in the right direction in the process of reforming the current laws on insolvency in India, it is necessary to ensure that the law-making authorities enact necessary amendments and sub-ordinate legislations that address the processes with cross-border insolvency in detail to provide effect to the provisions in Draft Z. For example, due to the nature of the work carried out by insolvency professionals and foreign representatives in such proceedings, it is important that the government release guidelines or a code of conduct for such individuals. Additionally, the Code prescribes a time limit for the resolution of insolvency matters, and on many occasions, the courts have specified that this limit under Section 12. The Code and the draft do not elaborate upon how this time limit will apply to cross-border insolvency matters that usually have multiple parallel proceedings. There is a need to re-evaluate the time limit that will be available to the courts to dispose of such matters to ensure that the proceedings are time-bound and efficient. Furthermore, the Code needs to specify that, in cases where the centre of the main interest of an Indian debtor is in a foreign jurisdiction, the Code will cease to apply and the provisions therein cannot be invoked for relief or other proceedings to avoid any dispute in jurisdictional legitimacy.
CONCLUSION
The Model Law has severed as an adequate blueprint in many nations while addressing the issue of cross-border insolvency proceedings. However, as India is yet to adopt Model Law, its insolvency remains stagnant and underdeveloped. Indian legislators need to re-evaluate the ineffective system of reciprocal agreements and should consider incorporating parts of Draft Z into the Code to facilitate the coordination between domestic and foreign courts and to regulate the role of insolvency and foreign representative. In addition to considering recommendations in Draft Z, it could be beneficial for law-makers to study international documents such as the International Bar Association’s Cross-Border Insolvency Concordat for general principles, and the American Law Institute’s NAFTA Transnational Insolvency Project for corporate and commercial insolvency resolution practices. With a few changes in the cross-border insolvency regime in the country, India could emerge as a Major Restructuring Hub of Asia.