CROSS BORDER INSOLVENCY: WOEFULLY INADEQUATE ARENA UNDER IBC
[This article was first published on Corporate Professional Today (Taxmann). The copyright to this article is vested with Taxmann Publications and is being republished on this blog without any intention to infringe the copyright owned by it.]
In the current scenario, India does not have any legal framework regulating cross border insolvency. Under Companies Act, 1956, a court could order the winding up of an unregistered or a foreign company. But if an Indian company with the assets in a foreign jurisdiction was sought to be wound up, there is no specific statutory framework for such proceedings. In the absence of any legal framework, it is difficult for a liquidator to enforce the disposition of foreign assets in liquidation. In its current form, the code contains only two provisions that may possibly enable and assist the liquidator with respect to a company having assets in a foreign jurisdiction. Section 234 of the code allows the Union government to enter into reciprocal agreements with other countries to enforce the provisions of the code. Section 235 envisages a “Letter of Request" by the liquidator for action on the assets of the company situated in another country. It is pertinent to note that Section 234 & 235 have not been notified, in consequence, they have no effect. It is well-established fact that the foreign proceedings, orders passed by the foreign courts are well governed by the Code of Civil Procedure, 1908. But it recognises only the final orders and in exclusion to orders pertaining to the Insolvency.
In order to address the same, Ministry of Corporate Affairs issued a public notice for the suggestions on a draft chapter in Cross border Insolvency (proposed Amendment) to be inserted under the Insolvency and Bankruptcy Code, 2016 (IBC). The aforesaid amendment will be based on the United Nations Commission on International Trade Law model law (UNCITRAL). This article will be focussing on the complexities of cross- border insolvency in the Indian context which is being addressed by the proposed amendment to some extent.
Understanding Cross Border Insolvency
Cross Border Insolvency primarily raises three main questions:
(i) Which country's law should be applied?
(ii) Which nation has jurisdiction to administer the insolvency process?
(iii) How are judgments asserting control over assets be enforced?
These complexities can be explained by taking recourse to the various theories. On the basis of the theory of territoriality, each nation is sovereign over assets located within their own jurisdiction and can implement its own laws. Further according to the Universalist approach, a universal law over assets that is widely accepted by the nations will be applied. At last, the Hybrid approach wherein where jurisdictions try and work out the most relevant centre for conducting the proceedings, with co-operation from other jurisdictions in relation to assets that may be located there.
Cross border Insolvency Regulations: Need of the Hour.
When a company runs into debt, it is the creditor who suffers the most even more than the debtor. Upon the admission of a corporate insolvency petition by the National Company Law Tribunal (NCLT), an embargo is imposed automatically which restricts the company to sell off or transfer its assets, etc. However, such an embargo has only territorial application. It only operated within India or governs the assets which are within the boundaries of India. The embargo will not be enforceable over the overseas assets of the company unless any framework is formulated to that effect. To fill such lacunae a proper legal framework regulating the operation of NCLT’s orders and directions outside India and similarly the recognition of foreign court’s order and directions in a cross- border insolvency proceedings were required to be set.
The Insolvency and bankruptcy code, 2016 is silent on the position of foreign creditor’s right to approach NCLT in order to initiate the corporate insolvency proceedings. However, the apex court in the case of Macquaire Bank litmited v. Shilpi cable technologies ltd ., took a liberal view and pronounced that foreign creditors shall have the same right as of the domestic creditor to initiate and participate in the corporate insolvency resolution process under IBC.In order to protect the interests of foreign creditors, the apex court has expanded the ambit of ‘person’, which includes the person residing outside India too.
Cross border Insolvency (Proposed Amendment): A Solution
The new draft seems to be an optimistic approach to address the complexities regarding the cross border insolvency. This UNCITRAL model law attempts to create a mechanism by enumerating a procedure for the cross border insolvency. However, this draft is not a substantive insolvency law. This draft enables the insolvency professional to participate or commence proceedings in the court of other jurisdictions. It further lays down principles for the identification of the most appropriate jurisdiction for the commencement of the insolvency proceedings and emphasises that the resolution professional appointed in a particular jurisdiction should be granted recognition as well as access to the proceedings in other jurisdictions too.
From the analysis of the draft, it can be concluded that the said is based on the principles of Center of Main Interests (COMI) for deciding where the main proceedings for insolvency should be initiated. COMI can be determined by various factors. Some of the essential tests are the determination of command and control test, place of registered office which is generally the head office of the company.
The proposed amendment provides for cooperation between the Indian adjudicating authorities (NCLTs) and foreign courts. Such cooperation is catalysed by conducting a joint hearing with the foreign courts. The resolution professional has also empowered to directly communicate with the foreign representatives. Further, in order to prevent the multiplicity of proceedings against the same corporate debtor under IBC, fetters have been imposed that such proceedings can only be permitted if the corporate debtor has assets situated in India and the domestic proceedings relate to only those assets.
The draft on the cross border insolvency proceedings must be welcomed as it tries to fill the lacuna in relation to the enforceability of domestic adjudicating authority (NCLT’s) orders and in the same line India’s reciprocal obligation to foreign courts. This draft also enables the Indian creditors, access to foreign assets. However, the draft provided unbridled powers to NCLT in recognition of foreign proceedings. Such wide discretion might sometimes be contrary to the public policy of India and since the phrase “public policy” cannot be defined precisely, the jurisdiction of NCLT will depend in the future.
[Akshay Anurag, a final year student at the National University of Study and Research in Law, Ranchi is the Managing-Editor of this blog (TCCLR). He is scheduled to join Singh & Associates, Delhi.]
https://www.livemint.com/Opinion/ojupMIwmMalVd8vY29p7OP/Resolving-crossborder-insolvencies.html Public Notice dated 20.06.2018, available at http://www.mca.gov.in/Ministry/pdf/PublicNoiceCrossBorder_20062018.pdf http://www.mondaq.com/india/x/721994/Insolvency+Bankruptcy/Indias+Proposed+Cross+Border+Insolvency+Regime+Will+It+Trump+The+Gibbs+Rule Civil Appeal No. 15135 of 2017.  Macquarie Bank Limited v. Shilpi Cable Technologies Ltd.  Ian F. Fletcher, Insolvency in private international Law, Second Edition, 2005 at p. 390.