Author: Tanay Dubey, IV year of B.A.,LL.B. from ICFAI Law School , ICFAI UNIVERSITY Dehradun
Co-author: Dr. Vivek Kumar, Assistant Professor from ICFAI Law School , ICFAI UNIVERSITY Dehradun
Abstract
In themodern age, where the boundaries of states have diminished and Cross border trades are flourishing at high, an Insolvency regime that has little safeguards on offer for foreign creditors, is a law that certainly is in need of reforms.The enactment of Insolvency and Bankruptcy Code 2016 has consolidated the laws regarding Insolvency procedure but the same is ineffective to provide answers to the rights of foreign creditors of a Corporate Debtor. The National Company Law Tribunalhas addressed the issue, suggesting the Legislature to bring reforms for effective disposal of matters concerning Cross Border Insolvency.
This paper is intended to give out a bird’s-eye view of the currentregime regarding Cross Border Insolvency process in India. This study is theoretical and is based on secondary data.
Index Terms: Cross Border Insolvency, Insolvency and Bankruptcy Code 2016, India, Corporate Debtor, National Company Law Tribunal
Introduction
In the modern world where countries have opened their economies and have improved trade relations with other countries to boost their own economies and development. The modern world requires the countries to open up economies to get investments from the foreign sources and are highly dependent on these investments for prosperous economies, body Corporates are the best routes for these incoming investments. This raises a question over the jurisdiction and laws to be applicable when a Financial Debtor fails to repay the debts and has assets or securities present in different countries where a conflict of laws arises. This is where need of a law for regulating effective, smooth and easier Cross Border Insolvency comes to Picture. Hence when an insolvent debtor has credit and/or debtors in more than one jurisdiction i.e. in different countries, this circumstance is referred to as cross-border insolvency or international insolvency.
Insolvency and Bankruptcy Code 2016: a brief Introduction
“The legislative history of legislation relating to indebtedness goes back to the year 1964 when the 24th Law Commission recommended amendments to the Provincial Insolvency Act, 1920. This was followed by the Tiwari Committee of 1981, which introduced the Sick Industrial Companies Act, 1985. Following economic liberalisation in the 1990s, two Narsimham Committee Reports led to the Recovery of Debts and Bankruptcy Act, 1993 and the Sarfaesi Act, 2002. Meanwhile, the Goswami Committee Report, submitted in 1993, condemned the liquidation procedure prescribed by the Companies Act, 1956 as unworkable and being beset with delays at all levels—delaying tactics employed by the management, delays at the level of the courts, delays in making auction-sales, etc. This then led to the Eradi Committee Report of 1999, which proposed amendments to the Companies Act and proposed the repeal of SICA. This Committee echoed the findings of the Goswami Committee and recommended an overhaul of the liquidation procedure under the Companies Act.”[1]
“It was for the first time, in 2001, that the N.L. Mitra Committee of RBI proposed a comprehensive Bankruptcy Code. This was followed by the Irani Committee Report, also of RBI in 2005, which noted that the liquidation procedure in India is costly, inordinately lengthy and results in almost complete erosion of asset value. The Committee also noted that the insolvency framework did not balance stakeholders' interests adequately. It proposed a number of changes including changes for increased protection of creditors' rights, maximisation of asset value and better management of the company in liquidation. In 2008, the Raghuram Rajan Committee of the Planning Commission proposed improvement to the credit infrastructure in the country, and finally a Committee of Financial Sector Legislative Reforms in 2013 submitted a draft Indian Financial Code, which included a “resolution corporation” for resolving distressed financial firms.”[2]
“All this then led to the Bankruptcy Law Reforms Committee, set up by the Department of Economic Affairs, Ministry of Finance, under the Chairmanship of Shri T.K. Viswanathan. This Committee submitted an interim report in February 2015 and a final report in November of the same year. It was, as a result of the deliberations of this Committee, that the present Insolvency and Bankruptcy Code of 2016 was finally born.”[3]
Provisions Relating to Cross Border Insolvency under the Code
Section 234: Agreements with foreign countries[4].
(1) The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code.
(2) The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified.
Section 235: Letter of request to a country outside India in certain cases.[5]
235. (1) Notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding.
(2) The Adjudicating Authority on receipt of an application under sub-section (1) and, on being satisfied that evidence or action relating to assets under sub-section (1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to a court or an authority of such country competent to deal with such request.
Committees to Suggest Reforms for Cross Border Insolvency
The Ministry of Corporate Affairs (hereinafter, MCA) in October 2018 formed the Insolvency Law Committee (ILC) under the chairmanship of Mr. Injeti Srinivas that submitted a report oncross-border insolvency to the MCA (hereafter, “ILC Report”). The ILC Reportrecommended theadoption of the UNCITRAL Model Law on Cross-Border Insolvency as a part of the Insolvency and Bankruptcy Code, 2016. The ILC also submitted a draft law referred as PART Z which called for adoption of model laws with certain modifications as the said Part within the Insolvency and Bankruptcy Code 2016.
On 23rd January, 2020, the MCA constituted the Cross Border Insolvency Rules/Regulations Committee (hereafter, CBIRC). Its original remit was topropose the rules and regulatory framework that would enable the implementation of Part Z of the IBC proposed by the ILC Report. On 21st February, 2020, itsremit was expanded to analyse the UNCITRAL Model Law on Enterprise GroupInsolvency and to make recommendations governing the resolution of group enterprises for the purpose of the IBC. The CBIRC has submitted its report on 20th June 2020 tracing out in detail the framework for adoption of UNCITRAL Model Law as Part Z of the Insolvency and Bankruptcy Code 2016.[6]
The four key elements of the Part Z[7]
Part Z of the ILC Report recommends the adoption of the four key elements of theUNCITRAL Model Law on Cross-Border Insolvency, with some necessary modifications. These elements are:
1. Access: The UNCITRAL Model Law on Cross-Border Insolvency allows foreign representatives and foreign creditors direct access to domestic courtsand confers on them the ability to participate in and commence domestic insolvency proceedings against a debtor. Direct access to foreign creditors forinsolvency proceedings of Indian companies under IBC is already permitted. Similarly, direct access of foreign creditors to winding up proceedingsof foreign debtor companies under the Companies Act 2013 is also alreadypermitted.From the perspective of this report, the question of access is hence limitedto the access of a foreign representative to Indian proceedings and access ofIPs under the IBC to foreign proceedings.
2. Recognition: The UNCITRAL Model Law on Cross-Border Insolvency allowsrecognition of foreign insolvency proceedings by a domestic court. It alsoallows reliefs to be granted consequent to such recognition. The court mayrecognise a proceeding as main or non-main.3 Reliefs are allowed to begranted irrespective of whether the proceeding is main or non-main. Uponrecognition of a main proceeding, certain reliefs, such as a moratorium onsale or transfer of assets, are required to be granted whereas these may beat the discretion of the court for non-main proceedings.
3. Cooperation: The UNCITRAL Model Law on Cross-Border Insolvency laysdown the basic framework for cooperation between domestic and foreigncourts, domestic and foreign insolvency professionals, and courts and domestic or foreign IPs.Part Z adopts the principle of direct cooperation between: (1) the insolvency courts (domestic or foreign), (2) between courts and insolvency professionals or foreign representatives, and (3) between domestic and foreigninsolvency representatives. However, it proposes that cooperation betweendomestic and foreign courts be subject to Central Government guidelines.Notably, Part Z also allows for cooperation in respect of foreign proceedingswhich have not sought recognition.
4. Coordination: The UNCITRAL Model Law on Cross-Border Insolvency provides a framework for commencement of domestic insolvency proceedings,when a foreign insolvency proceeding has already commenced or vice versa.It also provides for coordination of two or more concurrent insolvency proceedings in different countries by encouraging cooperation between courts. The principle of coordination between proceedings has been adopted in thePart Z.
UNCITRAL
The United Nations Commission on International Trade Law is a subsidiary of United Nations General Assembly, and was established in 1966 by Resolution 2205 (XXI) OF December 17,1966. The Commission carries out its work in annual sessions which are held in alternate years held at Vienna International Centre and at United Nations Headquarters in New York.In the year 1999 a proposal was made to the Commission that it should undertake further work on insolvency law, specifically corporate insolvency, to foster and encourage the adoption of effective national corporate insolvency regimes.
In December 1999 an exploratory meeting to consider the said proposal was held and on the basis of its recommendations the commission gave Working Group V (Insolvency Law) a mandate to prepare a comprehensive legislative guide. In 2001 the first draft of Legislative Guide on Insolvency Law was considered by the Working Group V, and the work developed through seven one-week sessions, the final of which took place in March of 2004.The Final negotiation on the draft legislative guide on insolvency law were held during the thirty-seventh annual session of UNCITRAL held in New York from 14-21 June 2004 and the text was adopted by consensus on 25th June 2004. Subsequently the United Nations General Assembly adopted the resolution 59/40 of December 2004 expressing its appreciation to UNCITRAL.
The UNCITRAL Model Law on Cross-Border Insolvency, adopted in 1997, is designed to assist States to equip their insolvency laws with a modern, harmonized and fair framework to address more effectively instances of cross-border insolvency. Those instances include cases where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State where the insolvency proceeding is taking place.
It focuses on authorizing and encouraging cooperation and coordination between jurisdictions, rather than attempting the unification of substantive insolvency law, and respects the differences among national procedural laws. For the purposes of the Model Law, a cross-border insolvency is one where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State where the insolvency proceeding is taking place.
Purpose of the Model Law
“The purpose of this Law is to provide effective mechanisms for dealingwith cases of cross-border insolvency so as to promote the objectives of:
(a) Cooperation between the courts and other competent authorities ofthis 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 thatprotects the interests of all creditors and other interested persons, includingthe debtor;
(d) Protection and maximization of the value of the debtor’s assets;and
(e) Facilitation of the rescue of financially troubled businesses, therebyprotecting investment and preserving employment”[8]
Relevant Provisions of the UNCITRAL Model Law
Article 1[9]. This Law applies where:
(a) Assistance is sought in this State by a foreign court or a foreign representative in connection with a foreign proceeding; or
(b) Assistance is sought in a foreign State in connection with a proceeding under [identify laws of the enacting State relating to insolvency]; or
(c) A foreign proceeding and a proceeding under [identify laws of the enacting State relating to insolvency] in respect of the same debtor are taking place concurrently; or
(d) Creditors or other interested persons in a foreign State have an interest in requesting the commencement of, or participating in, a proceeding under [identify laws of the enacting State relating to insolvency].
2. This Law does not apply to a proceeding concerning [designate any types of entities, such as banks or insurance companies, that are subject to a special insolvency regime in this State and that this State wishes to exclude from this Law].
Article 2. Definitions[10]
For the purposes of this Law:
(a) “Foreign proceeding” means a collective judicial or administrativeproceeding in a foreign State, including an interim proceeding, pursuant toa law relating to insolvency in which proceeding the assets and affairs ofthe debtor are subject to control or supervision by a foreign court, for thepurpose of reorganization or liquidation;
(b) “Foreign main proceeding” means a foreign proceeding takingplace in the State where the debtor has the centre of its main interests;
(c) “Foreign non-main proceeding” means a foreign proceeding, otherthan a foreign main proceeding, taking place in a State where the debtor hasan establishment within the meaning of subparagraph (f) of this article;
(d) “Foreign representative” means a person or body, including oneappointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs orto act as a representative of the foreign proceeding;
(e) “Foreign court” means a judicial or other authority competent tocontrol or supervise a foreign proceeding;
(f) “Establishment” means any place of operations where the debtorcarries out a non-transitory economic activity with human means and goodsor services.
Article 8[11]. Interpretation:
In the interpretation of this Law, regard is to be had to its international origin and to the need to promote uniformity in its application and the observance of good faith.
Article 15.[12] Application for recognition of a foreign proceeding
1. A foreign representative may apply to the court for recognition of the foreign proceeding in which the foreign representative has been appointed.
2. An application for recognition shall be accompanied by:
(a) A certified copy of the decision commencing the foreign proceeding and appointing the foreign representative; or
(b) A certificate from the foreign court affirming the existence of the foreign proceeding and of the appointment of the foreign representative; or(c) In the absence of evidence referred to in subparagraphs (a) and (b), any other evidence acceptable to the court of the existence of the foreign proceeding and of the appointment of the foreign representative.
3. An application for recognition shall also be accompanied by a statement identifying all foreign proceedings in respect of the debtor that are known to the foreign representative.
4. The court may require a translation of documents supplied in support of the application for recognition into an official language of this State.
Article 21[13]. Relief that may be granted uponrecognition of a foreign proceeding
1. Upon recognition of a foreign proceeding, whether main or nonmain, where necessary to protect the assets of the debtor or the interests ofthe creditors, the court may, at the request of the foreign representative,grant any appropriate relief, including:
(a) Staying the commencement or continuation of individual actionsor individual proceedings concerning the debtor’s assets, rights, obligationsor liabilities, to the extent they have not been stayed under paragraph 1 (a)of article 20;
(b) Staying execution against the debtor’s assets to the extent it hasnot been stayed under paragraph 1 (b) of article 20;
(c) Suspending the right to transfer, encumber or otherwise dispose ofany assets of the debtor to the extent this right has not been suspended underparagraph 1 (c) of article 20;
(d) Providing for the examination of witnesses, the taking of evidenceor the delivery of information concerning the debtor’s assets, affairs, rights,obligations or liabilities;
(e) Entrusting the administration or realization of all or part of thedebtor’s assets located in this State to the foreign representative or anotherperson designated by the court;
(f) Extending relief granted under paragraph 1 of article 19;
(g) Granting any additional relief that may be available to [insert thetitle of a person or body administering a reorganization or liquidation underthe law of the enacting State] under the laws of this State.
2. Upon recognition of a foreign proceeding, whether main or nonmain, the court may, at the request of the foreign representative, entrust thedistribution of all or part of the debtor’s assets located in this State to theforeign representative or another person designated by the court,providedthat the court is satisfied that the interests of creditors in this State areadequately protected.
3. In granting relief under this article to a representative of a foreignnon-main proceeding, the court must be satisfied that the relief relates toassets that, under the law of this State, should be administered in theforeign non-main proceeding or concerns information required in thatproceeding.
Article 23[14]. Actions to avoid acts detrimental to creditors
1. Upon recognition of a foreign proceeding, the foreign representative has standing to initiate [refer to the types of actions to avoid orotherwise render ineffective acts detrimental to creditors that are availablein this State to a person or body administering a reorganization orliquidation].
2. When the foreign proceeding is a foreign non-main proceeding,the court must be satisfied that the action relates to assets that, underthe law of this State, should be administered in the foreignnon-main proceeding.
Case Law: Jet Airways (India) Ltd v. State Bank of India & Anr.[15]
Facts: The consortium of lenders filed a case against the leading airline in India, the question that the lessors raised was with respect to the deregistration and repossession of the aircraft objects that were being operated by Jet Airways. Even though India had acceded to the Cape Town Convention and Protocol, the enabling legislation, that is the 2018 Bill has not been passed.
The NCLAT Directed the Administrator of ‘Jet Airways (India) Limited’ (Offshore Regional Hub) to and the ‘Resolution Professional’ of ‘Jet Airways (India) Limited’ to form an agreement of terms and conditions with the Dutch Administrators, Subsequently the same was formed and submitted before the Hon’ble NCLAT tittle as Cross Border Insolvency Protocol, wherein all the other clause were agreed upon by all the Creditors, a dispute arose with the terms of Clause 6.1.2. of the Protocol.
Held: In the present case, we make it clear that the ‘Committee of Creditors’ have no role to play as the agreement reached between the ‘Dutch Administrator’ and the ‘Resolution Professional’ of India is on the basis of the direction of this Appellate Tribunal. In spite of the same, unfortunately the ‘Committee of Creditors’ interfered with the matter and put its view to the ‘Resolution Professional’ resulting into difference of the suggestions.
The Dutch Trustee’ is equivalent to the ‘Resolution Professional’ of India, therefore, as per law he has a right to attend the meeting of the ‘Committee of Creditors’. However, as we do not want to overlap the power between one and other, we are of the view that the suggestion given by the ‘Dutch Trustee’ (Administrator) as shown in its ‘Clause 6.1.2’ should be part of the Agreement - ‘Cross Border Insolvency Protocol’. Therefore, we direct to insert ‘Clause 6.1.2, as suggested by the ‘Dutch Trustees’, which reads as follows:
“6.1.2 [The Dutch Trustee shall be invited to participate in the meetings of the CoC as an observer but shall not have a right to vote in such meetings.]”
Conclusion
There is a need and there has been proper work done to reform the Insolvency regime in India by the Ministry of Corporate affairs and the committees that have sought the introduction of Part Z which will be an adaptation of the UNCITRAL Model Law to deal with the cases involving issues of Cross Border Insolvency. Its now not a matter of if the Parliament will legislate on the issue, but just when will the Parliament be introducing the Part Z. The Insolvency and Bankruptcy Code 2016 since its inception has been an ever developing and judicially evolving legislation, with new precedents coming in every other day, it only a matter of time now to see how India adapts the Model Laws as part of its Insolvency regime.
[1]Mobilox Innovations (P) Ltd. v. Kirusa Software (P) Ltd., (2018) 1 SCC 353 [2] ibid [3] ibid [4] Insolvency and Bankruptcy Code 2016 [5] ibid [6]https://ibbi.gov.in/uploads/whatsnew/2021-11-23-215206-0clh9-6e353aefb83dd0138211640994127c27.pdf [7] ibid [8] Preamble to the Model Law [9] UNCITRAL Model Law On Cross-Border Insolvency 1997 [10] UNCITRAL Model Law On Cross-Border Insolvency 1997 [11] UNCITRAL Model Law On Cross-Border Insolvency 1997 [12] ibid [13] ibid [14] UNCITRAL Model Law On Cross-Border Insolvency 1997 [15]2019 SCC OnLine NCLAT 1216