CROSS BORDER INSOLVENCY IN INDIA AND THE NEED TO ADOPT UNCITRAL MODEL LAW

Author: AYUSH B. GURAV, a Student of Maharashtra National Law University [MNLU], Mumbai.

Abstract

In the context of an increasingly interconnected global landscape and expanding international trade, this study endeavors to underscore the imperative of integrating the UNCITRAL Model Law into the Indian legal system pertaining to insolvency. The author delves into the historical context of insolvency laws in India, shedding light on their limitations. The objective is to guide readers through the contemporary challenges faced by companies with assets spanning the globe and the resulting hardships for both domestic and foreign creditors.

Furthermore, the research scrutinizes the existing insolvency and bankruptcy provisions in India, aiming to illuminate the disparities between the current inadequate regulations and an optimal legal framework for handling cross-border insolvency issues. This analysis is enriched by the examination of recent judicial decisions, contributing to the effort to bridge the existing gap and pave the way for a more effective legal framework for cross-border insolvency in India.

Keywords: Insolvency and Bankruptcy Code (IBC), Cross-Border Insolvency, UNCITRAL Model Law, NCLAT.

Introduction

In the context of India’s economic development, the insolvency and bankruptcy laws play a pivotal role within the legal framework. These laws, vital for the dissolution of various business entities, impact a spectrum of stakeholders such as banks, employees, creditors, and the government. Recognizing the influence of political and economic pressures on bankruptcy laws, experts assert that an effective insolvency framework is essential for India to attract foreign companies, facilitate the establishment of manufacturing units, address creditors’ concerns globally, and improve its ranking in the Ease of Doing Business Index.

Historically, India relied on disparate legislations like the 2013 Companies Act, Recovery of Debt Due to Banks and Financial Institutions Act, 1993 and SARFAESI, leading to inefficiencies in handling financially distressed firms. In 2016, the Insolvency and Bankruptcy Code, 2016, proposed by the T.K. Viswanathan-led committee, aimed to consolidate existing laws, offering a timely and efficient mechanism for corporate debtor revival. This code transformed insolvency resolution, decreasing resolution periods and reducing non-performing assets. While the Code prioritizes the interests of all stakeholders, its impact extends beyond individual investors, contributing significantly to India’s economic growth and attracting foreign investment through cross-border mergers and acquisitions.

Despite its successes, the Code lacks provisions addressing cross-border insolvency, an increasingly relevant concern in the era of globalization. The current legal framework in India regarding foreign investors and recognition of foreign courts remains in its early stages, requiring further development to align with global standards.

Cross-Border Insolvency: Challenges & Legal Complexities

In the realm of financial distress, the cross-border variant of insolvency emerges when the assets or creditors of a corporate debtor are scattered across multiple jurisdictions, giving rise to the complex landscape of cross-border insolvency. Professor Ian Fletcher, an esteemed scholar in commercial insolvency matters, suggests that ‘cross-border insolvency’ should be viewed as a scenario where insolvency extends beyond the boundaries of a single legal system. In such instances, a sole set of domestic insolvency laws cannot be immediately and exclusively applied, considering the foreign elements involved. The common law courts have a rich history in dealing with cross-border insolvency, as illustrated by the Solomons and Ross case, where an English creditor’s claim against a Dutch trading firm bankrupt in English courts had to be pursued in Dutch courts due to the initiation of bankruptcy proceedings there.

International insolvency situations pose three crucial questions: (a) determination of applicable law, (b) identification of the jurisdiction overseeing the entire insolvency process, and (c) enforcement of judgments controlling assets without conflict. These questions present significant challenges for courts dealing with cross-border insolvency cases, resulting in diverse approaches by jurisdiction-specific courts and a lack of consistent precedents.

In the Indian context, cross-border insolvency concerns manifest in various scenarios, including when Indian debtor assets are abroad, when foreign debtor assets are within India, or when foreign debtor assets are abroad but involve Indian creditors.

Courts typically adopt three approaches when grappling with cross-border insolvency. The territorial approach asserts jurisdiction based on the location of assets, potentially leading to disproportionate distribution issues. The universalist approach proposes a single administrator applying a global regime over assets, disregarding the diversity of insolvency laws in different jurisdictions. A more pragmatic hybrid approach involves jurisdictions collaborating to determine the most suitable venue for proceedings and facilitates effective cross-border cooperation, addressing the absence of a robust legal framework.

The intricate issues arising from cross-border insolvency instill apprehension among creditors, emphasizing the need for a cohesive approach to safeguard their claims amidst insolvency proceedings initiated in the debtor’s main center of interests.

Reforming the Indian Cross-Border Insolvency

The Indian legal framework pertaining to cross-border insolvency proceedings is primarily governed by Sections 234 and 235 of the Code. Originally absent in the initial bill presented to the committee, these provisions were later incorporated to address challenges related to cross-border insolvency. The primary focus of the drafters initially revolved around corporate insolvency resolution processes and liquidation, leaving the intricacies of cross-border insolvency unexplored.

The interim nature of bilateral treaties was justified by the existing legal infrastructure, specifically Section 13 and 44A of the Code of Civil Procedure, 1908, addressing the execution of decrees from reciprocating territories. However, these provisions proved inadequate, leading to instances where the framework fell short in handling the complexities of cross-border insolvency effectively.

The major issue stemming from this inadequacy is the absence of a bilateral treaty with states housing portions of assets. The Code fails to provide a procedure or relief in such situations, creating a gap in addressing these scenarios. Furthermore, establishing reciprocal arrangements with different countries proves cumbersome, hindering the timely settlement of insolvency cases.

Recognizing these shortcomings, the Ministry of Corporate Affairs formed The Insolvency Law Committee in November 2017. The committee, in its March 2018 Report, identified deficiencies in the existing framework, acknowledging the need for a reevaluation of the cross-border insolvency system. The Committee, noting that the initial foundation for the Code had overlooked detailed deliberations on cross-border insolvency, recommended the adoption of the UNCITRAL Model Law in its 2018 Report.

The Model Law on Cross Border Insolvency of UNCITRAL

Introduced in 1997, emerged from the United Nations Commission on International Trade Law’s thirteenth session in Vienna. Distinguished from a United Nations Convention, the Model Law stands out by not necessitating a State to formally notify the United Nations or any other States of its decision to implement it. This flexibility has contributed to its widespread adoption globally, making it the predominant legal framework for addressing challenges arising from cross-border insolvencies.

Comprising five integral chapters, the Model Law provides a comprehensive approach to various aspects of cross-border insolvency, encompassing the access of foreign creditors and representatives to state courts, recognition of foreign proceedings and associated relief, cooperation with foreign courts and representatives, and procedures for managing concurrent proceedings. The Model Law puts forth four fundamental principles aimed at facilitating insolvency proceedings in foreign states.

Principle of Access

It empowers foreign representatives to initiate domestic insolvency proceedings directly in a state that has embraced the Model Law. This principle ensures the right of foreign creditors to be heard and eliminates barriers related to jurisdictions.

Principle of Recognition

The second principle, recognition, allows for the recognition of international proceedings and grants relief through local courts. The Model Law distinguishes between two types of foreign proceedings: Foreign Main Proceedings and Foreign Non-Main Proceedings, based on the corporate debtor’s main interest or establishment.

Principle of Relief

Relief, dictates that relief can be granted in both foreign main and foreign non-main proceedings. In the Indian context, the National Company Law Tribunal (NCLT) determines whether a proceeding qualifies as a foreign main proceeding, resulting in a stay of ongoing domestic proceedings with the foreign representative assuming control. Conversely, in the case of a foreign non-main proceeding, relief is at the discretion of the domestic court.

Principle of Cooperation and Coordination

Lastly, this principal advocates for maximum collaboration among jurisdictions involving foreign courts, domestic courts, and insolvency professionals. This principle aims to establish a framework for concurrent insolvency proceedings, allowing the initiation of domestic proceedings while foreign proceedings are ongoing. Furthermore, it facilitates coordination among multiple concurrent insolvency proceedings in different countries. Nevertheless, a state may decline cooperation if admitting or recognizing a specific proceeding contradicts its public policy. This provision, incorporating the exemption of public policy, has been integrated into the domestic legal frameworks of various countries, including developed nations like the United States.

NCLAT Paves a Way for Cross-Border Insolvency in India

The implementation of IBC in India was a phased process, reflecting the committee’s belief that legal practitioners and judges needed time to acclimate to the new legislation. This deliberate approach was driven by the time-sensitive and intricate nature of the Code, designed to effectively manage insolvency resolution, liquidation, and winding-up processes. Despite the complexity, Indian courts and tribunals not only embraced the Code promptly but also addressed legal gaps through judicial pronouncements.

The inaugural insolvency case in Indian courts involved P. MacFadyen & Co, where the liquidation of an Anglo-Eastern company raised questions following the sudden demise of a partner. Courts in London and Madras validated an arrangement transferring surplus funds for global distribution. English courts later affirmed the agreement as a “proper and common-sense business arrangement,” underscoring its benefit to all parties involved. However, even a century later, there is no comprehensive legal framework for cross-border insolvency, prompting the judiciary to establish precedents.

The Jet Airways case in 2019 marked a significant development in India’s evolving insolvency laws. The defunct airline, facing a debt of over Rs. 36,000 crores, saw creditors taking control as a Netherlands court simultaneously initiated winding-up proceedings. When a State Bank of India-led consortium sought insolvency proceedings in the National Company Law Tribunal (NCLT), the Dutch court’s order was not recognized. The NCLAT, on appeal, allowed collaboration between the Indian and Dutch administrators, emphasizing the need for a cross-border insolvency regime.

Similarly, in the State Bank of India v. Videocon Industries Ltd. case, the NCLT Mumbai Bench permitted the inclusion of overseas oil and gas businesses in Videocon Industries’ group insolvency proceedings. Highlighting the coordination principle in cross border insolvency and underscored the necessity for legislation governing such matters.

Thus, Judicial pronouncements have played a crucial role in fostering an efficient and corporate-friendly approach, addressing gaps in existing laws and paving the way for a comprehensive cross-border insolvency framework in India.

Conclusion

The imperative integration of the Model Law into the existing Insolvency and Bankruptcy Code (IBC) has been consistently advocated by various committees, including the Insolvency Law Committee in 2018, the Eradi Committee in 2000, and the N.L. Mitra Committee in 2001. Recognizing the prevalent deficiency in India’s cross-border insolvency laws, the adoption of the Model Law framework becomes an urgent necessity. Unlike the current provisions of the Code, which fall short in addressing the multifaceted aspects of insolvency, the Model Law offers a comprehensive solution.

The Model Law not only proposes a standardized approach to international insolvencies but also demonstrates sensitivity to the diverse legal frameworks across jurisdictions. Instead of advocating substantive unification of insolvency laws, it allows individual states the flexibility to align their domestic laws with the Model Law, permitting modifications as they see fit. This adaptability ensures a harmonious coexistence with the varied legal landscapes while promoting a unified global perspective on cross-border insolvency matters.

It is noteworthy that the absence of effective provisions for cross-border insolvency within the IBC renders it incomplete, akin to an inadequately baked cake. In light of the dynamic and interconnected nature of today’s financial landscape, the incorporation of the Model Law emerges as a crucial step towards bolstering India’s insolvency framework. The Model Law not only bridges existing gaps but also establishes a foundation for a more robust and globally aligned approach to handling insolvency issues. Therefore, aligning the IBC with the Model Law is not just a recommendation from past committees but a pragmatic response to the evolving complexities of contemporary insolvency challenges.

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