REVIEWING IBC FROM AN INTERNATIONAL PERSPECTIVE: THE CURIOUS CASE OF CROSS-BORDER INSOLVENCY: BY PRAKHAR HARIT

INTRODUCTION

An Indian firm with international operations has assets and businesses in multiple jurisdictions. It is likely to become insolvent due to the dramatic fall in its share price since the year 2017 because of its substantial operating losses and negative cash-flows and based on the report of an auditing firm. But then the question arises that if the company goes bankrupt, which country would have jurisdiction to initiate the corporate insolvency resolution process and whether that country also sells assets located in a foreign country?

INSOLVENCY AND BANKRUPTCY CODE, 2016

Before we start looking for answers, let us have a look at laws guiding cross border insolvency cases and powers authorities possess under such law. In India, Insolvency and Bankruptcy proceedings are guided by Insolvency and Bankruptcy Code, 2016 (hereinafter The Code). With enabling creditors to restructure bad debts and rehabilitate corporate debtors in a time-bound manner, it was believed to a radical rewriting of India’s corporate insolvency procedures. However, soon before its enactment, the Joint Parliamentary Committee while reviewing Insolvency and Bankruptcy Bill in the year 2016, expressed its concerns about the codes’ position in cross border insolvency cases[1]. The committee even noted that “Not incorporating this (cross-border insolvency provisions) will lead to an incomplete Code”. However, Govt. chose to ignore the recommendation and the cross-border insolvency provisions were not included.[2]

 

CURRENT POSITION OF LAW

Speaking of IBCs’ current position in cross border insolvency cases, Section 234[3] of the Code gives provides for ratification of bilateral treaties with another country about insolvency proceedings. Furthermore,  Under Section 235[4], Upon receiving an application from an official liquidator for liquidating assets of a corporate debtor situated outside India, NCLT may issue a letter of request to the competent court or official authority of another country where assets are located and with whom an agreement has been entered under Sec. 234.  Here is the catch. Instead of a uniform global cross-border insolvency process, India must enter different bilateral agreements for every nation. This led to problems like non-recognition of NCLT’s order directly and it cannot be enforced unless an agreement is entered between the countries[5].

CONSTITUTION OF INSOLVENCY LAW COMMITTEE

On November 16 (2017), the Insolvency Law Committee[6] (hereinafter The Committee) was instituted by the Govt. of India which was chaired by Secretary of Ministry of Corporate Affairs (MCA) to review the implementation of the Code in India. Taking note of the above situation, it issued a report on October 16(2018) whereby it opined for implementation of UNCITRAL Cross Border Insolvency Model Law[7] (hereinafter Model Code) with various modifications suited for Indian Context.

THE RECOMMENDATIONS

Model code provided for direct communication between foreign courts and domestic courts to facilitate uninterrupted and fast cross-border insolvency proceedings. However, the committee tweaked the law and gave Central Govt. the power to frame rules regarding conducting of communications between Foreign and Indian courts and recommended to do away with the requirement of a bilateral agreement. It also recommended empowering NCLT and Insolvency Resolution Professional to directly communicate with foreign courts and representatives, while discharging duties under the Code.

Furthermore, the draft provisions categorized proceeding in a foreign into two types to determine the level of control a jurisdiction has over the insolvency process. 

i.               Foreign main proceedings: Proceedings commencing in a jurisdiction where the Corporate debtor has its Centre of Main Interest (COMI). Draft provisions provided some guidance on how to determine Corporate debtor’s Centre of Main Interest[8]. Under Section 14 (Draft Part Z) a presumption was created that “the Jurisdiction where the corporate debtor's registered office is located in its COMI.” However, for the application of such presumption, it was further added that Corporate Debtor should not have moved to another country before three months of filing insolvency application in that country. While ascertaining COMI by NCLT, it is also bound to assess whether such location is ascertainable by third parties like creditors of corporate debtors. In case, NCLT is unable to determine COMI through the above factors, then it is required to conduct assessment through factors prescribed by the Central Government.

Once the proceeding is recognized as a foreign main proceeding, then the proceeding may commence under the code if the corporate debtor has assets in India and such proceedings shall be limited to the assets located locally.

 

ii.              Foreign non-main proceedings: Unlike foreign main proceedings, Foreign non-main proceedings may commence in the jurisdiction where the corporate debtor has an 'establishment' i.e. “a place where the corporate debtor carries out a non-transitory economic activity with human means and assets or services.” However, Internet services-based companies do not necessarily involve human means but do have an establishment in a country. Considering such complexity, the US excluded the requirement of 'human established' from the definition[9]. But the Committee has retained the requirement due to lack of enough conclusive jurisprudence.

In case, foreign policy is recognized after the proceedings have commenced under the Code, then all the non-mandatory relief given by NCLT must be consistent with the Act. Moreover, if any mandatory/non-mandatory relief granted by NCLT is inconsistent with the Code, then it has either to be modified or terminated.

However, there're cases where foreign proceedings have commenced in more than one jurisdiction, then NCLT is expected to seek cooperation and coordination by granting, modifying, or terminating any non-mandatory relief granted to the Corporate debtor to ensure coordination of such foreign proceedings.

Such categorization was also done to differentiate the reliefs that can be given. The draft provisions provided for two types of relief in the proceedings. In Foreign main proceedings, NCLT ‘shall’ declare moratorium[10] to ensure corporate debtors’ assets are protected during insolvency proceedings, on the following:

i.               The institution/continuation of suits or proceedings against the corporate debtor

ii.              Transferring, estranging, or disposing of assets or legal rights by the corporate debtor

iii.            Any action to foreclose, recover, or enforce security interests created by corporate debtor on any of its property.

iv.            Recovery of property by lessor/owner-occupied/possessed by the corporate debtor

Whereas in foreign non-main proceedings, NCLT ‘may’ grant non-mandatory relief like declaring a moratorium on the above-mentioned aspects.

Furthermore, NCLT may also authorize the foreign representative to distribute Corporate debtor's assets or any other person it deems fit upon ensuring the protection of Indian creditors.

CONCLUSION:

With such proposed amendments still pending before the govt.[11], as noted earlier, there’s no effective legal framework for resolving cross-border insolvency proceedings in India. Upon acknowledging such problem, NCLAT in Jet Airways case[12], stepped in for a temporary resolution, and approved UNCITRAL Cross Border Insolvency Model Law by enabling a Dutch Administrator appointed by the Dutch Court to participate in the meetings of the Committee of Creditors (CoC) constituted for the corporate insolvency resolution process of Jet Airways.

Coming back to the facts in hand (as discussed in starting paragraph), as per existing law, the corporate insolvency resolution process can only be furthered only when India shares a bilateral cross-border insolvency agreement under Sec. 234 of the Code. In an exceptional case like Jet Airways, the Judiciary might have stepped in but as an exception and such exception cannot become a norm.

 

 

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[1] report Of The Joint Committee On The Insolvency And Bankruptcy Code, 2015 (April 28, 2016) (Available On https://ibbi.gov.in/uploads/resources/16_Joint_Committee_on_Insolvency_and_Bankruptcy_Code_2015_1.pdf)

[2] Richa Mishra, Surabhi; Bankruptcy Code mum on Mallya-like cases (January 20, 2018), (Available on https://www.thehindubusinessline.com/companies/bankruptcy-code-mum-on-mallyalike-cases/article8520252.ece)

[3] Insolvency and Bankruptcy Code, 2016; Section 234

[4] Insolvency and Bankruptcy Code, 2016; Section 235

[5] Archana Jindal; Cross Border Insolvency in India: A Cherry on the Cake (May 12, 2020) (Available on https://ibclaw.in/cross-border-insolvency-in-india-a-cherry-on-the-cake-by-cs-anchal-jindal/ )

Because of the lack of such provisions, many large cases like Amtek Auto, Essar Steel, Jet Airways, etc. which are undergoing insolvency got confronted with complex cross-border issues which resulted in a significant loss in value of assets of such companies. 

[6] Insolvency Law Committee submits its 2nd Report on Cross Border Insolvency (October 22, 2018) (Available on https://pib.gov.in/newsite/PrintRelease.aspx?relid=184298)

[7] UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation (January 2014) (Available on https://www.uncitral.org/pdf/english/texts/insolven/1997-Model-Law-Insol-2013-Guide-Enactment-e.pdf)

[8]  Report Of Insolvency Law Committee On Cross Border Insolvency (October 16, 2018);  Section 14, Draft Part Z; (Available on http://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf)

[9] See 11 U.S.C. § 1502(5) (defining foreign non-main proceeding as ‘a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment’)

[10] Similar to Section 14 of the Insolvency and Bankruptcy Code, 2016

[11] K.R.Srivats; MCA panel’s scope on cross-border insolvency gets bigger (March 08, 2020) (Available on https://www.thehindubusinessline.com/companies/mca-panels-scope-on-cross-border-insolvency-gets-bigger/article31015843.ece)

[12] Jet Airways (India) Ltd. v State Bank of India & Anr; Judgment dated 26.09.2019 in Company Appeal (AT) (Insolvency) No. 707 of 2019 (Available on https://nclat.nic.in/Useradmin/upload/14485121915d8df2bae7814.pdf)