IMPLEMENTING CROSS BORDER INSOLVENCY PROCEEDINGS IN INDIA USING THE UNCITRAL MODEL LAW: NAGANATHAN RAMASWAMY IYER

Author’s Note:

This article dwells upon the intricacies of the Cross-Border Insolvency Process and analyses the inefficiency of the existing cross-border insolvency law. It brings a cogent argument as to why the UNCITRAL Model Law must be incorporated for cross-border insolvency process in India by analysing important provisions and at the same time lays out certain challenges in implementing the Model Law.

What is Cross-Border Insolvency:

 

When an organization or individual own assets which are abroad or are liable to creditors who are present abroad, and consequently they become insolvent, then such a financial situation is known as Cross-Border Insolvency.

 

When a Cross-Border Insolvency arises, 3 major dimensions[1] must be given importance:

 

1. Protecting the rights of the foreign creditor who has the right over the debtor's property which is in a different jurisdiction in respect with the place where the insolvency proceeding has been initiated.

2. When the assets of the debtors are in various jurisdictions and the creditor wants to involve those assets in different jurisdiction in the proceedings of insolvency.

3. The insolvency proceedings are going on or commenced on the same debtor in more than one jurisdiction.

 

With the advent of Globalization and Privatisation, the foreign investments increased, which eventually led to financial relations between Indian debtors and foreign creditors. This eventually led to an increase the Cross-Border Insolvencies. Hence, formidable laws had to be framed which would govern the Cross-Border insolvency resolution process.

 

Existing Laws for Cross-Border Insolvency in India:

 

Prior to 2015, there was no well-defined law for insolvency proceedings in the territory of India. Many economists and financial experts urged for the development of well-defined laws for the purpose of insolvency resolution. With a lot of considerations and deliberations, the Insolvency and Bankruptcy Code (IBC) was formulated in 2015 and came into effect in 2016. This included provisions and rules which were to be followed at times of insolvency.

 

Section 234 and 235 of the Insolvency and Bankruptcy Code, 2016 pertain to Cross-Border Insolvency. As per section 234[2], the Central Government has the authority to enter into agreement with any other foreign government to enforce the provisions of IBC in relation with assets of corporate debtors or debtors and including guarantors situated in any country outside India.

  

Section 235[3] provides that during the corporate insolvency resolution process, if the Insolvency Resolution Official is of the opinion that the assets of the corporate debtor or debtor or that of a personal guarantor are present in a country which is outside India and the Government of India has an agreement with such country as per the mandate of section 234, then such an Official shall make an application to the Adjudicating Authority seeking action on such assets and if the Adjudicating Authority finds it to be meritorious, he may send a letter to a court of such a country seeking for action on such asset.

 

To the naked eye, these provisions may seem to be fitting. But sadly, there are various flaws in the Insolvency Resolution Process of Cross-Border Insolvencies. 

 

Shortcomings in the Present Cross-Border Insolvency Framework:

 

Even though sections 234 and 235 have mandated an arrangement between the Government of India and other Foreign Governments for taking action on assets situated outside the jurisdiction of India, well defined procedures aren’t specified in the IBC.

 

In comparison to the 3 Dimensions of the Cross-Border Insolvency, the IBC has managed to focus only on the first dimension which relates to the protection of the rights of creditors situated in a foreign country in respect with the assets of the debtor in that country through sections 234 and 235. The IBC has not been able to address the other 2 dimensions which pertain to the jurisdictional capacity of handling the matter at court as well as the differential jurisdictions of the assets of the debtor.

 

Apart from this, there are no provisions which state the time duration for resolution, alternative solutions in cases where there are conflicting laws in the country where the assets of the creditor are present to that of the laws of India and also on the arrangement between the Government of India and the foreign Government. 

 

These loopholes in the Cross-Border Insolvency initiated a Special Committee in 2018 to suggest the inclusion of a chapter on Cross-Border Insolvency in the IBC based on the UNCITRAL Model Law of the United Nations.

 

What is the UNCITRAL Model Law:

The United Nations Commission on International Trade Law (UNCITRAL) Model Law was established in 1997 for the sole purpose of Cross-Border Insolvency disputes. The need for this model law arose due to the issue that every nation had its own manner of managing Cross Border Insolvencies and the Bankruptcy laws these nations were varied[4]. So far 42 countries have adopted the UNCITRAL Model Law in their domestic territories.

 

Why is the UNCITRAL Model Law important?

 

Unlike other United Nations propositions the UNCITRAL was passed as a Model Law and not as a Convention which gives flexible powers to the countries adopting the Model Law to modify or change the provisions according to their needs and requirements.

 

The UNCITRAL Model Law is important due to the presence of certain provisions which facilitate the insolvency proceedings. The following are the most important provisions of the UNCITRAL Model Law[5]: 

 

1. It includes a provision which makes it possible for foreign creditors as well as foreign insolvency representatives to appear at the domestic jurisdictional place of the insolvent member. For example, if a creditor is present in the UK, he has the liberty to appear and make his statement at the place of proceedings, for example, the USA.
2. A special provision is present which distinguishes the foreign insolvency proceedings as foreign main proceedings (where the place of proceeding is the ‘centre of interest’ of the debtor) and foreign non-main proceedings and also specifies the relief depending on the type of foreign insolvency proceedings.
3. It also makes a provision for direct communication of courts and insolvency representatives of one country with another.
4. In case of multiple creditors who are spread across a variety of jurisdictional limits, the UNCITRAL Model Law provides for the concurrent insolvency proceedings of the same debtor in multiple jurisdictional limits.

 

Why should India adopt the UNCITRAL Model Law for its Cross-Border Insolvency Proceedings?

 

Firstly, India as a developing country should take aspiration from developed countries like the US and the UK. Such countries have already adopted the UNCITRAL Model Law and it facilitates their cross-border insolvency proceedings. 

 

The Model Law is much clearer than the provisions of IBC which neither specified a specific set of rules for Cross-Border Insolvencies nor mandated reliefs under such proceedings. The Model Law provides a crisp procedure for Cross-Border insolvency proceedings and the necessary reliefs and remedies along-with it.

 

As the UNCITRAL is a Model Law, it gives flexibility for the State to implement its own changes in the provisions. The Special Committee which recommended the inclusion of the chapter on Cross-Border Insolvency by adopting the Model Law proposed the inclusion of only corporate debtors and not individuals[6]. This is a perfect example of the flexibility in the implementation of UNCITRAL Model Law.

 

As mentioned earlier, one of the most unique provisions of the Model Law is the concurrence among different Countries on the Insolvency proceedings. The courts and Insolvency Authorities can converse amongst each other and arrive at a solution. This is indeed beneficial for a country like India as it reduces the chance of malpractice in the system and also increases the efficiency of solving the issue[7].

 

The Centre of Main Interest is of utmost essence while dealing with the Cross-Border Insolvency. The present laws based on the IBC have not made any provisions in relation with the Centre of Main Interest for the corporate debtor. In such a case, the case can be registered only at the place of the Main Interest of the debtor and the foreign creditor will be at a loss. But, the proposed inclusion in the IBC on the basis of the UNCITRAL Model Law has clearly laid out a distinction between the Centre of Main Interest of the debtor and the Centre of Non-Main Interest of the debtor. Hence depending on whether the proceeding will be a Foreign Main Proceeding (Centre of Main interest of debtor) or a Foreign Non-Main Proceeding, necessary reliefs will be allocated by the Model Law guidelines.

 

With the current set of laws, it is difficult to initiate the Cross-Border Insolvency proceedings mainly due to the jurisdictional constraint. In India, the NCLT and NCLAT are the Appellate Authorities for handling insolvency issues. When a cross-border insolvency issue occurs, it is difficult to specify the jurisdictional limit of the NCLT and NCLAT in respect with the foreign creditors and assets of the debtor. But the Model Law solves the jurisdictional constraints by providing the creditor present in a foreign country to appear at the place where the insolvency proceedings have been initiated.

 

It is therefore important that India adopts the UNCITRAL Model Law, which will provide a respite for foreign creditors who are potentially foreign investors for the country. This will thereby increase the National Income of the country which will be pivotal towards the growth of the nation.

 

Challenges in Implementing the UNCITRAL Model Law:

 

One of the major challenges faced in the implementation of this law would be the vast play of politics. As there is free political participation present in India, Individuals and political parties who would not be benefitted by the Model Law would oppose it and make it difficult for the Legislators to pass this Law.

 

Secondly, India doesn’t have the resources to facilitate high volume insolvency process due to lack of necessary infrastructure. If the Model Law is introduced, the Insolvency Resolution Process would further get delayed and this would be detrimental for the creditors.

 

Thirdly, many people are not aware of the model law and the government has to educate the common people as to what this law is all about. As the largest democracy with over 130 Crore population, this would be a Himalayan task.

 

Conclusion:

The Model Law indeed promises to solve a majority of the problems of Cross-Border Insolvency proceedings. However, the main challenge will be the effective implementation of such a law in a country like India. The very fact that a Special Committee in 2018 suggested the inclusion of the Model Law as a chapter in the IBC shows a positive approach of the Government in improving the Cross-Border Insolvency mechanism, but still the Model Law has not been implemented. The Insolvency and Bankruptcy Code was amended in 2020, but there was no inclusion of the said chapter on Cross-Border Insolvency. Hence, only time will tell when and how the UNCITRAL Model Law would be adopted.

 

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[1] Sathark Jain and Anushka Seth, Cross Border Insolvency: Why India Should Adopt the Uncitral Model Law, INDIAN LAW JOURNAL (Dec. 2, 2020, 5:40 PM), https://www.indialawjournal.org/cross-border-insolvency.php. 

 

[2] Insolvency and Bankruptcy Code, 2016, § 234, No. 31, Acts of Parliament, 2016 (India).

[3] Insolvency and Bankruptcy Code, 2016, § 235, No. 31, Acts of Parliament, 2016 (India).

[4] Sathark Jain and Anushka Seth, Cross Border Insolvency: Why India Should Adopt the Uncitral Model Law, INDIAN LAW JOURNAL (Dec. 5, 2020, 9:52 PM), https://www.indialawjournal.org/cross-border-insolvency.php.

[5] Aparna Ravi, Filling in the Gaps in the Insolvency and Bankruptcy Code – Cross Border Insolvency, INDCORP LAW (Dec. 9, 2020, 2:15 PM), https://indiacorplaw.in/2016/05/filling-in-gaps-in-insolvency-and.html. 

 

[6] Kevin Pullen, Paul Apathy, Alexander Aitken and John Chetwood, India Proposes to Adopt the UNCITRAL Model Law on Cross-Border Insolvency (Dec. 9, 2020, 3:10 PM), https://www.herbertsmithfreehills.com/latest-thinking/india-proposes-to-adopt-the-uncitral-model-law-on-cross-border-insolvency.

[7] Id at 5.