In the era of globalisation, the national economies have integrated into a global economic system and the cross-border trade has increased drastically which changed the entire fabric of businesses. Globalisation and growth in international trade have resulted in companies having business in multiple jurisdictions across the globe. When an investor invests in a multinational enterprise having assets and creditors in foreign nations and the event that enterprise becomes insolvent, such insolvency would have cross-border consequences, leading to conflicts between the national laws concerning insolvency and liquidation. When a company goes into insolvency, both foreign-based and domestic investor would seek to protect their rights and interests and this is when cross-border insolvency laws come into the picture.
The insolvency regime of a sovereign nation reflects the priorities of that State. India, on 28-5-2016, took a step forward in this direction and introduced the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC” or “the Code”). The Code, primarily, provides the mechanism for the creditors of an entity to initiate corporate insolvency resolution process (hereinafter referred to as “CIRP”) in the event of default in the payment of debts by the corporate debtor. However, resorting only to national laws in relation to multinational players could be ineffective. In turn, a robust institutional arrangement is needed to efficiently deal with such disputes having cross-border consequences. Earlier, countries had intra-jurisdiction focused insolvency laws operating within their borders and therefore, leading to conflicts in the restructuring of the foreign-based corporate debtor. Hence, with the ultimate aim to facilitate a uniform approach, the United Nations Commission on International Trade Law proposed the UNCITRAL Model Law on Cross-Border Insolvency, 1997 (hereinafter referred to as “the Model Law”).
Unlike other multilateral conventions, the Model Law merely offers legislative guidance for States. Its primary objective is to assist States to equip their insolvency laws with a modern, harmonised and fair framework to address cross-border insolvency disputes efficiently and swiftly. The World Bank noted that insolvency proceedings may involve diverse interests and therefore, the legal system of a nationmust provide for unambiguous law concerning jurisdiction, recognition of foreign proceedings, cooperation with foreign courts, and choice of law. Also, in the light of the growing significance of cross-border insolvencies, the International Monetary Fund (IMF) encourages States to adopt the Model Law as it provides an effective mechanism for recognition of foreign proceedings and cooperation among different courts and administrators.
II. Existing mechanism for cross-border insolvency under IBC
The cross-border insolvency law guarantees an efficient restructuring mechanism to both creditor and corporate debtor by equitably safeguarding their interest and ensuring legal certainty of trade and investment. At present, following the recommendations of the Joint Committee on the Insolvency and Bankruptcy Code, 2015, the Code contains two provisions surrounding cross-border issues, yet to be implemented by the Central Government.
Section 234: Agreements with foreign countries
In order to enforce the provisions of IBC, the Central Government is empowered to enter into bilateral agreements with other nations to administer the cross-border ramifications and may also direct the application of the Code when assets or property of a corporate debtor or its personal guarantor is situated at any place in the country with which reciprocal arrangement has been expressly signed.
Section 235: Letter of request
This provision calls for the application of the doctrine of reciprocity, when, in the course of the insolvency resolution process, any evidence or action relating to the assets of a corporate debtor or its personal guarantor is required, the resolution professional or the liquidator or the bankruptcy trustee make an application to the National Company Law Tribunal (hereinafter referred to as “NCLT”) and NCLT, if satisfied, may issue a letter of request to a court or an authority of the country with which an agreement has been made to deal with such request.
The prima facie objective behind incorporating the abovementioned provisions in the Code is to maximise the asset value of the corporate debtor, however until now, for that purpose, India has not signed any reciprocal agreement with any other nation and also, no effective measures have been taken to implement the inter-government agreements.
The rationale behind uncertainty regarding implementation stems from the very fact that treaties with different nations would have varying provisions involved and therefore require lengthy negotiations between nations in their individual capacities. However, the burden on the judiciary will certainly be lessened if the nations adopt a uniform framework concerning cross-border insolvencies.
III. The Model Law and the 2nd Insolvency Law Committee Report: How significant are they?
With the object of having a hassle-free solution for the international insolvency resolution process, the Secretariat of UNCITRAL, on 30-5-1997, issued the UNCITRAL Model Law on Cross-Border Insolvency (hereinafter referred to as “the Model Law”). It is indeed the most widely accepted legal framework to deal with cross-border insolvencies and has been adopted in 44 States with varying modifications suitable for their domestic legal systems.
Considering the inadequacy of laws dealing with cross-border insolvencies in India, the Insolvency Law Committee (hereinafter referred to as “ILC”) in its second report on 16-10-2018, recommended incorporating the Model Law, with certain modifications, into the existing IBC. The adoption of the Model Law in India has been recommended in the past by the Eradi Committee and the N.L. Mitra Committee in the years 2000 and 2001 respectively. The Model Law, if adopted, would be helpful in numerous ways such as for improving the ranking in ease of doing business thereby significantly increasing the inflow of FDI, prioritising proceedings and domestic stakeholders (in the event when foreign proceedings are against domestic public policy), remedying Indian creditors in other jurisdictions, devising a mechanism for cooperation, etc.
The Model Law seeks to provide a uniform approach to cross-border insolvency proceedings by harmonising national insolvency laws dealing with it. It does not provide for substantive unification of insolvency laws, rather it respects the diversity found in the laws relating to insolvency of various jurisdictions and allows the States to draft their national laws in consonance with the Model Law after certain modifications as they deem necessary. The proposed amendment by the ILC is based on following main principles of the Model Law.
The “access” principle
As per the provisions of the Model Law, it will remove or subside many current barriers that are experienced by foreign liquidators with respect to jurisdiction, standing and right to be heard, and will allow any foreign representative to apply directly to access the court of a State which has adopted the Model Law so that they can also initiate domestic insolvency proceedings.
The “recognition” principle
It allows recognition of foreign proceedings and the relief by the domestic court that flows from that recognition. With the intent to determine the level of control that the jurisdiction has over the insolvency resolution proceedings and type and extent of relief that NCLT may grant in foreign proceedings, the Committee Report of 2018 recognises two types of foreign proceedings:
(i) Foreign Main Proceedings (proceedings in the State where the corporate debtor has a centre of its main interests); and
(ii) Foreign Non-main Proceedings (proceedings in the State where the corporate debtor has an establishment).
The “relief” principle
It specifies the relief that could be granted in both the foreign main and non-main proceedings. If NCLT determines that a proceeding is a foreign main proceeding then the ongoing domestic proceedings will be put on stay and the estate therein will be handled by the foreign representative so-appointed. Whereas, if a proceeding is termed as foreign non-main proceeding, then such relief is at the discretion of the domestic court.
The “cooperation” and “coordination” principle
The Model Law lays down the basic framework for the maximum possible cooperation and communication between domestic and foreign courts, and insolvency professionals. It also provides a framework for concurrent insolvency proceedings i.e. for the commencement of domestic proceedings, when a foreign proceeding has already started or vice versa. It also provides for coordination among two or more concurrent insolvency proceedings taking place in different countries by facilitating cooperation among them.
Moreover, the Model Law also contains a public policy exemption provision according to which a court may refuse to grant recognition to foreign proceedings or to take suitable action against it under the Model Law if admission or recognition of such proceedings is inconsistent with the public policy of its nation. A significant number of countries, including the USA, the UK and Singapore, have adopted the public policy exemption with varying degrees into their domestic legal systems.
Considering its universality and the flexibility that it provides by accommodating the domestic laws with necessary modifications, the second Insolvency Law Committee Report of 2018 has advocated for introduction of cross-border insolvency provisions based on the Model Law in the IBC. Adoption of the Model Law will serve as a strong signalling factor and may be seen as a progressive and forward-looking market reform while projecting a positive international image.
IV. The role of Indian judiciary in solving cross-border insolvency cases
There arise multiple complexities when it comes to the implementation of the law governing cross-border insolvencies in jurisdictions across the globe. Nations with common law have long been debating the impact of Court of Appeal decision in Gibbs & Sons v. La Societe Industrielle et Commerciale des Metaux, wherein it was held that full discharge of debtor’s liability towards certain creditors granted by a foreign court in a contract made and performed in England may not be readily acceptable in English Court.
The Gibbs rule though criticised off later but was followed grudgingly in the English courts. Several other courts have, time and again, highlighted the need to do away with the Gibbs rule.  It has been opined that, if a foreign creditor participates in the insolvency proceedings, he ought to be deemed to have submitted itself in personam to the jurisdiction of the insolvency court and cannot seek his claim independently. However, such restructuring puts the corporate debtor in an unfortunate situation bearing the costs of attaining the discharge of his liability in multiple jurisdictions.
These complexities in cross-border insolvencies do not end there but can be found in bankruptcy laws of other jurisdictions as well. Considering the Indian scenario, the last two years have witnessed the admission of certain high-valued companies to the insolvency resolution process, having assets and creditors outside the territorial scope of India, thereby raising concerns regarding the procedure to be adopted in such situations. India saw it first cross-border insolvency in 1908 in P. MacFadyen & Co., In re, wherein the proceeding was concerning the liquidation of an Anglo-Indian partnership, after the death of one of the partners. Consequently, the London and Madras Trustees entered into an agreement, confirmed by the respective courts, by which it was promised that surplus sum would be remitted to the other proceeding for global distribution. When the validity of this agreement was challenged, the English courts stated that the agreement was “clearly a proper and commonsense business arrangement” and that it was “manifestly for the benefit of all parties interested”.
Hence, with no constructive law in place dealing categorically with the cross-border insolvency parlance, the judiciary had no option but to set out an encouraging precedent for all such future matters.
Unfolding the Jet Airways saga: First Indian cross-border insolvency case
Recently, in 2019, Jet Airways became the first Indian company to undergo cross-border insolvency as a consequence of the ruling of the National Company Law Appellate Tribunal (hereinafter referred to as “NCLAT”) directing a “Joint Corporate Insolvency Resolution Process” under IBC, thus setting a breakthrough for the evolving insolvency law of the country. The crucial case is concerning the defunct debt-ridden Mumbai-based Indian-international airline that was estimated to owe a total liability of more than Rs 36,000 crores to its domestic and foreign lenders including the operational creditors.
The prominent question that rekindled the debate in the instant case is regarding the jurisdiction of the Netherlands court to try the matter relating to the bankruptcy of the airline registered and incorporated in India and to pass the suitable orders for its restructuring.
In the early June 2019, State Bank of India (hereinafter referred to as “SBI”) led consortium of creditors approached NCLT seeking an official declaration of Jet as bankrupt and initiation of CIRP proceedings against it to preclude the transfer of assets under Section 14 of IBC. Subsequently, on June 20, Jet was admitted to CIRP following which the adjudicating tribunal was apprised of the fact that two months earlier, in fact, a bankruptcy petition had been filed against the airline in the Noord-Holland District Court of Netherlands for asserted claims of unpaid dues worth nearly Rs 280 crores, by the two European creditors of the group seeking the seizure of one of the Jet Airways’ Boeing 777 aircraft that was parked in the Schiphol Airport in Amsterdam. Following which, a month later, the Dutch Court appointed a Netherlands-based bankruptcy Administrator to take charge of Jet assets located in the Netherlands.
Soon after the admission of the Jet Airways to CIRP in India, the administrator appointed by the Dutch Court approached NCLT, Mumbai Bench requesting it to recognise the insolvency proceedings in the Netherlands and to withhold the CIRP proceedings taking place in India, as the bankruptcy proceedings are already taking place against the airline in the competent court claiming its jurisdiction under Article 2(4) of the Dutch Bankruptcy Act and, therefore, the two parallel proceedings happening in different jurisdictions would vitiate the restructuring process and have an adverse impact on the creditors. However, the NCLT refused to withhold the Indian proceedings on the rationale that the twin provisions, they being, Sections 234 and 235 dealing with cross-border insolvency under the IBC had not yet been notified by the Government, and in the absence of such a law, the Tribunal outrightly barred the Administrator so appointed by the Dutch Court from participating in the proceedings going on under the IBC and, further, in para 29 of its order categorically declares the overseas proceedings null and void.
Aggrieved by the decision of the adjudicating authority, the Dutch Court appointed administrator appealed against the NCLT’s order. The Appellate Tribunal, on the assurance that the administrator would not alienate any offshore assets of the airline, set aside the order of the NCLT and further, allowed the Dutch Administrator to cooperate with the Indian Insolvency Resolution Professional and to participate in the meetings of the Committee of Creditors (hereinafter referred to as “CoC”). The NCLAT went further and allowed seamless cooperation between the Indian parties and their Dutch counterpart to conclude a resolution plan in the best interest of the Jet Airways and all its stakeholders. Thus, the curious case of Jet Airways brought forth an interesting attempt by the judiciary to incorporate Model Law framework into the Indian insolvency law and practice until such time as the law is enacted.
In consonance with the directions of the Appellate Tribunal, Resolution Professional and the Dutch Court-appointed Administrator agreed upon the “cross-border insolvency protocol” construed on the principles of Model Law framework, recognising India as the “centre of main interest” and therefore the proceedings taking place in the Netherlands as the “non-main insolvency proceedings”. The NCLAT taking the onus while issuing suitable directions for coordination, significantly not afforded the Dutch Administrator the right to vote in CoC, however, allowed him to attend the meetings only to the extent of preventing any potential overlap of powers.
The complication that exists in the present case is that the distinct doctrinal perspectives on cross-border insolvency adopted by India and Netherlands, wherein, the former adheres to the “universalist approach” of cross-border insolvency, which stipulates the institution and administration of insolvency proceedings by one court in the jurisdiction where the corporate debtor is domiciled or has the registered office, taking into account all his assets irrespective of their location while the latter adhere to a sort of “territoriality approach” of cross-border insolvency, which limits the jurisdiction of the court only to the assets present within the territory of the State and abstains the administrator so-appointed to take charge of the assets not situated within its particular territory. However, the Dutch Supreme Court in Yukos Finance v. Liquidator, OAO Yukos Oil Company, had allowed the foreign administrator to effectively exercise its powers without harming the interests of the creditors located in the Netherlands, based on a condition precedent that his actions are in accordance with the laws of the jurisdiction in which the insolvency proceedings are being commenced.
NCLAT in its ruling succeeded in striking out a “balance between the relief granted to the foreign representatives and the interests of those affected by such relief”, in line with the objective of the Model Law framework. The Jet Airways case is, interestingly, one of many such cases which exemplified the need to incorporate the cross-border insolvency regime in the existing laws.
The Curious Case of Videocon Industries: First Indian “Group Insolvency” Case
In August 2019, the Mumbai Bench of NCLT recognised the principle of “substantial consolidation” and allowed to consolidate 13 of the 15 Videocon Group companies. It was for the first time when consolidation of group companies for insolvency proceedings received green signal under IBC given the rationale that it would help in maximising the asset value of the debtor, thereby, setting a benchmark for group insolvency.
The doctrine of “substantial consolidation” is, primarily, an enabling doctrine, by way of which, adjudicating authority combines/merges the assets and liabilities of the individual corporate entities and proceed with a common insolvency resolution and restructuring process in order to achieve a fair value for the stressed assets of group companies while keeping in mind the interests of the creditors.
In December 2017, SBI filed insolvency application against the Videocon Industries at NCLT, Mumbai Bench, seeking to admit and initiate CIRP proceedings. Soon after the admission of Videocon Industries to CIRP, SBI led consortium moved an application seeking “substantial consolidation” of the 15 companies belonging to the corporate debtor, where the consortium was the common creditor. Meanwhile, separate CIRP proceedings were instituted against all the individual entities, however, it failed to obtain any attractive bid because of the lack of collateral assets and their inability to survive individually. In the absence of any express provision in the Code, the Tribunal analysed bankruptcy jurisprudence in the US and the UK and subsequently using its equity jurisdiction decided in favour of the consortium.
Interestingly, in February 2020, NCLT allowed the second round of group insolvency of Videocon Industries with 4 foreign-based companies. The Tribunal ordered to club overseas oil and gas businesses in the ongoing insolvency proceedings on a plea filed by the managing director of the Videocon Group for extension of the moratorium, thereby questioning extraterritorial applicability of IBC and procedure involved in collation of foreign subsidiaries assets with the ones in India. This case, all over again, voiced the issues surrounding coordination theory in cross-border insolvency and expressed the need for legislation governing the same.
First instance of recognition of Indian insolvency proceedings under Chapter 15 of the US Bankruptcy Code
Chapter 15 of the United States Bankruptcy Code provides for the procedure through which bankruptcy courts recognise the foreign insolvency proceedings. The United States, in 2005, adopted the UNCITRAL Model Law framework for the efficient administration of cross-border insolvencies by devising a mechanism which necessarily rules out the possibility of initiating separate proceedings in different jurisdictions. Pursuant to the Model Law, in November 2019, in SBI v. SEL Mfg. Co. Ltd., the Indian insolvency proceeding pending before NCLT, Chandigarh Bench secured, for the first time ever, recognition as “foreign main proceeding” within the meaning of Section 1502(4) of the US Bankruptcy Code, by the US bankruptcy court. This came after the application filed by the foreign representative attributed India as the “centre of main interests” of the foreign debtor, which was SEL manufacturing.
The Court, in this case, held that the recognition of the Indian insolvency proceeding is not contrary to the public policy of the United States. Further, it went on to state that it is equally pertinent to entitle the foreign representative and the debtor to all the reliefs in consonance with Section 1520 of the Code, to ensure maximisation of asset value without recklessly disregarding interests of the creditors.
V. Concluding remarks
Given the lack of a legal framework to deal with cross-border disputes under IBC, the observations of the courts in recent decisions indicate a positive judicial trend as regards the potential of India to devise a corporate-friendly approach. Such cases should, however, serve as a clarion call for the Government so that the process of incorporating cross-border insolvency provisions is expediated. Notably, the draft provisions, as proposed by the ILC, if adopted, would provide a framework that could go a long way in ensuring coordination and communication among States to successfully resolve the cross-border insolvency disputes. A law in line with the Model Law, if enforced, will sufficiently strengthen the Code and would encourage foreign direct investment (FDI), therefore, pave the way for ease of doing business in India, which is the need of the hour. Moreover, though Sections 234 and 235 of the IBC suggests a way to deal with international insolvencies, their implementation in more practical scenarios attracts complexities. The entire process involves signing bilateral agreements with different nations having different terms of arrangement and entailing lengthy negotiations to work that out. For example, what is a fallback plan in situations when there exists no bilateral arrangement with the foreign nation? Such implications necessitate the adoption of uniform and stable framework like Model Law to resolve cross-border insolvency cases and thus, easing the whole process. Hence, IBC being completely silent on cross-border insolvency is akin to a half-baked cake.
* BA LLB (Hons.) 3rd year law student, Damodaram Sanjivayya National Law University, Visakhapatnam.
**BA LLB (Hons.) 2nd year law student, Damodaram Sanjivayya National Law University, Visakhapatnam
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