Addressing Cross-Border Insolvency In India
Author: LawSphereX
Category: Corporate & Insolvency
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ADDRESSING CROSS-BORDER INSOLVENCY IN INDIA
Hanan Fathima & Muhammed Rayhaan, Gujarat National Law University
ABSTRACT
With the dalliance of globalisation and the emergence of foreign investment, the advent of cross-border insolvency poses a plethora of challenges in the modern economy, despite its virtues. This brings to question several concerning issues, such as the protection of domestic creditors due to the varied nature of global insolvency laws; drawbacks in recognition of foreign proceedings; conflicting claims in different jurisdictions; and more, all actively hampering coordination among different courts and adjudicating authorities (as understood in the case of the Hanjin Shipping Company in
2016) and necessitating striking a careful balance to maintain everyone's
interests. In India, the Indian Bankruptcy Code (IBC) further exacerbates the situation with its complete lack of any mention of the term ‘cross-border insolvency’ and the absence of any structured framework or legislation in this regard. The existing arrangement, as per Sections 234 and 235 of the IBC, continues to remain largely inadequate and ineffective, breeding the aforementioned complications of recognition and coordination, as evidently observed in the collapse of Jet Airways. This often requires bilateral agreements as the only plausible solution (as per Section 234) in the current system, which fosters an atmosphere of inconsistency and delay, all of which severely need to be mitigated to alleviate the burden among different parties and pave the way for seamless insolvency procedures with India.
The Insolvency Law Committee (ILC) of the Ministry of Corporate Affairs derived a similar conclusion in their October 2018 report, further analysing the United Nations Commission on International Trade Law’s (UNCITRAL) Model Law on Cross-Border Insolvency and categorically commenting on how the provisions of said Model Law may or may not be adopted by the IBC. Furthermore, the ILC report elucidates certain key advantages of implementing the Model Law and officially recommends its adoption in the form of a Draft Cross-Border Insolvency Legislation, or alternatively, Draft Part Z. For reference, the UNCITRAL Model Law sustains itself as a landmark legal framework in the matter of cross-border insolvency, enhancing cooperation, ensuring fair treatment, facilitating timely and effective resolution, and promoting legal certainty in intricate situations.
The provisions of this law, such as the prevention of discrimination against foreign creditors and direct access to resources in domestic courts, significantly improve procedures and enhance cooperation, thus proving themselves as a valuable contribution to domestic insolvency regimes, specifically India, which is not part of the 51 nations that currently implement this law. This prevailing situation puts forth the necessity of a deeper analysis of the existing concerns of cross-border insolvency and, consequently, the adoption of the UNCITRAL Model Law in India, which are the objectives this paper seeks to achieve.
Conjointly, the researchers' methodology involves a secondary analysis of the aspects mentioned supra in defining the nuances of this agenda and ultimately addressing the various concerns of this matter with reference to Indian laws and regulations, holistically decrypting the complex phenomenon of cross-border insolvency. Introduction and Theory As the magical numbers of 1991 dawned in the calendars of the Republic of India, humanity outdid itself with the introduction of the New Economic Policy. The golden words of liberalisation, privatisation, and globalisation (hereinafter LPG) would forever transform the Indian economy, allowing it to grow multi-fold due to this legislation, propelling itself as the 5th largest economy in the world.
The virtues that we draw today from this legislation are evident, a holistically developed economy with growth in all 3 sectors, soaring foreign reserves, record import and exports and the like. Furthermore, the benefits transgress mere numbers, extending to the common welfare of the people as well. Indians and residents now enjoy the vast availability of foreign products, their quality and performance, boosting sentiment and satisfaction. Indian manufacturers now also have access to foreign investment and technology, which largely improves their effectiveness. With the entry of multi-national companies (hereinafter MNCs) into the country, skilled labour now finds seamless employment in several fields. All this draws one very simple conclusion: there is no denying the unequivocal advantages the LPG policy has brought to our country.
However, there always exists the other side of the coin. Even today, several economists continue to actively debate the LPG policy, or parts of it thereof, for the consequences it has brought to our land. And while this consequence may be diverse, one particular aspect directly affects the legal sector, making complicated procedures only worse. This aspect, primarily arising out of concepts like foreign direct investment, is termed cross-border insolvency.
Cross-border insolvency can be described as a phenomenon occurring when a company with assets and liabilities in more than one jurisdiction or country declares itself insolvent. 1 Such a scenario is a direct consequence of the process of globalisation as companies around the world continue to expand into other markets by investing in other countries. Issues with Cross-Border Insolvency Like any modern advent, Cross-Border Insolvency presents itself with several challenges in the modern economy. Most of them can be directly inferred from the very term ‘cross-border’. It specifically involves creditors and debtors that are dispersed across several countries, transgressing jurisdictional authority along the way. 2 This would further stem to various adverse yet varied problems, each requiring individual attention as they actively hamper seamless operation of the business world.
Some of these concerns can be elementary in nature, like language, and history and structure of the legal systems. Insolvency laws vary around the world and are codified in different languages, each arising out of distinct legal systems with their own histories and traditions. Insolvency laws in certain countries, further, prioritize different areas of interest when it comes to insolvency as opposed to other nations. Assuming a one-size-fits-all approach is simply implausible in this regard. This also involves a concept called ‘Centre of Main Interest’ (hereinafter COMI), which defines in which country or jurisdiction, the main economic interest of a particular enterprise lies. The primary issue arising out of this distinction is that of recognition, such of that in the case of Jet Airways, which is discussed further below in this paper.
The Indian tribunals refused to recognize the proceedings taking place in the Netherlands, which was only later fixed after an appeal was filed by the Dutch. 3 Friction in such instances between different jurisdictions in recognition actively mitigates the effectives and seamlessness of the insolvency process. 1 Moiz Rafique Sadhwani Abhishek, Navigating the Labyrinth: Cross-Border Insolvency Regime in India, BAR AND BENCH - INDIAN LEGAL NEWS (2024), https://www. barandbench. com/law-firms/view-point/navigating-thelabyrinth-cross-border-insolvency-regime-in-india (last visited Oct 10, 2024).
2 Manasi Lad-Gudhate, Cross-Border Insolvency, ICSI CHARTERED SECRETARY (2023),
https://www.icsi.edu/media/webmodules/CSJ/April/15ArticleManasiLadGudhate.pdf (last visited Oct 10, 2024). 3 JSA-Poonam Verma Sengupta & Pradyumn Amit Sharma, Jet Airways’ Return to the Skies, LEXOLOGY (2024), https://www.lexology.com/library/detail.aspx?g=d1da89ac-8126-4626-94cb-dc283af01be2 (last visited Oct 10, 2024).
Another important debate is that of the territorialist approach vs the universalist approach, essentially discussing whether a single insolvency procedure should be conducted for the entire world (universalist), or every jurisdiction has its own procedures (territorialist). Both have their shortcomings, the former being the arduous coordination efforts required to bring all parties concerned under one umbrella, and the latter, which is the more popular alternative, posing the aforementioned challenge or recognition, and coordination among different proceedings. 4 These issues could further correlate to foreign direct investment and investor sentiment. Foreign investors not only look for opportunities with good prospect but consistent legislation and certainty in legal proceedings can play a major role in investment decisions.
India, and its relation to Cross-Border Insolvency Insolvent enterprises in India are covered under the Insolvency and Bankruptcy Code of 2016 (hereinafter IBC),5 a landmark legislation dedicated to consolidating and amending various insolvency legislations from the past and ensuring resolutions of corporate persons, firms and individuals. It aims at ensuring the value of the asset is the highest possible, promote entrepreneurship in the country, address credit and establish a competent authority, namely the Insolvency and Bankruptcy Board of India, to oversee and enforce matters contained within the code. While the code addresses several important aspects, it contains no mention of the words ‘crossborder insolvency’ whatsoever. The concept is only covered briefly in Section 234 and Section
235 of the IBC, which are stated below.
Section 234, Clause I: ‘The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code.’ Clause II: ‘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
4 International Monetary Fund, 6 Cross-Border Insolvency Issues,
https://www. elibrary. imf. org/display/book/9781557758200/ch06. xml (last visited Oct 10, 2024). 5 Insolvency and Bankruptcy Board of India, https://ibbi. gov. in/en/legal-framework/act (last visited Oct 10, 2024). any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified.
’6 Section 235, Clause I: ‘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.
’ Clause II: ‘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. ’7 Upon reading the above 2 sections, a few things become evident. First, India has no prescribed legislation or regulation to deal with cross-border insolvency, and this is the closest that they get to it. And second, the current arrangement is highly inadequate and ineffective. Elaborating in detail, as per Section 234, the issue of cross-border insolvency can only be addressed if the Government of India enters into a bilateral agreement with the nation where the assets of the enterprise exist.
While there may be several agreements already in place, getting into a fresh bilateral agreement between two nations is no easy task, involving several thousand factors that may or may not be related to the question of insolvency, only delaying an already lengthy procedure. The same also poses significant challenges in recognizing foreign proceedings. If a bilateral agreement or any other arrangement is deemed unsuccessful, at least one concerned party will be significantly alienated, where ensuring their rights is close to impossible. This party could
6 Id.
7 Id.
either be domestic or international, but the inability to recognize and coordinate proceedings can have adverse consequences. The section also exclusively mentions enforcing the IBC in the proceeding, which could be difficult if the COMI of the enterprise is not India, and the nature of the regulations in that country vastly varies from that encompassed in the IBC. This would further hamper the process of ensuring domestic creditors in India are rightfully treated. This would be the case with foreign creditors as well, if the COMI of the enterprise is India. A very common example often quoted on this matter is that of Jet Airways Limited, an Indian airline company which suspended operations in 2019, and its largest creditor, the State Bank of India (hereinafter SBI) triggered insolvency proceedings.
Jet airways had significant investments in the Netherlands as well, where domestic creditors there initiated their own proceedings following the company’s insolvency. Considering Jet Airways had its COMI in India, Dutch insolvency professionals reached out to the National Company Tribunal Law (hereinafter NCLT), the adjudicating authority in India, for the Dutch proceeding to be recognized by the Indians, which the NCLT refused to do so. This led to the Dutch appealing at the National Company Appellate Tribunal Law (hereinafter NCLAT) which ruled in favour of the Dutch, requiring the NCLT in Mumbai to recognize the Dutch proceedings. 8 The NCLAT further asserted that the Dutch professional would further be allowed to act as an observer to proceedings taking place in India. This case was one that set an important precedent for future proceedings involving cross-border insolvency.
Previous Action and Resolution The issue of cross-border insolvency in India was extensively studied by the Insolvency Law Committee (hereinafter ILC), of the Ministry of Corporate Affairs (hereinafter MCA) of India
2018. In March, they published a report where a part of it was dedicated to examining the
current arrangements in India and further discussed the adoption of the United Nations 8 AMLEGALS-Mr Rohit Lalwani & Aditi Tiwari, An Overview of Cross-Border Insolvency in India, LEXOLOGY (2022), https://www.lexology.com/library/detail.aspx?g=83c36e66-e1e2-4804-a2ca-329ddb9d8fc1 (last visited Oct 10, 2024).
Commission on International Trade Law’s (hereinafter UNCITRAL) Model Law on Cross- Border Insolvency (discussed in detail below) in India.9 This was further augmented in the October 2018 report which focused specifically on the issue at hand and revealed certain intricacies. Firstly, it mentioned certain key advantages of adopting said Model Law in the country, including but not limited to:10
1. Increasing foreign investment
a. The adoption of a structured insolvency system would attract foreign investments as it would increase their confidence in the Indian insolvency system and cooperation among different courts.
2. Flexibility
a. The Model Law is cognizant of differing laws across the world, and its adoption could provide consistency between Indian proceedings and foreign ones.
3. Protection of domestic interest
a. It protects public interests by providing a means to refuse recognition in case of conflicts with domestic policy.
4. Mechanisms for Cooperation
a. The model law simplifies the coordination among professionals, courts, and adjudicating authorities across different jurisdictions and ensures cooperation in proceedings, and.
5. Priority to domestic proceedings
6. Mechanisms for cooperation
a. The model law provides for effective coordination amongst different insolvency
9 Shri Injeti Srinivas et al., Report of the Insolvency Law Committee.
10 CrossBorderInsolvencyReport_22102018.pdf,
https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf (last visited Aug 25, 2024). professionals and courts, enabling them to make faster decisions.
7. Protection of Indian creditors
8. Remedy in jurisdictions with reciprocity
This report also discusses certain key issues in detail, such as that of access to foreign representatives, recognition of foreign proceedings, its relief and cooperation, and concurrent proceedings. It further elaborates on the provisions that can be adopted within the Indian system, with special emphasis on its applicability to corporate debtors, excluded entities, reciprocity, excluded ‘other persons of interest, and amendments to Sections 234 and 235 of the IBC. The adoption of the Model Law with changes was suggested by the ILC in an attached document called ‘draft Part Z’. 11 Draft Part Z The Draft Part Z, also called the Draft Part on Cross-Border Insolvency is a compilation of recommendations the ILC made to the central government with respect to the matter of crossborder insolvency.
This part clearly clarifies the scope of its application among various persons and clearly defines 8 key terms related to cross-border insolvency, such as ‘Adjudicating Authority’, ‘COMI, etc. Chapter II of draft part Z tackles an important issue, that of access of foreign creditors and adjudicators to the adjudicating authority. It elaborates on the rights of the foreign adjudicator, his ability to commence a proceeding under the IBC, and his participation in domestic proceedings. This further extends to foreign creditors as well, who are allowed to access domestic proceedings, about how a notification is sent to them with the commencement of a proceeding, and the specifics of the notification. 12 Chapter III of the draft mentions recognition of foreign proceedings and their relevant relief.
It talks about the application for the recognition of a foreign proceeding, certain presumptions
11 Id.
12 PublicNoiceCrossBorder_20062018.pdf,
https://www. mca. gov. in/Ministry/pdf/PublicNoiceCrossBorder_20062018. pdf (last visited Aug 25, 2024). regarding the same, COMI discussions, the decision to recognize a foreign proceeding, and the subsequent effects of recognition. 13 This chapter also touches upon the relief provided upon the recognition of a foreign proceeding, protection of foreign creditors and other concerned stakeholders, and avoidance of acts that are detrimental to creditors. Chapter IV addresses the cooperation with foreign courts, representatives and other stakeholders. It mentions the coordination between the adjudicating authority and foreign courts, resolution professionals, liquidators, foreign representatives, and several forms of cooperation that can be adopted.
14 Chapter V discusses the matter of concurrent proceedings, considering the recognition of a main foreign proceeding, proceedings under the IBC, and coordination, while Chapter VI is dedicated for miscellaneous items. 15 UNCITRAL Model Law The UNCITRAL Model Law on Cross-Border Insolvency, established by the United Nations Commission on International Trade Law, provides a comprehensive legal structure for addressing complex issues associated with cross border insolvency efficiently. 16 By formulating a clear and structured framework to address insolvency proceedings spanning across multiple jurisdictions, this law encourages cooperation among courts and insolvency representatives17. Two of the important concepts introduced in this model law is “foreign main proceedings” and “foreign non-main proceedings”.
18 These concepts assist in identifying the primary insolvency process applicable in the country where the debtor has its COMI and other proceedings taking place in various jurisdictions. 19 Implementing these concepts can strengthen legal certainty in international business affairs and solve insolvency issues more
13 Id.
14 Id.
15 Id.
16 UNCITRAL Model Law on Cross-Border Insolvency (1997) | United Nations Commission On International
Trade Law, https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency (last visited Oct 10, 2024).
17 Id.
18 UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation.
19 UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY WITH GUIDE TO ENACTMENT AND INTERPRETATION,
(United Nations Commission on International Trade Law ed. , 2014). effectively. Furthermore, the UNCITRAL Model Law on Insolvency supports the involvement and active participation of foreign representatives in the insolvency resolution process and facilitates the acknowledgement of foreign judgements and procedures. Objectives The Model Law aims to encourage cooperation between insolvency representatives and the court across different jurisdictions,20 which facilitates the development of a streamlined process for cross border insolvency resolution. This streamlined process helps in mitigating conflicts and inconsistencies which may transpire due to differing laws on insolvency in different countries.
Further, by ensuring that the creditors receive a fair share in the distribution of the debtor’s assets and safeguarding the rights of debtors by preventing discriminatory practices, this law protects the interest of creditors and debtors alike. 21 Another vital objective of this law is to encourage certainty and predictability in legal proceedings by laying out a clear and coherent structure for solving cross border insolvency cases. 22 Additionally, this law reduces the delays and uncertainties in the insolvency resolution process by promoting appropriate recognition and relief in foreign insolvency proceedings.
23 Key Provisions of the Model Law Access to Foreign Insolvency Representatives and Creditors Allowing direct access to foreign insolvency representatives and creditors is one of the basic principles of the UNCITRAL Model Law on Cross-Border Insolvency which enables participation of foreign insolvency representatives in domestic insolvency proceedings. 24 This, in turn, leads to a more systemic and well-ordered cross-border process. Recognition of Foreign Proceedings The Model Law lays down the guidelines for the process of recognition of foreign proceedings, including but not limited to the distinction between ‘foreign main proceedings” and “foreign
20 Id.
21 Id.
22 Id.
23 UNCITRAL Model Law on Cross-Border Insolvency (1997) | United Nations Commission On International
Trade Law, supra note 16.
24 Id.
non-main proceedings”. When the insolvency proceedings transpire in a country where a debtor has the centre of its main interest (COMI), the proceedings are called “foreign main proceedings”, whereas the proceedings taking place in a country where the debtor has an establishment is called “foreign non-main proceeding”. Such acknowledgement of the preliminary insolvency processes occurring in a foreign jurisdiction launches a series of legal protections which comprises of a halt on the domestic proceedings against the assets owned by the debtor. 25 Relief and Collaboration The Model Law stipulates that judicial bodies are required to provide appropriate and equitable relief measures that will safeguard the debtor’s assets and simultaneously uphold the interests of the creditors involved in the proceedings.
The relief measures may encompass a diverse range of actions, extending to but not confined to initiatives such as the delegation of the management of the debtor’s assets to a foreign representative, the temporary suspension of the right of the debtor to transfer or encumber their assets in any way, and halting any executive actions against the assets of the debtor. The collaboration among domestic and foreign courts as well as insolvency practitioners across borders is another highly emphasized aspect in the model law. 26 Coordination of Concurrent Proceedings The Model Law sets forth outlines for coordinating concurrent insolvency proceedings. Should a debtor be involved in multiple insolvency proceedings that span across different jurisdictions, the Model Law ascertains the harmonization of such proceedings to maximise efficiency and equity?
Such coordination is vital in cases where the debtor’s assets and creditors are distributed across multiple nations. 27 Protection of Creditors and Other Interested Parties In order to safeguard the interests of all the stakeholders in an insolvency proceeding, the Model Law establishes some conditions that forbid bias against international creditors. It assures
25 UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY WITH GUIDE TO ENACTMENT AND INTERPRETATION,
supra note 19.
26 Id.
27 Id.
identical rights for foreign and domestic creditors to participate in insolvency proceedings and receive equitable treatment. Additionally, safeguards have been provided in the law to prevent misuse of relief and recognition processes, ensuring that these mechanisms do not harm creditors unfairly. 28 Impact and Implementation The UNCITRAL Model Law on Cross-Border Insolvency has been adopted by 60 nations across 63 jurisdictions, demonstrating its broad acceptance. Improved collaboration and more predictable outcomes in cross-border insolvency cases are among the characteristic features that distinguish the states that have adopted the Model Law. The development of supplementary texts, such as the Model Law on Recognition and Enforcement of Insolvency-Related Judgments (2018) and the Model Law on Enterprise Group Insolvency (2019), was prompted by the success of the model law.
29 Case Law and Judicial Interpretation The implementation of the Model Law has led to the emergence of significant case law which has been meticulously compiled and analysed in the Digest of Case Law on the UNCITRAL Model Law on Cross-Border Insolvency. This digest offers valuable insights into the various interpretations and applications of the provisions under the Model Law. Moreover, the “Judicial Perspective’ provides an analytical examination from the viewpoint of the judges, enriching the understanding of the practical implications associated with the Model Law and promoting uniform interpretation. 30 Conclusion While cross-border insolvency bears with it several challenges that restrict seamless functioning of business organisations and other concerned authorities, it is not necessarily something that can be solved through elimination.
Foreign investment is a cornerstone of modern economies, and the world would simply come to a standstill if it ceased to exist.
28 Id.
29 Id.
30 Id.
Therefore, the only logical method going forward would address the issue through amendments as opposed to elimination. Due to the varied and diverse nature of legislations around the world, the challenges a phenomenon like cross-border insolvency pose throughout the world isn’t uniform either, which only means a uniform solution isn’t going to do much. Such an issue involves a careful balance between sovereign regulation and international legislation, to ensure enough consistency to solve the aforementioned issues while ensuring it is in accordance with insolvency laws globally. With regards to India, one cannot deny the inadequate and underdeveloped nature of crossborder legislation. The lack of its mention in the IBC, coupled with a messy and ineffective arrangement to bypass the issue reflect the true nature of the issue in India, requiring immediate attention.
Cognizant of the several nuances of the issue of hand, there have been several attempts and suggestions, including the selective adoption of the UNCITRAL Model Law have been made but no action has taken place till date. The UNCITRAL Model Law on Cross Border Insolvency signifies a monumental advancement in the field of global insolvency law, as it lays down a coherent and adaptable legal framework that addresses the intricate challenges posed by cross-border insolvency cases while simultaneously promoting principles of collaboration and fairness among jurisdictions. Its widespread adoption by various jurisdictions, coupled with the continuous development of supplementary texts, underscores its lasting relevance and effectiveness in the realm of insolvency law.
In light of the widespread influence of globalization on economic activities, the Model Law will persist as an indispensable tool for managing the multifaceted challenges related to cross-border insolvency in the future. All of this begs the question: if the adverse effects are obvious, the solutions are plausible, and the solutions have actually been suggested, why is there no change? The fact that the Model Law was analysed and suggested over 6 years ago is a testament to the fact that it’s adoption in India isn’t as comfortable as it seems, and there is a large amount of friction in addressing the issue, which would demand extensive research of its own. This, unfortunately, does not change the scene and we remain at crossroads.
The threats posed by cross-border insolvency are still imminent, and it is of paramount importance that the issue not just be addressed in India, but also be actively mitigated, in order to ensure the comfort of all parties concerned, and the smooth functioning of the business world.