Introduction:
We had dealt with the draft chapter on Cross Border Insolvency (‘CBI’), proposed to be included within the framework of Insolvency & Bankruptcy Code, 2016 (‘IBC’/ ‘Code’) vide Public Notice dated 20 June 2018, in our previous article featured in August 2018. Majority of the laws pertaining to CBI have developed further since then. Vide this present Article, we wish to highlight the law as it stands today.
Cross Border Insolvency involves situations where the debtor has assets in more than one jurisdiction/country, or when its creditors are overseas and outside the jurisdiction of a country. With the sharp jump in the number of cases filed against large Multi-National Companies (MNCs) seeking initiation of Corporate Insolvency Resolution Process (‘CIRP’) against them, and with the assets of these corporate debtors frequently situated overseas, or with proceedings seeking insolvency resolution already commenced outside India, the need for a CBI framework has become the need of the hour.
Prior to the Code, a limited mechanism for enforcement of foreign judgments was included under the Civil Procedure Code, 1908 (‘CPC’). However, such provision was not broad enough to include for all insolvency processes, including orders for reorganization, administrative and interim orders, etc.
Even though the United Nations Commission on International Trade Law (UNCITRAL) came out with its Model Law on CBI as early as in 1997 (‘Model Law’)[1], only 50 countries have subscribed to the Model Law so far, and India is not one of those countries. The Model Law prescribes four main necessities to a CBI law:
- ‘Access’, which means access by insolvency officials and creditors of one country to the courts of another, and to be able to directly participate in the proceedings of the other country.
- ‘Recognition and Relief’, which allows for recognition of foreign proceedings, be it final awards or interim orders, and segregation of multi-country proceedings into ‘main proceedings’ and ‘non-main proceedings’ to determine distribution of jurisdiction/ powers of courts for resolution.
- ‘Cooperation and Co-ordination’ between all stakeholders of the resolution process, inter-country viz., courts/ tribunals and insolvency professionals, and notifications with respect to commencement of insolvency proceedings; and
- ‘Public Policy’, which allows for countries to determine the acts that goes against the public policy of their jurisdiction, and to restrain from passing any directions with respect to the same.
However, since the Model Law only serves as a template for the States to build their own legislations along the lines of the points mentioned above, India has taken substantial time in adopting the Model Law. For ease of understanding, we list down the various attempts made by the lawmakers and the Tribunals in India till date to formulate a CBI framework below:
Evolution of laws:
- The Bankruptcy Law Reforms Committee (‘BLRC’), charged with drafting of the IBC, in its report from November 2015, first observed that CBI issues include ‘Indian financial firms having claims upon defaulting firms which are global, or global financial persons having claims upon Indian defaulting firms,’ and expressed a need to address such issues.
- This need was recognized later by the Joint Parliamentary Committee (‘JPC’), in its report in April 2016 reviewing the BLRC’s report, which recommended adding Sections 234 and 235 to the Code, in its final version.
- Section 234 deals with agreements with foreign countries, as per which the Central Government can enter into an agreement with a foreign government for enforcing provisions of the Code. Pursuant to such agreement, the Code can be modified in its application to assets or property of a corporate debtor situated outside India.
- Section 235, on the other hand, deals with letters of request to be made with respect to assets of a corporate debtor located outside India, pursuant to the agreement executed under Section 234. If any evidence is needed or action to be taken in respect to such assets, an application shall be first made by the resolution professional (‘RP’), liquidator or bankruptcy trustee to the jurisdictional National Company Law Tribunal (‘NCLT’), followed by a letter of request issued by the NCLT to the court/ insolvency authority of such other country which can deal with such request.
- The language of the sections has left in ambiguity whether or not foreign creditors can participate in the insolvency proceedings in India. Therefore, the Supreme Court, in the case of Macquarie Bank Limited Shilpi Cable Technologies Ltd., (2018) 2 SCC 674, clarified that the meaning of ‘person’ under Section 3(23) of the Code includes persons resident outside India. Accordingly, foreign creditors/ foreign banks and financial institutions can participate in the insolvency resolution process in India. However, to what extent has not been determined.
- The Insolvency Law Committee (‘ILC’), thereafter, charged with reviewing the implementation under the Code, in its report of March 2018, suggested that a new chapter dealing with CBI be inserted into the Code, for ease of procedures. Therefore, the draft chapter, built on the Model Law, was released in June 2018, to be inserted into the Code (‘Draft Part Z’/ ‘Draft’)[2].
- The Draft left various issues unattended, such as: amendments to be made to the Code to bring it in line with Draft Part Z, absence of provisions for penalties against foreign representatives, absence of powers of regulation and imposition of penalties etc. Hence, a second report was released in October 2018 by ILC, which provided further recommendations on the framework, such as drafting a code of conduct for foreign representatives and recommending their registration with IBBI etc. However, this second report, too, retained certain problems with the Draft.
- In the interregnum, the NCLT, Mumbai Bench, in State Bank of India Jet Airways (India) Ltd., CP/2205(IB)/MB/2019, was faced with the question of parallel cross-border insolvency proceedings being conducted against Jet Airways. In its Order dated 20 June 2019[3], the Bench stated that even though insolvency proceedings against Jet Airways had already been initiated before the Noord – Holland District Court, since there is no provision and mechanism in the Code to recognize the judgment of an insolvency court of any foreign nation, and the Sections 234 and 235 have not been notified as enforceable yet, the same cannot be taken into consideration by the tribunals in India.
- The bankruptcy administrator from Holland for Jet Airways (‘Administrator’) had also filed an application for being an Intervenor in the Indian insolvency application proceedings and wished to take control of the assets of Jet Airways in India, as per the bankruptcy laws in Netherlands. However, in the absence of any reciprocal agreement between the countries, such request was held unsustainable, and the order of Noord-Holland District Court was held a nullity ab initio.
- On appeal, the National Company Law Appellate Tribunal (‘NCLAT’), New Delhi Bench observed that via a Joint Agreement between the RP in India and the Administrator, interests of all stakeholders can be balanced and maximization of the assets of the corporate debtor can be achieved. Some procedural directions such as cooperation between the professionals from both countries, collation of claims of creditors from both countries and exchange of such lists, and interim stay on the selling, alienation or transfer of assets in both countries etc. were issued by NCLAT, throwing some light on the type of procedures required under the CBI regime.
- Some practical difficulties such as cooperation between the Committee of Creditors (‘COC’) here in India and the Administrator, responsibility of funding fees payable to the Administrator as well as RP, division of creditors that are eligible to file their claims before the Administrator as well as RP, whether the Administrator should be allowed to attend COC meetings and have a right to vote etc. were also exposed.
- However, the questions of whether proceedings itself can be initiated in another country, when one has already started, the way forward if liquidation has been directed in one country, as opposed to insolvency resolution in another, among others, were left open for interpretation.
- In another case before the NCLT, Mumbai Bench, in State Bank of India Videocon Industries Limited, MANU/NC/7959/2020, even though no parallel proceedings have been instituted before another jurisdiction, the questions of whether foreign assets in that other jurisdiction can be included in the Indian insolvency proceedings, and whether the moratorium under Section 14 of the Code can be made applicable to foreign assets, were debated and it was held in the affirmative. However, no explanations have been provided on the administration aspect of these assets.
- Meanwhile, a case before the NCLT, Chandigarh Bench, in SBI v. SEL Mfg. Co. Ltd., 26 CP (IB) No. 114/Chd/Pb/2017, has been recognized as the ‘foreign main proceeding’ within the meaning of Section 1502(4) of the US Bankruptcy Code (‘US Code’), by the US Bankruptcy Court, based on the Model Law. By doing say, the US Bankruptcy Court made applicable all reliefs to the corporate debtor under Section 1520 of the US Code, as per which the assets and properties of the corporate debtor shall be protected under US Bankruptcy laws. This was a good example of the ease of insolvency resolution, in the presence of a uniform law built on the Model Law.
- Taking into consideration these developments, The Cross-Border Insolvency Rules/ Regulations Committee (CBIRC), in its report of June 2020[4], made more modifications to Draft Part Z.
Notice dated 24 November 2021:
Vide the latest Notice, the Ministry of Corporate Affairs (‘MCA’)[5], Government of India, has released another slew of recommendations to ensure Draft Part Z is finally made into a law:
- The Notice extends the coverage under the Draft to include personal guarantors and recommends provisions for adjudicating on applications filed against the personal guarantors.
- The Notice clarifies that the pre-packaged insolvency resolution process shall not entertain CBI provisions at this stage, and entities governed by special laws have also been brought out of the purview, particularly financial service providers notified under Section 227 of the Code.
- All benches of the NCLT and DRT are now recommended to have jurisdiction to adjudicate applications under Draft Part Z. Not just with powers of recognition of foreign proceedings/ judgments, but the NCLT/ DRT shall now be empowered to enforce foreign judgments as well.
Keeping the above in mind, the latest Notice brings India a step closer to finalizing a framework. However, the latest recommendations are also a work in progress.
While the increase of coverage of Draft Part Z to personal guarantors is a welcome and time-saving move, there is scope for ambiguity since, in case of initiation of insolvency resolution against Part III debtors (which includes personal guarantors), the main adjudicating authority is the jurisdictional Debt Recovery Tribunal (DRT), whereas in case of adjudication of insolvency proceedings against such guarantor before NCLT, cross-border applications may also be filed in NCLT. This overlap of jurisdiction may result in much confusion, with scope for forum-shopping or multiple applications filed questioning the jurisdiction of the authority. Further, these additional enforceability powers to the NCLT/ DRT may interfere with the powers of a civil court under the CPC.
The Notice itself is still subject to revisions, and the preparation and issuance of a formal Bill to make Draft Part Z a legislation/ as a part of the Code is still pending.
Conclusion:
As can be seen above, the various interpretations given by the courts, along with the drafts released, pose many gaps and much room for speculation. Relief in cases involving CBI so far has been very ad-hoc and in dire need of a formal legislation.
With the Draft Part Z, even after the latest Notice, some other clarifications such as about the term ‘public policy’ which is very wide in its ambit, the accountability of a foreign representative, via a code of conduct or otherwise, are yet to be provided. The latest recommendations also cover only single entities’ insolvency resolution and do not cater to corporate groups. Also, as of now, any litigation or arbitration proceedings in India may continue even if insolvency proceedings have been initiated against the corporate debtor in foreign countries, creating a legal quagmire.
In short, India still has a long way to go to arrive at a proper Cross Border Insolvency law, but the number of judicial precedents, skeleton drafts, and recommendations being circulated indicate that steps are being taken in the right direction. The formal legislation is now awaited to understand the next steps.
[The author is a Senior Associate in the Corporate and M&A advisory practice in Lakshmikumaran & Sridharan Attorneys, Hyderabad]
[1] UNCITRAL Model Law on Cross Border Insolvency (1997), available at: https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency
[2] Report of Insolvency Law Committee on Cross Border Insolvency (October 2018), available at: https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf
[3] State Bank of India and Ors. v. Jet Airways (India) Limited, MANU/ND/7877/2019 (Dated 20 June 2019)
[4] Available at: https://mca.gov.in/bin/dms/getdocument?mds=rrg9eENnNT9kek31pVicTQ%253D%253D&type=open
[5] Notification, bearing File No. 30/27/2018-Insolvency Section, dated 24 November 2021, issued by the Ministry of Corporate Affairs, Government of India, available at: https://prsindia.org/files/parliamentry-announcement/2021-12-15/Cross-Border%20Insolvency%20under%20IBC.pdf
