India: Cross Border Insolvency: Indian Law Vis A Vis International Law: UNCITRAL Model

The rapid growth of global economy has led to widespread international trade and this expansion in international trade has brought with it increasing possibilities of cross border insolvency proceedings. In its simplest form, Cross Border Insolvency may involve insolvency proceedings in one country with its creditors located in another country/countries on the other hand in the most complex of cases it may involve subsidiaries, assets, operations and creditors in dozens of nations.

One of the most noteworthy features of international insolvency law is the lack of legal structures either formal or informal to deal with insolvency that transgresses the national borders. Expansion and growth of international trade has made aspects such as choice of law and the conflicts that may arise in circumstances of adverse municipal laws, an important consideration in the context of global economy. Companies may be connected to more than one jurisdiction either by foreign creditors that may press claims or by having assets or branches in more than one country which in turn would result in decrees that may be passed in different legal jurisdictions resulting in further complexities in enforcement and recognition.

In the above pretext, the issue of Cross Border Insolvency poses a serious challenge to India. There are inadequate provisions in the Indian common law regime to enable the Indian courts to recognize and enforce the rights and claims of the foreign creditors and the judgment passed by the courts in foreign jurisdiction. Above all there are no provisions in the existing insolvency legislation or in any enactments in India to deal with Cross Border Insolvency cases. In the light of the above said circumstances it has been strongly suggested that India should adopt the United Nations Commission on Trade Law (UNCITRAL) Model Law on Cross Border Insolvency which would be an ideal solution in the present circumstances.

THE MODEL LAW1

According to UNCITRAL, a legal body within the United Nation system in the field of International Trade, national insolvency laws were either ill equipped or lagging behind to deal with the cases of Cross Border Insolvency. The problem has always been that each country has its own way of dealing with the issues of Cross Border Insolvency and various national insolvency laws and practice are simply too diverse. Some countries have signed treaties with each other but there has never been a uniform approach to resolve Cross Border Insolvency issues.

Recognizing the need for certainty and clarity on these issues, UNCITRAL adopted the text of Model Law on Cross Border Insolvency issues on 30 May 1997. This Model Law was approved by resolution of United Nations (UN) General Assembly on 15 December 1997.

KEY PROVISIONS

The Model Law focuses on four components identified as key elements for the conduct of Cross Border Insolvency cases: Access, Recognition, Relief (Assistance) and Cooperation

(a) Access

This provision gives the representative of foreign insolvency proceedings and the creditors a right of access to the courts of an enacting state to seek assistance to appoint and authorize a representative of the local proceedings, being conducted in an enacting state, to seek assistance elsewhere.

(b) Recognition

One of the key objectives of Model Law is to establish simplified procedures for recognition of qualifying foreign proceedings in order to avoid time consuming legislation and to provide certainty with respect to decision to recognize. These core provisions accord recognition to orders issued by foreign courts commencing qualifying proceedings and appointing the foreign representatives of those proceedings provided it satisfies specified requirements. Qualifying foreign proceedings should be recognized as either a main proceeding, taking place where the debtor had its centre of main interests at the date of commencement of the foreign proceedings or non main proceedings taking place where the debtor has an establishment. Recognition of foreign proceedings under Model Law has several effects, principal amongst them is the relief accorded to assist the foreign proceeding.

(c) Relief

The basic principle of model law is that the relief considered necessary for the orderly and fair conduct of Cross Border Insolvency should be available to assist the foreign courts. By specifying the relief that is available, the Model Law imports the consequences of foreign law in to the insolvency system of the enacting states. The element of the relief available include interim relief at the discretion of the court between the making of an application for recognition and the decision on that application , an automatic stay upon recognition of the main proceedings and relief at the discretion of the court for both main and non main proceedings following recognition.

(d) Co-operation and Co-ordination

These proceedings address cooperation among the courts of the states where the debtor's asset is located in coordination of concurrent proceedings concerning that debtor. The Model Law expressly empowers courts to cooperate in the areas governed by the Model Law and to communicate directly with foreign counterparts. The Cooperation between the courts and foreign representative and between foreign and local representatives is also authorized. The provisions addressing coordination of concurrent proceedings aim to foster decision that would best achieve the objective of both proceedings, whether local and foreign proceedings or multiple foreign proceedings.

INDIAN POSITION

The existing law in India does not provide legal foundation to resolve a matter relating to international insolvency. In India bankruptcy procedures are still governed by an age old statute that has worn out the passage of time. The Provincial Insolvency Act 1920 and the Presidency Town Insolvency Act 1909, both are extremely outdated legislations and seem to be totally incapable to deal with the issues of Cross Border Insolvency, which is a concept that is only about a decade and a half old.

The Law Commission of India2 took up the revision of these insolvency laws on reference made to it by the government. In the year 1964 the commission proposed a comprehensive Insolvency Legislation for India which was not acted upon by the government As far as the Companies Act, 1956 is concerned the foreign companies are dealt as unregistered and covered under the heading of the unregistered companies. It suffers from short comings, due to absence of any provisions dealing with foreign proceedings, foreign representatives and foreign judgment in India.

In the year 1999, the Government of India set up a High Level Committee headed by Justice V.B. Balkrishna Eradi3, retired judge of the Supreme Court of India for remodeling the existing laws relating to insolvency and winding up of companies to bring them in tune with the international practices in this field. One of the main recommendations of the committee was that the part VII of the Companies Act, 1956 should incorporate new substantive provisions to adopt the UNCITRAL Model Law and that the Model Law itself may be incorporated as schedule to the Companies Act, 1956 which will apply to all cases of cross border Insolvency.

Some important recommendations of Eradi Committee, the Companies Act (second Amendment) Act 2002 was passed but unfortunately this amendment has ignored to provide any framework for Cross Border Insolvency with recognition of foreign proceedings. Hence the current position is that if a foreign company is taken in to liquidation outside India, its Indian business will be treated as separate matter and will not be automatically affected unless an application is filed before Insolvency Court for winding up its branches in India. This problem can however be resolved through the machinery of Coordination and Cooperation between foreign courts provided by the UNCTIRAL Model Law.

Thus the adoption of UNCITRAL Model law for Cross Border Insolvency issues will enable India to meet the demands of the globalization of economy and to deal with international insolvency on the world forum. This will radically change the orientation of Indian Law in the present scenario of insolvency cases and make it suitable for dealing with the challenges arising from globalization and increasing integration of Indian economy with the world economy.

CONCLUSION

The globalization of trade and commerce has produced international pressure on nations to enact laws and provide institution that can deal with variety of Cross Border Insolvency issues. In absence of specific legislation for dealing with cross border Insolvency, courts in India are yet to be prepared to deal with the plethora international Insolvency issues. Such absence can impede India's growth to enhance and enrich its economic status in a drastic manner. Judicial involvement and devotion in regulating economic aspects is nothing but a natural corollary to its economic development. UNCITRAL Model Law on Cross Border Insolvency has the potential to confer an opportunity to India to equip its judiciary to regulate one such economic aspect- Cross Border Insolvency by empowering its courts to extend coordination to foreign courts and accrue benefits out of the reciprocating coordination.

Footnotes

1 Can be seen at www.uncitral.org

2 26th Report on Insolvency laws which was submitted to law Minister in the year 1964

3 Eradi Committee submitted its report to the Prime Minister on 31st August 2000

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