The Indian legal regime on insolvency and bankruptcy has long been criticised for being cumbersome, long drawn out, outdated, creditor unfriendly and fragmented across multiple pieces of legislation. The Indian Insolvency and Bankruptcy Code, 2016 (Code), which came into effect on May 28 2016, seeks to address the lacuna in the present regime and provide a consolidated framework for the insolvency of companies, limited and unlimited liability partnerships, and individuals. While the Code is being hailed for providing a mechanism for time-bound recovery of dues from insolvent debtors in India and for contributing to the ease of doing business in India, whether it would prove effective in dealing with cross-border insolvency is debatable.
Here, we discuss the concept of cross-border insolvency in the context of the Code, the mechanism offered by the Code to address cross-border insolvency, and the gaps that need to be filled to make cross-border insolvency provisions more effective.
What is cross-border insolvency?
Cross-border insolvency broadly covers three aspects:
(i) where foreign creditors have rights/claims over a debtor's assets in another jurisdiction where insolvency proceedings are underway;
(ii) where a debtor has branches/assets in several jurisdictions, including a jurisdiction other than where the insolvency proceedings are underway; and,
(iii) where a debtor entity is subject to insolvency proceedings simultaneously in one or more jurisdictions.
The need to address cross-border insolvency
With increasing globalisation, there has been a surge in cross-border investment activity. In such a setting, issues of insolvency can have global ramifications. An argument has long been made in favour of providing for a mechanism for coordination and co-operation between courts/insolvency authorities such as administrators/liquidators of different countries, in order to avoid conflict of law situations and to protect and maximise the value of the debtor's assets. Ultimately, an effective system of cross-border insolvency laws will strengthen global trade and investment.
Recognition of foreign insolvency proceedings is one of the foremost objectives of any legal regime that seeks to address cross-border insolvency. At present, Indian law recognises foreign judgments and foreign decrees of some reciprocating territories, such as the UK and Singapore (section 13 and 44A of the Code of Civil Procedure, 1908). However, no recognition has been accorded to foreign proceedings, including insolvency-related proceedings, such as reorganisations.
Mechanism under the Code
When the Code was introduced into the Indian parliament, it was completely silent on the issue of cross-border insolvency. It is only on the basis of recommendations from the Report of the Joint Committee on the Insolvency and Bankruptcy Code, 2015 (Joint Committee) that a mechanism for dealing with cross-border insolvency was incorporated into the Code.
For insolvency proceedings against corporates, the Code empowers an interim resolution professional to take control and custody of assets of a debtor that are located in foreign countries. In these circumstances the debtor's ownership rights are recorded in the balance sheet or with information utilities (the Code provides for the setting up of 'information utilities' that serve as repositories of financial information and function to create and store financial information provided by creditors), or the depository of securities or any other registry. Further, a liquidator is empowered to take custody/control of and sell the assets and property (including those situated outside India) of a corporate debtor (section 35(1)(b) and (f) of the Code).
The Code also provides for an enabling mechanism under which the central government of India may enter into reciprocal agreements with the governments of any country for the purpose of enforcing the provision of the Code. This includes agreements for application of the Code to assets and property of corporate debtors, including personal guarantors, situated in foreign countries (section 234 of the Code).
Under section 235 of the Code, in the course of the insolvency/bankruptcy proceedings, a resolution professional (responsible for overseeing the insolvency process initiated under the Code and taking over the management and affairs of debtors)/ liquidator/bankruptcy trustee may make an application to the relevant adjudicating authority (the National Company Law Tribunal in the case of body corporates, and the Debt Recovery Tribunals in cases of individuals and unlimited liability partnerships) seeking evidence or action in relation to assets of the debtor/guarantor in a country with whom India has entered into a reciprocal arrangement. If the concerned adjudicating authority is satisfied that evidence or action as contended in the application is required, it may issue a letter of request to a competent court or authority of that country.
Implementation and issues
The reciprocal arrangement mechanism appears to be aimed more towards reducing judicial red-tape across borders, which is in line with the broader objective of timely recovery of debts under the Code. There seems to have been a conscious attempt to streamline and smoothen the interaction between resolution professionals/liquidators and foreign insolvency administrators and allow for easier access to foreign assets of entities undergoing insolvency in India.
However, reciprocal agreements require individual long-drawn-out negotiations with each country, and it may be argued that such an arrangement does not bring about the efficiency that could be achieved by a uniform code of co-operation between various jurisdictions. Vastly differing reciprocal agreements with different countries may complicate insolvency proceedings, particularly the distribution of debtor assets which are located in different countries. Further, the reciprocal agreement mechanism does not address issues relating to co-ordination/recognition of insolvency proceedings commenced in multiple jurisdictions and involving multiple branches of a single entity.
Issues relating to cross-border insolvency have previously been examined by the Eradi Committee (2000) and the NL Mitra Committee (2001). In 2000, the high level committee on law relating to the insolvency and winding up of companies (under the chairmanship of Mr Justice V Balakrishna Eradi, retired) suggested an amendment to the provisions of the Companies Act, 1956 to incorporate key provisions of the UNCITRAL Model Law on Cross-border Insolvency (Model Law), which was adopted by the United Nations through a General Assembly resolution on December 15 1997. The Report of the advisory group on bankruptcy laws (under the chairmanship of Dr NL Mitra) is one of the most detailed studies of India's cross-border insolvency laws undertaken. This committee recommended adoption of the Model Law in India.
The Model Law is the most widely accepted blue-print system of laws to effectively deal with cross-border insolvency issues. It attempts to achieve effective co-operation between enacting countries while ensuring the least intrusion into each country's internal insolvency and bankruptcy laws. Access, recognition, relief and co-operation are the key tenets of the Model Law, by a combined action of which the Model Law ultimately aims for recognition of foreign insolvency proceedings, foreign decisions and access of foreign liquidators/ administrators to local court proceedings. Once a foreign proceeding has been recognised in a particular jurisdiction, the Model Law contains provisions, including for (a) suspension of any transfer, encumbrance, disposal of the assets of debtors in that particular jurisdiction; and, (b) entrustment of the assets of debtors in that particular jurisdiction to the foreign administrator (article 19 of the Model Law). There are also provisions dealing with coordination of concurrent proceedings to ensure that there is no inconsistency between a domestic insolvency proceeding and any relief granted in respect of a foreign proceeding sought to be recognised (article 29 of the Model Law). The Model Law has presently been adopted by 41 countries, including the US and the UK.
The way forward
Like every major overhaul of laws that India has seen in recent years, the Code is an ambitious consolidation of India's insolvency and bankruptcy laws, albeit ripe for challenge. Although India has already begun talks with countries such as the US for entering into reciprocal agreements, opting for reciprocal arrangements instead of adopting the Model Law is a move that is likely to be debated. In fact, even if India were to adopt the Model Law, the Model Law allows for a system where agreements entered into with a country could supersede the provisions of the Model Law.
The Interim Report of the Bankruptcy Law Reforms Committee (constituted in 2014 by the Department of Economic Affairs to study the corporate bankruptcy legal framework in India and to submit a report) had recommended that considerations relating to adoption of the Model Law should be taken only after observing the effectiveness of the regime proposed by the Code. Further, as per the Joint Committee's report, the Government of India has indicated that it will come up with a framework on cross-border insolvency at the appropriate stage and that additional issues with global ramifications can later be considered. These include cross-border insolvency issues relating to multinational companies with branches in multiple jurisdictions.
To conclude, while the reciprocal agreements mechanism may not serve as a wholesome solution to address cross-border insolvency, the Code as a whole does appear to be a move in the right direction and is likely to bring about an improvement in global perception regarding ease of doing business in India. Further, given the fact that there has not been an outright rejection of alternative/supplementary methods to address cross-border insolvency issues, the overall state of affairs in India's insolvency regime now does seem encouraging.
This article was first published in The Guide To Asia-Pacific's Leading Lawyers - 2016 edition.