A. Legal framework governing cross-border insolvency in India
Usually, a situation concerning cross-border insolvency arises when the debtor has assets or creditors in different jurisdictions or when different insolvency proceedings have been filed in multiple jurisdictions. As such, the mechanism pertaining to cross-border insolvency is primarily focused towards regulating the insolvency proceedings that operate much beyond the realm of domestic jurisdiction and the constraints therein. Broadly speaking, the following aspects are involved in a cross-border insolvency:
- Equal protection of the interests of domestic and foreign creditors;
- Safeguarding the value of the assets of a debtor, which are located in different jurisdictions;
- Coordination and cooperation amongst courts and judicial authorities in various jurisdictions and the domestic laws applicable therein;
- Uniformity in the insolvency law and practices of different jurisdictions.
In India, the primary legislation governing insolvency and bankruptcy is the Insolvency and Bankruptcy Code, 2016 ("the Code"). However, even though the Code has made strides in drastically harmonising the insolvency process in India, it does not account for a sufficient procedure to regulate cross-border insolvency proceedings. The Code offers two provisions that assist in cross-border insolvency disputes i.e. Section 234 and Section 235. Section 234 of the Code empowers the Central Government to enter into bilateral agreements with other countries for purposes of enforcing the Code.1 Section 235 of the Code empowers the adjudicating authority under the Code to issue a letter of request to a court in a country in which an agreement under Section 234 has been entered into, to deal with assets situated in that country in a specified manner.2
B. Limitations of the prevailing framework
Except for the above-mentioned provisions in the Code, there's not much legal framework for cross-border insolvency in India. As such, the present legal system governing cross-border insolvency in India, comes nowhere even close to addressing the real issues associated with the process and has many drawbacks, including but not limited to the select few listed below:
- Section 234 and Section 235 of the Code have not yet been notified and no steps have been taken to implement them. Therefore, the development of a cross-border insolvency regime is mostly still up in the air and not many positive steps have been taken in that regard.
- India's willingness and ability to negotiate and then enter into bilateral treaties with foreign governments is one of the pre-requisite for the smooth functioning of cross-border insolvency. The burdensome nature of the tasks involved and the time required in negotiating and finalizing such treaties cannot be undermined.
- There exists no procedure to deal with cross-border insolvency issues in a scenario where the assets or creditors of the debtor are situated in a country with which no bilateral treaty has been effected.
- Further, there's not much guidance on the process and options available to insolvency professionals to avail evidence etc. in a case where the assets of an Indian debtor are located in a different jurisdiction.
- The Civil Procedure Code, 1908 provides for a mechanism for enforcing foreign judgments, however the same is not broad enough to include all insolvency orders, for example, orders regarding reorganization processes, administrative order etc. Moreover, procedural and jurisdictional issues such as parallel proceedings, coordination, cooperation, etc. remain unaddressed by the present system concerning cross-border insolvency cases.
II. GUIDELINES ON CROSS BORDER INSOLVENCY PROPOSED BY THE INSOLVENCY LAW COMMITTEE
A. Features of the UNCITRAL Model Law and India's draft Guidelines
United Nations Commission on International Trade Law ("UNCITRAL") Model Law on Cross-Border Insolvency, 1997 ("UNCITRAL Model Law") provides for legislative guidance for states on cross-border insolvency. The UNCITRAL Model Law has been strongly recommended for providing a wide-ranging solution for resolving cross-border insolvency issues. The international aspects of insolvency proceedings have been acknowledged by the World Bank, which has further noted that the insolvency laws should provide for rules of jurisdiction, choice of law, cooperation amongst courts of different countries and recognition of foreign judgments. Further, the IMF encourages the adoption of the UNCITRAL Model Law as the same would provide for an effective means of reducing the difficulties faced in cross-border disputes and further in achieving cooperation and coordination amongst courts and concerned authorities in different jurisdictions.
The four main principles governing the UNCITRAL Model Law are: Access, Recognition, Cooperation and Coordination. It aims to provide the foreign professionals and creditors with a direct access to domestic courts, which in turn enables them to participate and/or commence domestic insolvency proceedings against the concerned debtor. In terms of recognition, the UNCITRAL Model Law accounts for the recognition of foreign proceedings in domestic courts and enables the courts to accordingly determine the relief to be granted. Further, the UNCITRAL Model Law provides for bringing about effective cooperation between insolvency professionals and courts of different countries and also ensuring coordination so as to efficiently manage the conduct of concurrent proceedings in different jurisdictions. The intent of the UNCITRAL Model Law seems to be to assist states to mould their insolvency laws in a modern, harmonised and fair framework so as to address the instances of cross border insolvency more effectively. It respects the differences in various national laws and primarily focuses on improving cooperation and coordination between countries, instead of attempting to unify the national laws.
In an attempt to address the shortcomings of the present cross-border insolvency mechanism, or the lack thereof, India has released a set of draft guidelines containing a specific chapter i.e. Part Z ("draft chapter") on cross-border insolvency. The basis of these draft guidelines is found in the UNCITRAL Model Law, incorporating some minor modifications. These guidelines were recommended by the Insolvency Law Committee ("Committee") vide its Report submitted on 16.10.2018.
In its report, the Committee had recommended the inclusion of the draft chapter in the IBC which comprises of 29 sections, which essentially include the General Provisions and Public Policy Exception, Access of Foreign Representatives and Creditors to the Adjudicating Authority, Recognition of a Foreign Proceeding and Relief, Cooperation with Foreign Courts and Foreign Representatives, Concurrent Proceedings and some miscellaneous provisions.3 Few noteworthy features of the draft chapter are highlighted as follows:
- Application of the draft chapter: The applicability of the draft chapter is limited to corporate debtors and the same does not extend to individual debtors and personal insolvency. The rationale for this distinction could be said to be a cautious approach, as the legislature might deem it better to first observe and study the implications of the draft chapter on corporate debtor, before extending it to individual debtors.
- Reciprocity: The requirement of reciprocity is captured in the draft chapter, therefore it would only be applicable to those foreign countries which have also adopted the UNCITRAL Model Law into their domestic legal framework. As such, it leaves the question of cross-border insolvency process with countries not having adopted the UNCITRAL Model Law, still answered.
- Foreign main proceedings and foreign non-main proceedings: Two types of foreign proceedings are described in the draft chapter, which creates a distinction between foreign main proceedings and foreign non-main proceedings. In that context, a foreign main proceeding refers to a foreign proceeding taking place in the State where the corporate debtor has the centre of its main interests. Whereas, a foreign non-main proceeding means a foreign proceeding, other than a foreign main proceeding, which takes place in a State where the corporate debtor has an establishment. Such a distinction is necessitated so as to understand, determine and demarcate the level of control that a foreign jurisdiction can exercise over the insolvency process in India and further the type and extent of relief that can be granted by the Adjudicating Authority in relation to such foreign proceedings.
- Determination of Centre of Main Interests ("COMI"): Under Section 14 of the draft chapter, guidance is provided for determination of COMI. It provides for a prima facie presumption that the corporate debtor's registered office is its COMI, unless there is proof to the contrary. However, this presumption would be applicable provided that the registered office of the corporate debtor has not been moved to another State within three months prior to the commencement of insolvency proceedings in such State. It further provides that the Adjudicating Authority will conduct an assessment of where the corporate debtor's central administration takes place in order to determine the corporate debtor's COMI. Such assessment might also include factors as prescribed by the Central Government, and should be carried out in a manner that is ascertainable by third parties, including the creditors of the corporate debtor.
B. Benefits and implications of implementing the draft chapter
It is worth noting that around 51 jurisdictions have adopted the UNCITRAL Model Law so as to effectively cope up with the challenges of cross-border insolvency proceedings.4 Along with the advantage of having reciprocity in countries like Singapore, U.K. and US, amongst many others that have adopted and implemented the UNCITRAL Model Law, India would additionally be able to avail the following benefits by adapting the UNCITRAL Model Law in the form of the draft chapter, in its legislative framework:
- Economic benefits: Enacting an effective cross-border insolvency law would result in increased predictability and certainty of investment framework and thereby making India an attractive investment destination for foreign creditors.
- Flexibility: The draft chapter respects the differences amongst different national laws on insolvency and provides for deviations to be made from the UNCITRAL Model Law so as to best suit the domestic conditions and maintain consistency with domestic insolvency law.
- Protection of domestic interest and public policy exception: The draft chapter allows the refusal of recognition of foreign proceedings or provision of any other assistance, if in case such action would be manifestly contrary to India's public policy. Therefore, public interest and public policy is put at a higher threshold and limitations are imposed on foreign creditors, debtors or other interested persons, so as to prevent the abuse of the law and process by such parties.
- Precedence to domestic insolvency proceedings: Under the draft chapter, supremacy is provided to the proceedings initiated under the Code. Therefore, once proceedings are commenced under the Code, the Adjudicating Authority has the discretion to not recognize any proceeding inconsistent with it and commenced under the provisions of the draft chapter.
- Remedy in jurisdictions with reciprocity: Many countries have enacted the UNCITRAL Model Law with a requirement of legislative reciprocity, which means that such a country would grant recognition, cooperation etc. to Indian proceedings only if India has adopted the UNCITRAL Model Law in some way. Therefore, adopting the draft chapter would go a long way in assisting Indian creditors and professionals to receive assistance from such reciprocating countries, in effectively addressing issues related to cross-border insolvency proceedings.
- Domestic and global mechanism for corporation: The draft chapter provides for direct cooperation and coordination between courts and insolvency professionals, in foreign jurisdictions as well as domestically. Such a mechanism might assist in enabling consistency in the system and result in a uniform line of judicial decisions and rulings and provide faster and effective assistance in case of concurrent proceedings.
III. JET AIRWAYS CASE: INDIAN JUDICIARY'S NOTEWORTHY ENCOUNTER WITH CROSS BORDER INSOLVENCY DISPUTE
A. Parallel insolvency proceedings in India and Netherlands
In the year 2019, the National Company Law Appellate Tribunal ("NCLAT") gave a ruling, consequent to which Jet Airways (India) Limited ("Jet Airways") became the first Indian company to be subjected to cross-border insolvency. NCLAT's ruling set a leading precedent in the evolving insolvency law in India as it directed the conduct of a "Joint Corporate Insolvency Resolution Process" under IBC.
It all began when State Bank of India filed a Section 7 application against Jet Airways, upon the admission of which the Corporate Insolvency Resolution Process ("CIRP") of Jet Airways was commenced on June 20, 2019. Following this, the adjudicating authority was aware of the fact that a Dutch Court had already initiated insolvency proceedings and a Bankruptcy Administrator was appointed in Netherlands to take charge of Jet Airways' assets located therein. The same was done at the instance of a bankruptcy petition which was filed by two European creditors against Jet Airways for claims of unpaid dues amounting to nearly INR 280 crores. The European creditors were seeking the seizure of one of the Jet Airways' Boeing 777 aircraft as the same was parked in the Schiphol Airport in Amsterdam.
B. NCLT's Decision on the Cross-Border Insolvency
Subsequent to Jet Airways' admission to CIRP in India, the Bankruptcy Administrator appointed by the Dutch Court moved the National Company Law Tribunal, Mumbai Bench ("NCLT") praying for the recognition of the insolvency proceedings in the Netherlands. The Administrator also requested the NCLT to withhold the CIRP on account of the ongoing bankruptcy proceedings against Jet Airways in the competent court, which derived its jurisdiction under Article 2(4) of the Dutch Bankruptcy Act. It was highlighted that occurrence of two parallel insolvency proceedings in different jurisdictions would adversely affect the restructuring process and have a detrimental impact on the creditors involved.
The primary issue that was considered was pertaining to the jurisdiction of the courts in Netherlands to adjudicate upon and pass suitable orders in the matter relating to the bankruptcy of Jet Airways which is registered and incorporated in India.
However, the NCLT refused to withhold the Indian insolvency proceedings. The basis provided for the same was that Section 234 and Section 235 of the Code, deal with cross-border insolvency and they were not yet brought into effect. Hence, the NCLT held that in absence of such a law, the Bankruptcy Administrator was barred from participating in the Indian insolvency proceedings and further declared that ongoing proceedings in Netherlands were null and void.
C. Appeal before the NCLAT and its ruling
The Bankruptcy Administrator, being aggrieved by the NCLT's decision, moved an appeal against the same in the NCLAT. As such the NCLAT allowed the appeal in the following manner:
- NCLAT set aside the order passed by the NCLT upon an assurance being provided by the Bankruptcy Administrator that it would not alienate any offshore assets of Jet Airways.
- NCLAT allowed the Bankruptcy Administrator to cooperate with the Resolution Professional as appointed under the Code and also to participate in the meetings of the Committee of Creditors, however only to the extent of observing and preventing any likely overlap of powers.
- Further, the NCLAT ensued cooperation between the Indian parties and the Dutch counterpart in order to finalise a resolution plan the would be in the best interest of the Jet Airways and all its stakeholders.
Pursuant to the directions of the NCLAT, the Resolution Professional under the Code and the Bankruptcy Administrator, which was appointed by the Dutch Court, mutually agreed upon a "cross-border insolvency protocol" which was essentially construed on the basis of the principles provided in the UNCITRAL Model Law. Thereby, India was recognised as the "centre of main interest" and the proceedings being held in Netherlands were taken as the "non-main insolvency proceedings". Therefore, the case of Jet Airways presents itself to be an interesting study relevant to the legal position pertaining to cross-border insolvency proceedings in India as it highlights an earnest attempt by the Indian judiciary to be a front-runner in evolving principles and effecting mechanisms to deal with cross-border insolvency proceedings.
The UNCITRAL Model Law, in essence, provides a fairly independent framework which allows the concerned jurisdiction to evaluate and thereby decide the operational nitty gritty best suited to that countries legal landscape. As such, the UNCITRAL Model Law offers a wide scope of benefits and clarity w.r.t. cross-border insolvency disputes.
However, as highlighted above, presently there exists not much of a legal framework for addressing cross-border insolvency disputes in India. Even if the two provisions as provided in the Code are notified and implemented, they suffer from various shortcomings and would not be able to provide a comprehensive mechanism for cross-border insolvency proceedings. As such, eventually the draft chapter recommended by the Committee would have to be adapted and included in the Code, thereby resulting in the introduction of various amendments and rules to accommodate the draft chapter.
In January 2020, Ministry of Corporate Affairs had constituted a special committee to further understand and recommend the necessary rules and regulatory framework for a smooth implementation of proposed cross border insolvency provisions in the Code.5 However, there does not seem to be many updates on the progress made by the said committee regarding their work on the inclusion of cross-border insolvency provisions in the Code.
Having said that, it cannot be ignored that a lot of procedural and legal challenges would have to be addressed for the effective adaptation and implementation of the draft chapter. However, once the hard work is carried out and the hurdles are met, the legal framework could ensure cooperation and communication between different jurisdictions and successfully address the resolution of cross-border disputes concerning India.
1 Section 234: Agreements with foreign
234(1) The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code.
(2) 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 any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified.
2 Section 235: Letter of request to a
country outside India in certain cases:
235. (1) 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.
(2) 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.
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