When it comes to domestic insolvency proceedings, there are different stages such as identification of the assets of the debtor, identification of creditors and verification of the dues payable to them, the settlement of claims post the approval from the adjudicating authority, etc. However, when it comes to attaching the foreign assets of the Corporate Debtor in the liquidation estate or considering the claims of foreign creditors in the insolvency proceedings of the Corporate Debtor ("CD"), the Insolvency and Bankruptcy Code, 2016 ("Code") is silent on this aspect.
Certain provisions were inserted in the Code after the Bankruptcy Law Reforms Committee made certain observations with regards to implementing Cross-Border Insolvency mechanism in the Code. The provisions include Section 234 and 235 of the Code which deals with the power of the Central Government to enter into any agreement for enforcing the provisions of the Code and the latter provision talks about the power of the Resolution Professional ("RP"), liquidator or bankruptcy trustee to make an application to the NCLT for taking into consideration the assets available of the Corporate Debtor in foreign jurisdiction. However, as the said provisions have not been notified yet, the power cannot be termed as an effective remedy to suffice the purpose of the Cross-Border Insolvency.
In the past few years, the legislature had tried to cover this particular aspect and promulgated some draft amendment to the Code. Through such amendment, the Board proposed to enact "Draft Part Z" which specifically deals with the aspect of Cross-Border Insolvency in India. There are separate provisions given under Part Z, which talks about moratorium, Centre of main interest, access and notification to foreign creditors, etc. However, the said provisions in Part Z do not take into consideration the concept of group insolvency or take into account the assets of the subsidiary of the CD and accumulate them in the liquidation estate.
ISSUES AND THE CONCERNS OUT OF THE SUGGESTIVE CHANGES IN THE CODE
The major issue revolves around the accumulation of "Liquidation Estate" and the assets of the CD that needs to be accumulated in the Liquidation Estate. The liquidation estate under the Code includes all the assets of the CD post the failing of the resolution process and the purpose of forming a liquidation estate is to maximize the value of the assets of the CD and distribute it in a fair and equitable manner.
The issue here is that if we are focusing on the implementation of the Cross-Border Insolvency, the need to consider Group Insolvency or taking the assets of the subsidiary or the associated company into consideration is of prime importance. In Dynepro Pvt. Ltd. v. V. Nagarajan (Company Appeal (AT) (Insolvency) No. 229 of 2018), the National Company Law Appellate Tribunal held that "assets" do not include the assets of any Indian or foreign subsidiary of the Corporate Debtor. The ruling made it clear that the provision is rough and there is no scope for considering assets of the subsidiary in the Liquidation Estate under section 36(4)(d). As the robust mechanism for Cross-Border Insolvency requires a purposeful approach for the implementation of the same, it is of prime importance to consider the assets of associated company in the insolvency proceedings of the CD.
In many cases, the controversy as to what will be considered under the Liquidation Estate and what not has been settled. However, the concerned legislative change with regards to Cross-Border Insolvency and not considering this aspect of Liquidation Estate will hamper the expectations and interests of the Creditors from the Code. The main aim of the Code is to maximize the assets and pay out the debts to the Creditors as much as possible, hence, the said purpose will be fulfilled if the legislature takes into account the required changes in the Code itself.
UNCITRAL MODEL LAW DEALING WITH CROSS-BORDER INSOLVENCY
The other jurisdictions that follow UNCITRAL Model Law, find it easy to cope with the recent checks of the Insolvency regime. The UNCITRAL Law states the principles that can be adopted by the Countries to suit the domestic context of the enacting jurisdiction. Model Law allows foreign insolvency officials and foreign creditors direct access to domestic courts and allows them to participate in domestic insolvency proceedings. The Model Law follows the principle of Centre of main interests ("COMI") according to which if simultaneous proceedings are going on against the same CD in different jurisdictions, then one will be considered as the main proceedings and the other one will be non-main proceedings. Recognition of main proceedings is essential in terms of relief to be granted to the Creditors of one jurisdiction and CD itself. The Model Law covers almost every aspect with regards to cooperation between domestic and foreign courts, coordination between two jurisdictions in terms of insolvency proceedings initiated, etc.
However, not implementing those provisions in the present legal context will give a drawback to the Creditors and will expose the CD to simultaneous proceedings in various jurisdictions. The UNCITRAL Model Law on Group Insolvency also covers the aspect of group insolvency where the assets of the various members of the same enterprise will be subject to same insolvency proceedings. This approach is way better to implement in the domestic insolvency regime to further provide reliefs to the Creditors as they will be provided with maximum value of the debt.
LIQUIDATION ESTATE UNDER SINGAPORE INSOLVENCY LAW
Under the Singaporean Insolvency Law regime, i.e., Insolvency, Restructuring and Dissolution Act, 2018 ("the Act"), the provision takes care of various aspects with regards to concerns of the Company and the Creditors. Under section 106 of the Act, procedure is given for submitting the Company's statement of affairs. Further, under section 64 of the Act, the Court has the power to restrain the proceedings against the Company if the Company proposes a compromise or an arrangement between the Company and its Creditors. In order to facilitate the Company the Court can pass certain orders with regards to restraining the proceedings against the subsidiary or the holding company. These reliefs are not limited to only the subject Company but to its subsidiary, holding or ultimate holding Company as well. As per Section 65 of the Act, the Court can pass any order to grant relief on these similar terms in favour of the subsidiary, holding or ultimate holding Company of the subject Company.
Now, this particular provision itself suggests the intention of the legislature to take into account the assets of the associated company and the power of the Court to regulate the same in the insolvency proceedings of the subject Company.
On similar footing, Regulation 27(1) of the Insolvency, Restructuring and Dissolution (Court-Ordered Winding Up) Regulations, 2020 talks about preparation of statement of affairs for which Form CWU-7 is to be filled by the relevant persons, i.e., the Key Managerial persons of the Company. The said regulation is to be read with Section 141 of the Act which specifically deals with the submission of Statement of Company's affairs to Official Receiver or Liquidator at the time of winding up. Under the said provision, the statement do include the assets of the Company. In Form CWU-7, a specific field is provided for which the relevant persons has to provide details about the other assets of the Company under insolvency. The term "other assets" has not been defined anywhere in the Act or in the Regulation, however, after construing the provisions of the Act and the Regulation, it can be inferred that assets of the subsidiary or associated companies can be considered if the Company is under the winding up process as the other assets of the Company can be the assets held by it in its subsidiary or other associated company and at the time when a Scheme of arrangement is proposed by the Company as at that time the Court has the power to grant relief to the Company and the Associated Company as well.
The present Insolvency regime in India does not suffice to make the mechanism related to Cross-Border Insolvency, robust. To make it suffice, it is necessary to consider amending the provision related to Liquidation Asset, i.e., Section 36 of the Code to take into consideration the assets of the subsidiary or other group entity of the CD. The BLRC report that talked about Cross-Border Insolvency also took into consideration the aspect of the matters where the subsidiary is also involved. The Committee which was formed and promulgated Draft Part Z of the Code should be mindful of this particular aspect which itself is a big issue to be resolved at an earlier stage to eradicate future litigations to come on this subject matter.
As we have seen in the provisions of the Singapore Insolvency Law with regards to considering the aspect of other assets while computing the Company's statement of affairs, the explicit provision clearing this particular position will be beneficial. As the UNCITRAL Model Law is silent about accumulation of subsidiary's assets in the Liquidation Estate, it will be interesting and important for the legislature in India to amend the laws in such a manner which will address the issues faced by the Creditors in the past.
It is important for the Creditors to look at the perspective that whether the arrangement made between the Creditor and CD and if another group company is involved in the whole process, then a mechanism should be considered for taking into account, the assets of that particular entity while insolvency proceedings are underway. It will be important to see as to what steps will be taken by the IBBI and the MCA to tackle this particular aspect.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.