Currently, cross border insolvency has no clear legal framework in India and the Ministry of Corporate Affairs issued a public notice at the end of June (the "Notification") inviting comments and suggestions on the proposed draft chapter on cross border insolvency it plans to introduce under the Insolvency & Bankruptcy Code, 2016 (the "Code"), broadly based on the United Nations Commission on International Trade Law Model Law on Cross Border Insolvency (the "UNCITRAL Model Law")2.
This article will discuss the complexities of cross-border insolvency in the Indian context, set out the broad principles of the UNCITRAL Model Law and ask the nuanced question in the context of the Notification: whether the so called Gibbs rule prioritizing the rights of creditors under English law contracts over and above an insolvency process in a foreign court, still takes precedence (the "Gibbs Rule").
2. CROSS-BORDER INSOLVENCY SCENARIOS
Before we plunge into an analysis of the Notification and its implications, it's worthwhile noting that cross border insolvency issues could be triggered by a number of circumstances, and in particular, in the Indian context:
- where creditors of an Indian debtor wish to enforce their rights over the assets of an Indian debtor, which are located overseas;
- where the creditors of a foreign debtor wish to enforce their rights over the assets of that foreign debtor in India; and
- where Indian creditors to a foreign debtor, wish to enforce their rights over the assets of that foreign debtor in a foreign jurisdiction.
Note that a foreign creditor can already initiate (or be a part of any) insolvency proceedings against an Indian debtor, initiated under the Code in India.
The issues stemming out of these scenarios are complex and cross border insolvency, inevitably throws up a panic amongst creditors across jurisdictions over how their individual claims may be compromised by the initiation of insolvency (or restructuring proceedings) against the debtor in its center of main interests.
Forefront in the mind of the creditor is whether the law of the main proceeding will essentially subordinate its claim, forcing it to participate in that main proceeding and any restructuring plan that may arise form it.
Conversely, in the context of the insolvency professional appointed to administer the debtor, the question arises to what extent it can seek relief before foreign courts in relation to assets which may be located in that jurisdiction, firstly, preventing the sale of those assets, preserving value for the liquidation estate; and secondly, preventing foreign creditors in that jurisdiction, from exercising their rights against the debtor (and its assets located in that jurisdiction) in parallel to, or otherwise, outside of the process initiated in debtor's center of main interest.
3. THE THEORY
Cross border insolvency, in essence, can be distilled down to three key questions: which law should be applied; who has jurisdiction to administer the insolvency process; and how are judgments asserting control over assets enforced?
The treatment of financially distressed debtors, with assets across jurisdictions has two main theoretical approaches, and a third, more practical model. Firstly, there is the territorial approach, which broadly sets out that each jurisdiction applies its own laws over assets located in that jurisdiction, to the exclusion of other jurisdictions. Secondly, there is the universalist approach, with a single administrator applying a single global regime over assets, across borders. Thirdly, there is the hybrid approach, where jurisdictions try and work out the most relevant center for conducting the proceedings, with co-operation from other jurisdictions in relation to assets that may be located there.
4. THE UNCITRAL MODEL LAW
The UNCITRAL Model Law attempts to deal with the complexities outlined above through rationalizing the process in dealing with cross-border insolvency, but it should not be mistaken for creating a substantive, unified insolvency law.
It does this by providing a framework for access to insolvency appointed professionals in the courts of other jurisdictions, permitting them to participate or commence proceedings in that particular jurisdiction, though in the Indian context, this may need to be modified, on the basis of locus standi in the Indian courts, requiring foreign insolvency professionals to appoint an Indian insolvency professional to represent them in Indian proceedings.
It also lays out principles for where insolvency proceedings should be initiated. The UNCTRAL Model Law sets out a principle for identifying the most appropriate jurisdiction for commencing insolvency proceedings (the main proceeding) and ensures that the resolution professionals appointed in that jurisdiction are granted recognition and access in proceedings in other jurisdictions, where the insolvent entity may have assets (the non-main proceeding).
In essence, the UNCITRAL Model Law sets out the principle of center of main interests (commonly referred to as "COMI") in deciding where the main proceeding should be commenced. Interestingly, COMI is not given a definition in the UNICTRAL Model Law. It broadly implies that it is the seat of a corporate entity's major stakes, whether that is in terms of control or the location of its assets and its significant operations. COMI is determined by factors, both objective and ascertainable by third parties, especially creditors and potential creditors.3
Essentially, the command and control test is the commonly applied test to determine the COMI of an entity.4 There is a presumption in favour of the place of its registered office, which normally corresponds to the head office of the company5 and this presumption has worked well where there is no serious controversy.6 In effect, the registered office, or the place of incorporation serves as proof of existence of a corporate entity.
The registered office, however, does not otherwise have special evidentiary value and does not shift the burden of proof away from the foreign representatives seeking recognition as a main proceeding.7 Courts generally take into account other factors, such as the location of the debtor's headquarters; the location of those who actually manage the debtor (which could possibly be the headquarters of a holding company); the location of the debtor's primary assets; the location of the majority of the debtor's creditors or of a majority of the creditors who would be affected by the case; and the jurisdiction whose law would apply to most disputes.8
In the Indian context, the initiation of proceedings against an Indian corporate entity when the COMI lies in India itself, makes such proceedings the "foreign main proceedings"9 (under the UNCITRAL Model Law) for a foreign creditor. Recognition of the proceedings as a main proceeding will result in automatic relief such as a stay or moratorium on domestic proceedings in relation to the debtor, and the Indian insolvency professional would, presumably be afforded rights as a foreign representative of a foreign main proceeding before the courts of contracting states to the UNCITRAL Model Law, in any application to stay parallel main proceedings, or otherwise, to commence secondary proceedings in relation to the Indian debtor's assets which may be located overseas.
In the event that it is possible that the COMI of an Indian debtor is determined to fall outside India (lets say, Mauritius for example), foreign main proceedings shall ensue in that jurisdiction, and the Code, having no extra-territorial effect as of now, shall cease to apply. In such circumstances, relief available to Indian creditors in that jurisdiction will be subject to the laws of where the foreign main proceedings are initiated and the provision of the Code, shall be applicable, only in so far as it is consistent with, or otherwise, at the discretion of the court, in who's jurisdiction the foreign main proceedings are commenced.
It should be stressed that the UNCITRAL Model Law does not import the substantive law of the foreign system into the insolvency system of the enacting state, nor does it apply the relief that would be available under the enacting state in any foreign proceedings. It does however, grant recognition and assistance to foreign representatives of an insolvency resolution process in applying for interim relief and automatic stays, where available in that particular jurisdiction where such relief is sought.
5. THE CURRENT LEGAL FRAMEWORK IN INDIA
Sections 234 and 235 of the Code deal with cross border insolvency in a cursory manner, empowering the government to make treaties and further empowering the Adjudicating Authority under the Code, to issue a letter of request to a court in a country, with which an agreement has been entered into, to deal with the assets in a specified manner (presumably, in accordance with the provisions of the Code). Theoretically, this should also provide a framework for foreign representatives to apply to the Indian courts to deal with assets in India in a manner consistent with the insolvency laws of the jurisdiction where foreign main proceedings have been initiated, in relation to a debtor, with assets in India.
For foreign proceedings to be recognized in India, the process set out under the Civil Procedure Code, 1908 will be applicable, together with English common law principles, though it should be noted that it is not broad enough to cover some insolvency related proceedings.
Likewise, for Indian proceedings to be recognized abroad, the procedural rules of that foreign jurisdiction will apply. Those countries that have adopted the UNCITRAL Model Law (which include most industrialized countries) are required to provide recognition, assistance, cooperation and appropriate relief in relation to insolvency proceedings commenced in India, except where that country has otherwise required reciprocity.
As of June 2018, 44 states have adopted the UNCITRAL Model Law, including the United States, the United Kingdom and Singapore. Note, however, that certain countries that have adopted it may have made reservations to it, and may require reciprocity.10
Clearly, while the Code permits the government to enter into treaties to implement the UNCITRAL Model Law, negotiating up to 200 separate bilateral treaties in a relatively short space of time is just not practical, and it would further complicate matters, with the Indian courts having to take into account the nuances of each treaty in any cross border insolvency matter. Surely, the simplest solution would be for India to simply sign and ratify the UNCITRAL Model Law and then incorporate that into the Code.
While the Notification proposes to essentially adopt the UNCITRAL Model Law, there are a couple of key nuances and it appears to apply only to corporate insolvency, and not in relation to the insolvency of individuals. There is a general public policy restriction, which essentially says that India will not give effect to the treaty provisions if it violates public policy, though it should be noted that this reservation is a common one amongst most contracting states and the nuance is how the courts in India might interpret the principle, and whether they will accord it narrow, or broad status, potentially frustrating the rights of foreign representatives in actions before the Indian courts.
6. SUBSTANTIAL ASSETS OVERSEAS?
Insolvent entities (or those which are being restructured) might have substantial assets outside of its COMI (for example, the entity itself might be the legal registered owner of property). It may also have shares in foreign subsidiaries or other group companies, and these share certificates, are essentially moveable property (though they are likely to be pledged to any lender of the subsidiary or the group company as security for any loan).
However, it needs to be underlined, that the assets of any foreign subsidiary or group company are not the assets of the insolvent parent company (other than the shares held by it in any such foreign subsidiary or group company). This is a cardinal principle of limited liability and the courts will only lift that veil on the ring fencing of liabilities in exceptional circumstances.
As mentioned above, the Code already permits foreign creditors to apply to the Adjudicating Authority for either the initiation of insolvency proceedings against the Indian entity or to be a part of the ongoing proceedings, in the same manner as Indian creditors, with the same rights. The Code, by virtue of including a "person resident outside India" in the definition of "persons",11 rightly underlines the principle of neutrality towards the identity of the corporate debtor's creditors.
However, the Code had fallen short in addressing situations where Indian creditors sought to enforce rights over an Indian debtor with assets overseas and also, where Indian creditors sought to enforce rights over a foreign debtor with assets overseas, wherein there is neither a provision for automatic attachment over assets situated overseas nor for parallel simultaneous proceedings against the corporate debtor in more than one jurisdiction.
In non UNCITRAL Model Law contracting states, the principles of private international law essentially govern cross-border insolvency, and a formal application will need to be made by the appointed Indian insolvency resolution professional to attach those assets in the court of the relevant foreign jurisdiction where the Indian debtor may have assets.
In UNCITRAL Model Law contracting states (and those contracting states that accept applications from insolvency professionals in non-contracting states), generally, co-operation, assistance and recognition of foreign law proceedings will be afforded.
It's perhaps pertinent to now turn to the question of how other jurisdictions approach the problem of locus standi in the context of foreign insolvency proceedings and orders from foreign courts or tribunals?
The United Kingdom, for example, although it does not recognise India as a "relevant country" under the provisions of Section 426 of the Insolvency Act of 198612, it does, however, provide an insolvency professional the right to approach the English Courts to either request recognition of insolvency proceedings under which it has been appointed, so as to ensure that assets located in the UK become part of the Indian insolvency proceedings, or, otherwise, be a part of insolvency proceedings initiated by a creditor in the UK.
7. THE RULE IN GIBBS
But what about contracts between an Indian debtor and foreign creditors, which are governed by English law? Will those foreign creditors be subject to (and bound by) the Code in the event that an insolvency resolution process is triggered in India against the Indian debtor? Will those foreign creditors need to prove their debts through the process in India and does the moratorium under the Code apply to parallel proceedings by foreign creditors before foreign courts, seeking enforcement of any local security interests?
There is a long-standing principle of English law that a debt governed by English law cannot be discharged by a foreign insolvency proceeding, unless that creditor submits to those foreign proceedings, derived from the decision by the English Court of Appeal in Anthony Gibbs and sons v La Société Industrielle et Commerciale des Métaux.13
The Gibbs Rule was recently put to test by English courts in the case of the Bakhshiyeva v Sberbank of Russia & Ors  EWHC 59 (Ch). In this case, the court considered an application by a foreign representative to the English court on behalf of the International Bank of Azerbaijan (the "Debtor") for a permanent stay on a creditors' enforcement of claims in England under English law contracts, contrary to the foreign insolvency proceeding, to which the creditors of the Debtor were purportedly bound.
In this case, the foreign insolvency proceedings had been initiated in Azerbaijan against the Debtor and a restructuring plan had been agreed by nearly all of its creditors (the "Restructuring Plan"), which had been approved by the Azeri courts (the "Approving Order") and the question arose as whether they should be recognised in England under the Cross Border Insolvency Regulations, 2006 (the "CBIR", which broadly, implement the UNCITRAL Model Law).
The judgment is quite an interesting one, because there are essentially three issues at stake: firstly, whether a moratorium can be extended indefinitely (when it appears that the moratorium period under local law seems to be on the brink of expiry); secondly, whether creditors with rights under foreign law documents, who did not participate or agree to the restructuring plan are bound by it; and thirdly, whether the Gibbs Rule is still good law.
Turning to the brief facts of the case, Sberbank had lent USD 20 million to the Debtor, pursuant to English law financing documents and another creditor, Frankin Templeton, was the beneficial owner of USD 500 million of notes, issued by the Debtor and also governed by English law (Sberbank and Frankin Templeton together, being the "Respondents").
The Respondents did not participate in the Restructuring Plan and did not consent to it. At first instance, the English court granted the representative of the Debtor the relief sought, imposing a moratorium, preventing creditors in general, and the Respondents in particular, from commencing or continuing any action against the Debtor.
The Respondents appealed the decision, arguing that the foreign restructuring proceedings under Azeri law came to an end at the end of January 2018 and further, it did not bind them, relying on the Gibbs Rule.
It was cited in the judgment that many English law insolvency academics now consider the Gibbs Rule as an anachornism, with some going so far as to say that the "Gibbs doctrine belongs to an age of Anglocentric reasoning which should be confined to history."14 It was also pointed out in the proceedings that in the case of Pacific Andes Resource Development Ltd, the Singapore High Court15 chose not to be bound by the Gibbs Rule, finding that:
"In the case of a contractual obligation which happens to be governed by English law, a further rule should be developed whereby, if one of the parties to the contract is the subject of insolvency proceedings in a jurisdiction with which he has an established connection based on residence or ties of business, it should be recognised that the possibility of such proceedings must enter into the parties' reasonable expectations in entering their relationship, and as such may furnish a ground for the discharge to take effect under the applicable law."
The Gibbs Rule is not doubt problematic: on the one hand, it does not recognise foreign insolvency or restructuring proceedings taking precedence over an English law debt; yet on the other hand, the English courts generally expect a foreign court to recognise its own judgements in relation to a restructuring in England, over and above foreign creditor's rights under a foreign law loan agreement. This appears to be a paradox.
On the question whether the Gibbs Rule had been eroded by the adoption of the UNCITRAL Model Law (incorporated under the CBIR), some academics have pointed out that:
"In situations where a restructuring is on foot in the foreign jurisdiction, the foreign representative can seek recognition in England pursuant to Article 15 of the [Model Law]. (One is obviously dealing with a situation where the foreign representative does not wish to proceed with a parallel scheme of arrangement in England and creditors have not sought to invoke the English court's insolvency jurisdiction.) Provided the foreign representative was appointed in foreign main proceedings, i.e. where the debtor has the centre of its main interests, the mandatory consequences of recognition include, under Article 20(1), the staying of both creditor actions and executions against the debtor's assets ..."
Furthermore, the effect of this for foreign creditors who do not agree to any restructuring plan initiated in the debtor's COMI should become obvious:
"Hence the foreign representative can stymie a hold-out creditor who might be minded to ignore the foreign restructuring and proceed instead to bring an action or to seek to execute in England, relying upon a debt that arose under an English contract. By applying for a stay the foreign representative may not have to deal, at least not immediately, with the substantive question of whether the English debt will ultimately be discharged by the foreign proceedings.
However, the application of Article 20 in respect of a foreign restructuring is not wholly free from complexity. The reference in Article 20(2)(a) to 'as if' a winding-up order had been made raises some uncertainty. For there is, of course, no discharge in a winding up.
Thus one may ask: what will happen in England in respect of the stay once the foreign restructuring plan has been approved, the corporation resumes trading outside bankruptcy protection and the foreign proceedings are formally closed by the foreign court?"
Nevertheless, pursuant to the definitions of a foreign proceeding16 and a foreign representative17 under Article 17(1) of Schedule 1 to the CBIR, the court must recognise a foreign insolvency proceeding if:
- The foreign insolvency proceeding constitutes a "foreign proceeding" as defined by Article 2(i) of Schedule 1 to the CBIR;
- The applicant is a "foreign representative" within Article 2(j) of Schedule 1 to the CBIR; and
- The application satisfies the evidential requirements set out in Article 15 of Schedule 1 to the CBIR.
Where a foreign liquidation is recognised by the English court as a foreign main proceeding, under the CBIR, then the debtor benefits from an automatic stay in England.18 However, the situation is slightly different in the context of a foreign restructuring where an administration moratorium is granted.
In considering a similar case, based on similar facts to the Sberbank case, the Englsh court, in Re BTA Bank JSC ,19 granted a stay order for two principle reasons:
"first, the relief is appropriate because it enables the English court to cooperate with the financial court in Almaty City in subjecting the bank's assets and claims to a single regime for the benefit of the general body of claimants. Secondly, I consider the relief appropriate because there plainly should not be an unseemly scramble for English assets by English claimants to the possible prejudice of the general body of claimants, but there should be an ordered approach to such English claims as might survive the Kazakh insolvency process."20
Notwithstanding the decision in Re BTA Bank JSC, the court held that the UNCITRAL Model Law and the CBIR does not empower an English court to vary, or discharge rights granted under English law, or otherwise, essentially conform the rights of creditors under English law, with the rights that they have under foreign law (and have otherwise, not consented to).
What appears to be a critical empahsis in the judgment is the distinction between insolvency (and the distribution of assets) and restructuring (and the variation or removal of rights). Although they are both collective proceedings (involving the debtor's creditors), the first process relates to the removal of assets from the grasp of a single (or class of) creditor in a particular jurisdiction (for the collective benefit of the creditors as a whole), while the second process relates to the denial of contractual rights, if that creditor has not consented to a restructuring plan.
The Sberbank judgment further seems to underline that the English courts will not apply foreign law, or apply English law in such a manner that replicates or achieves the intended relief that may be available under foreign law, if such a result could not be achieved under English law.
So to what extent does the Code and the proposed incorporation of the UNCITRAL Model Law address the lacuna of the Gibbs Rule and what, in the context of the Sberbank judgment, might happen if an Indian debtor undergoing the corporate insolvency resolution process in India under the Code had foreign creditors pursuant to English law financing documents?
In these circumstances, would an English court admit the insolvency resolution professional's application as a foreign representative to stay any action by those creditors until the moratorium period had expired under the Code? Can it already do this by virtue of the CBIR incorporating the UNCITRAL Model Law, without further legislative action required in India, adopting the UNCITRAL Model Law as part of the Code?
In the absence of any reservation made by the United Kingdom in relation to reciprocity for its insolvency representatives in India, granting it rights under the UNCITRAL Model Law, it is reasonable to conclude that the answer to that question would be yes.
Secondly, would an English court reject any application for a permanent stay or moratorium made by the Indian foreign representative in connection with foreign creditor's rights under English law financing documents and the Indian debtor's assets located in the United Kingdom?
What can we take away from the Sberbank judgement is that an application for permanent relief that goes beyond the moratorium period of the restructuring process in India, will likely be struck out by an English court. But that's a different conclusion from temporary relief, preventing creditors from asserting their rights under English law documents against the Indian debtor in the UK during the moratorium period under the Code in India; and such temporary relief is likely to be granted by an English court.
It's worth re-iterating that the Code enables the Adjudicating Authority to send a Letter of Request to an appropriate Court of the country with which a bilateral treaty has been entered into under Section 234, for recognition of proceedings, though theoretically, such a request is still subject to the discretion of the English court and the application of the Gibbs Rule, notwithstanding the provisions of the UNCITRAL Model Law and the incorporation of it under English law through the CBIR.
Finally, it should be noted, in the context of the Sberbank case, that the Azeri law has been amended to extend the moratorium period, potentially, indefinitely, and this raises the question to what extent any temporary relief granted in the English courts is necessarily required to be extended, until the moratorium allowing the restructuring, comes to a close? It remains to be seen how that question will be dealt with.
The Notification, setting out the draft chapter on cross-border insolvency (essentially adopting the UNCITRAL Model Law) is to be welcomed, though it is assumed that it paves the way for India's accession to the UNCITRAL Model Law (as amended), rather than the laborious alternative of having to enter into bilateral arrangements with other jurisdictions.
However, as the complexity of the foregoing discussion should highlight, simply adopting the cross-border insolvency regime should not be mistaken to mean that the provisions of the Code will be imported, or its intent applied in foreign jurisdictions.
What should be clear, if anything, is that the Gibbs Rule remains good law and foreign creditors will retain their rights under English law financing agreements, notwithstanding an Indian restructuring, assuming of course, that they have not participated in the restructuring or consented to the restructuring plan.
Further, it is unlikely that a permanent stay on proceedings before the English courts will be granted to a foreign representative of an Indian debtor in the context of a restructuring that has not been implemented within any time bound requirement.
1. The author would like to acknowledge and thank Sankalp Singh, a Law student at Hidayatullah National Law University for researching and contributing to this article.
2. Public Notice dated 20.06.2018, available at http://www.mca.gov.in/Ministry/pdf/PublicNoiceCrossBorder_20062018.pdf
3. In re Stanford International Bank, 2010 Bus LR 1270 [at ¶ 56].
4. Ian F. Fletcher, Insolvency in private international Law, Second Edition, 2005 at p. 390.
5. Article 16(3) Model law; see also Virgos, Miguel, and Schmit, Etienne. (1996) Report on the Convention on Insolvency Proceedings, EU Council Document 6500/96 DRS 8 (CFC)
6. H.R. Rep. No.31, 109th Congress, 1st Session, at para 114.
7. In Re Tri-Continental Exchange Ltd 349 B.R. 627 (2006) at p. 635.
8. In re SphinX, Ltd., 371 B.R. 10 (S.D.N.Y.2007)
9. Article 2(b), UNCITRAL Model Insolvency Law, 1997
10. For a further discussion of the principle and implications of reciprocity, see 'Should Reciprocity Be a Part of the UNCITRAL Model Cross Border Insolvency Law?' by Keith D. Yamauchi (2007), International Insolvency Review Vol. 16., pages 145-179
11. Sec. 3(23)(g), Insolvency & Bankruptcy Code, 2016
12. Sec. 426, Insolvency Act 1986 stipulates an obligation on part of the British Courts to assist the foreign representatives from relevant countries in the insolvency proceedings involving attachment of assets situated in their jurisdiction.
13. Gibbs & Sons v. Societe Industrielle Des Metaux,  2 QBD 399.
14. Professor Ian Fletcher, quoted in paragraph 49 of the judgment
15. Pacific Andes Resource Development Ltd  SGHC 210 at 48
16. Article 2(i) of Schedule 1 to the CBIR defines a foreign proceeding as:
"... a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation."
17. Article 2(j) of Schedule 1 to the CBIR defines a foreign representative as:
"... a person or body, including one appointed on an interim basis, authorised in a foreign proceeding to administer the reorganisation or the liquidation of the debtor's assets or affairs or to act as a representative of the foreign proceeding."
18. Article 21(1) of Schedule 1 of the CBIR
19. Re BTA Bank JSC  EWHC 4457 (Ch)
20. Ibid. See paragraph 13 of the judgment by Norris J
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.