Cross Border Insolvency

Introduction

The concept of cross border insolvency refers to the treatment of financially burdened debtors where the assets of the debtors are in more than one country or the creditors are in more than one country.1

Insolvency means a state when an organization or an individual is not able to fulfil its financial burdens which are due to the lenders in terms of debts. When a company is declared as an insolvent there are certain procedures which a company goes through i.e., there are informal meeting which is organized between the company and the creditors for making an alternative mode of paying the debts.

When the outcome of such meetings are not as per expected due to poor management of cash or the cash inflow is less than expected then the company can be declared as insolvent by performing certain insolvency proceedings where the liquidator would acquire all the assets of the company and evaluate them and liquidate those assets in to pay off the debts.

Dimensions of cross border insolvency

The cross-border insolvency deals with three dimensions:

• Firstly, protecting the rights of the foreign creditors who have certain rights on the assets of the debtor which are in the different jurisdictions wherein the proceedings of the insolvency in place.
• Secondly, when the assets of the debtors are in various jurisdictions and the creditor wants to involve those assets in the different jurisdictions in the proceedings of insolvency.
• Thirdly, the insolvency proceedings are going on or commenced on the same debtor in more than one jurisdiction.

Cross-border insolvency denotes a situation where the insolvent debtor has assets in more than one jurisdiction or where some of the creditors of the debtor are not from the jurisdiction where the insolvency proceedings have been filed[1]. Professor Ian Fletcher, a renowned scholar on aspects of commercial insolvency, proposes that ‘cross-border insolvency’ should be considered as a situation‘…in which insolvency occurs in circumstances which in some way transcend the confines of a single legal system so that a single set of domestic insolvency law provisions cannot be immediately and exclusively applied without regard to the issues raised by the foreign elements of the case[2].

Current Scenario

A majority of significant corporate failures in recent times highlight the involvement of more than one jurisdiction making international insolvencies common and not an exceptional scenario. Cross border insolvency is not defined in the Code, but in general, it may be understood as insolvency of borrowers who have assets or creditors in different jurisdictions or are subject to insolvency proceedings in multiple jurisdictions.

The Insolvency and Bankruptcy Code, 2016

The Insolvency and Bankruptcy Code, 2016 does not discriminate between domestic and foreign creditors. By including “persons not resident in India” in the definition of persons under Section 3(23) of the Code and resultantly in the definition of creditors, the new legislation permits foreign creditors to commence and participate in the proceedings under the Code. Foreign creditors have been given the same rights as of the domestic creditors regarding the distribution of assets on the liquidation of an insolvent company.

However, the second and third aspects mentioned above are not dealt with in the Code as it currently lacks any mechanism for reciprocity, cooperation, coordination between jurisdictions of an Indian court or tribunal to seek the assistance of foreign courts or insolvency authorities when an insolvency proceeding may have implications across national borders. Subsequently, to fill up the lacuna, the Joint Parliamentary Committee’s Report introduced two new provisions, namely Sections 234 and 235 to address these situations.

Section 234[3] states that the Central Government may enter into bilateral agreements with other countries for purposes of enforcing the Code.

Section 235[4]provides the relevant court or tribunal in India to issue a letter of request to a foreign court or tribunal seeking its assistance in situations where a debtor’s assets may be located abroad.

With a spurt in commercial technology, cross-border trade has no longer remained the preserve only of large multi-national corporations. The growing size of economies has lured companies to stretch their business beyond their home jurisdictions, organizing their activities across national boundaries. Due to the increasing globalization of business activities, businesses encounter a wide array of legal systems. Therefore, when multinationals become insolvent, it comes as no surprise that such insolvencies have cross-border consequences

Objectives of Effective and Efficient Cross Border Insolvency

• Reciprocal agreements require individual long-drawn-out negotiations with each country.
• Reciprocal agreements do not bring about the efficiency otherwise achieved by a uniform code of co-operation between various jurisdictions.
• Differing reciprocal agreements with different countries complicate insolvency proceedings.
• 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.
• In the absence of reciprocal agreements, no guidance to an Insolvency Professional for availing evidence or taking action for foreign assets.
• Recognition of foreign insolvency proceedings is one of the major objectives of any legal regime that seeks to address cross-border insolvency.

At present, Indian law recognizes foreign judgments and foreign decrees of some reciprocating territories, such as the UK and Singapore (section 13 & 44A of the Code of Civil Procedure, 1908). However, no recognition has been accorded to foreign proceedings, including insolvency-related proceedings, such as reorganizations.

UNCITRAL Model Law and Its Implications

•  UNCITRAL received the content of Model Law on Cross Border Insolvency issues on 30 May 1997 and thereby was passed by United Nations (UN) General Assembly on 15 December 1997.
  •  Certain jurisdictions have substantially implemented the model law into their domestic legislation such as the USA, Japan, UK, Australia, Canada, Mexico, and South Africa.
  • The basic concept is to establish what the ‘ main proceedings’ are concerning any international insolvency, all other proceedings are referred to as the ‘non-main proceedings.
  • The main proceedings are commenced where the debtor has its Centre of Main Interest (COMI) whereas the non-main proceedings may be commenced in any place where the debtor has a commercial establishment.
  • No requirement for reciprocity between countries.
  • Focus on ensuring that countries get assistance to insolvency officials from other countries and eliminating preferences for local creditors over foreign creditors.

The Insolvency Law Committee vide its Report in 2018 has recommended the adoption of UNCITRAL Model Law. The basic objective behind this model law is to ensure that the interest of banks and persons involved including the creditors are protected to cross border insolvency matters. By introducing these provisions there will be substantial growth in mergers and acquisitions which would thereby enhance the economy of the country.

Circumstances where this Model Law can be applicable

a)      A foreign court or a foreign insolvency professional needs support in State.

b)      Both foreign and domestic proceedings are simultaneously in progress.

c)      Insolvency proceedings need to be commenced in State by foreign creditors and other interested parties.

d)     In a foreign State, assistance is required relating to domestic proceedings.

“The application for the recognition of foreign proceedings in India will have to be made to the NCLT by the foreign representatives under the Model Law as the tribunal is not compelled to automatically recognize the concurrent proceeding”.

The Insolvency Law Committee Report on March 2018 recommended having an all-included mechanism for cross border insolvency matters as the current provisions i.e., Section 234 & 235 of IBC do not provide a comprehensive framework so a separate chapter was required to be inserted in the Code which will be based on UNCITRAL Model Law on Cross Border Insolvency[5].

World Bank Principles on Effective Insolvency and Creditors Rights

In the area of the insolvency law framework and creditor/debtor regimes, Bank staff have continued their participation in the UNCITRAL working groups on insolvency law and security interests and have liaised with UNCITRAL staff and experts to ensure consistency between the Bank’s Principles and the UNCITRAL Legislative Guide on Insolvency Law. The Bank has also benefited from an ongoing collaboration with the International Association of Insolvency Regulators (IAIR) to survey the regulatory practices of IAIR member countries and develop recommendations for strengthening regulatory capacity and frameworks for insolvency systems. A similar collaboration with INSOL International has provided feedback and input in the areas of director and officer liability and informal workout systems.

• The Principles highlight the relationship between the cost and flow of credit (including secured credit) and the laws and institutions that recognize and enforce credit agreements (Part A).
• The Principles also outline key features and policy choices relating to the legal framework for risk management and informal corporate workout systems (Part B)
• Formal commercial insolvency law frameworks (Part C).
• The implementation of these systems through sound institutional and regulatory frameworks (Part D).

The Principles distil best practice on design aspects of creditor/debtor rights systems, emphasizing contextual, integrated solutions and, the policy choices involved in developing those solutions. The Principles are used in connection with the joint IMF-World Bank program to develop Reports on the Observance of Standards and Codes (ROSC). The Principles are a flexible benchmark in a wide range of country systems. The Principles are a collaboration of the World Bank Group with UNCITRAL, IAIR, and INSOL.

Efficient, reliable, and transparent creditor/debtor regimes and insolvency systems are of key importance. The Principles call for an integrated approach to reform, taking into account a wide range of laws and policies in the design of creditor/debtor regimes and insolvency systems. Countries must adapt and evolve to maximize their advantages for commerce and to attract investment by adopting laws and systems that create strong and attractive investment climates[6].

Landmark Case Law

Jet Airways (India) Ltd. v. State Bank of India & Anr., Company Appeal (AT) (Insolvency) No. 707 of 2019-in the insolvency proceedings of Jet Airways (India) Private Limited[7], the National Company Law Tribunal (“NCLT”) in Mumbai expressly stated that while insolvency proceedings against the corporate debtor have already been initiated before the NOORD – Holland District Court, “there is no provision and mechanism in the I&B Code, at this moment, to recognize the judgment of an insolvency court of any Foreign Nation. Thus, even if the judgment of Foreign Court is verified and found to be true, still, sans the relevant provision in I&B Code, we cannot take this order on record.” Earlier in the year, a Jet Airways flight had been grounded in Amsterdam over non-payment of dues to a European Cargo firm. The Jet group has been facing insolvency proceedings in the Netherlands and India at the same time. The Dutch court-appointed administrator in charge of the proceedings in the Netherlands moved the NCLT (Mumbai) to have the NCLT recognize the Dutch proceedings. Upon the NCLT rejecting its plea, the Dutch administrator approached the National Company Law Appellate Tribunal (“NCLAT”) to recognize Jet Airways’ insolvency proceedings in the Netherlands. On August 21, 2019, the NCLAT asked the creditors of Jet Airways to file an affidavit on whether they are willing to cooperate with the Dutch Administrator, pay his fees and accord foreign lenders the same status as the Indian creditors, who otherwise are also eligible to file their claims before the resolution professional coordinating the insolvency proceedings[8]

Under the pursuant to the NCLAT’s directions, the Dutch Court Administrator and the Resolution Professional agreed upon a ‘Cross Border Insolvency Protocol’ wherein India was recognized as the ‘centre of main interests’ and the Dutch proceedings were recognized as the ‘non-main insolvency proceedings’[9].Through this Protocol, the Resolution Professional and the Dutch Court Administrator have agreed on terms and conditions on which they will cooperate in the ongoing insolvency process, except the involvement of the Dutch Administrator in Committee of Creditors meetings. The NCLAT, in response, allowed the Administrator the right to attend Committee of Creditors meetings but to only observe, to prevent an overlap of powers.

In the same order, the NCLAT also set aside the order of the Mumbai-bench of NCLT, which had said that the Dutch court administrator had no jurisdiction in India and therefore would not be able to take part in Jet Airways’ CoC meetings or raise claims on the airlines’ assets in India. The Jet Airways case is only one of many such cases that exemplify the need for a regime that deals with situations where a corporate debtor may have creditors and assets dispersed across various jurisdictions. Similarly, in the Videocon Industries insolvency saga, news reports had indicated that Videocon has requested the NCLT to include its overseas assets in the ongoing corporate insolvency resolution process[10].

The NCLT, in a recent order, has permitted the inclusion of Videocon’s foreign businesses in the corporate insolvency resolution process in India. However, for situations such as these, the tribunals are proceeding on a case-by-case basis as there is no clear cross-border insolvency framework in India yet.

Conclusion

As we look into the aspect of cross border insolvency, it requires a proper legal framework. This necessity has been recognized by the legislature as without proper legal provisions there would be a threat for the foreign investors to invest in India. While when we look at the current situation in India, India is inviting many foreign nations to invest in the country and to even set up their manufacturing units in the country. So, to save their interest and motivate them to invest in the country the formulation of the law is of great importance.

The UNCITRAL has also given aspects of cross border insolvency and has given a procedural framework in regard to insolvency for efficiency in the administration. As when we look into the aspect of insolvency it requires many complex issues in several areas of law in different jurisdictions.

References:

[1] Halliday, T.C. and Carruthers, B.G., 2007. The recursivity of law: Global norm making and national law making in the globalization of corporate insolvency regimes. American Journal of Sociology, 112(4), pp.1135-1202.

[2] Bogdan, M., 2000. Ian F. Fletcher, Insolvency in Private International Law: National and International Approaches. Nordic  Journal of International Law, 69(4), pp.527-528

[3] The Indian Bankruptcy Code, 2016.

[4] The Indian Bankruptcy Code, 2016.

[5]Cross Border Insolvency- An Analysis under the Code at  https://ezresolve.in/blog/2019/9/9/cross-border-insolvency-an-analysis-under-the-code by Ez-Resolve.

[6] ICR PRINCIPLES – PRINCIPLES FOR EFFECTIVE INSOLVENCY AND CREDITOR/DEBTOR REGIMES at http://pubdocs.worldbank.org/en/919511468425523509/ICR-Principles-Insolvency-Creditor-Debtor-Regimes-2016

[7] State Bank of India v. Jet Airways (India) Ltd., CP 2205 (IB)/ MB/2019, CP 1968(IB)/MB/2019, CP 1938(IB)/MB/2019, Order dated 20 June 2019.

[8] Jet Airways (India) Ltd v. State Bank of India, Company Appeal(AT)(Insolvency) No. 707 of 2019, Order dated 12 August 2019; NCLAT seeks Jet lenders’ response on Dutch insolvency administrator’s plea, Business Standard, available at: https://www.business-standard.com/article/companies/ nclat-seeks-jet-lenders-response-on-dutch-insolvencyadministrator-s-plea-119082101584_1.html.

[9] Jet Airways (India) Ltd. (Offshore Regional Hub/Offices) v. State Bank of India Company Appeal (AT) (Insolvency) No. 707 of 2019, Order dated 26 September 2019.

[10] Videocon requests NCLT to include overseas oil assets in insolvency process, Economic Times, available at:// economictimes.indiatimes.com/article show/70779728. cms?from=mdr&utm_source=contentofinterest&utm_medium=text&utm_campaign=cppst.