This blog is written by Dr Raghav Pandey and Monika Saini. Dr Raghav Pandey is an Assistant Professor at Maharashtra National Law University Mumbai and Monika Saini is a penultimate year law student at Maharashtra National Law University Mumbai.
The Finance Minister, in the Union Budget 2022-23, gave nod to the new framework for cross-border insolvency cases. The new framework is based on UNCITRAL Model Law (“Model Law”) on Cross Border Insolvency. This move is aimed at revamping the Insolvency and Bankruptcy Code (“IBC”). The amendment is aimed at improving the overall efficiency of the resolution process and to address the concerns regarding cross-border insolvency cases.
The need for a Cross Border Insolvency framework became apparent after the extended insolvency proceedings of Jet Airways (1st Indian Cross Border Insolvency case) and the Videocon Group (1st Indian Group Insolvency Case). These two companies had assets and claims from other jurisdictions as well. In the Jet Airways case, the National Company Law Appellate Tribunal (“NCLAT”) directed a “Joint Corporate Insolvency Resolution Process” under the IBC. The direction came in light of a prominent question regarding the jurisdiction of the Netherlands court. For the 1st time, the National Company Law Tribunal in the case of Videocon group recognised the principle of “substantial consolidation”. The tribunal in this case allowed consolidation of group companies for insolvency proceedings under the IBC. Regardless, such a framework is necessary for a country like India, whose economy is integrated with the global financial and trade systems, and thus, multinational companies operate here.
Cross Border Insolvency refers to the cases wherein the debtor has assets or creditors in more than one country. The United Nations Commission on International Trade Law proposed the UNCITRAL Model Law on Cross Border Insolvency, adopted in 1997. The Model Law is the most widely accepted legal framework to deal with cross-border insolvency issues. The countries can adopt the model laws by making suitable modifications as per their domestic needs. 49 countries have adopted the Model Law to date.
The proposed framework is a step in the right direction as currently, IBC does not directly deal with cross-border insolvency cases. The IBC has only two sections, i.e. Section 234 and Section 235, which are relevant in dealing with the cases of Cross Border Insolvency. Section 234 gives the power to the Central Government to enter into bilateral agreements with other countries to enforce provisions of the IBC. Section 235 empowers the Adjudicating Authority (“AA”) to issue a letter of request to deal with assets situated in that country in a specified manner to a court in a country in which an agreement under Section 234 has been entered into.
The current framework under the IBC has many limitations. For instance, there is no procedure for the cases wherein the assets or creditors of the debtor are situated in a country with which no bilateral treaty has been entered into. Entering into separate agreements with each country will involve multiple negotiations and prove to be time-consuming. Further, the Civil Procedure Code (“CPC”) empowers the Indian courts under Section 13, 14 & 44A to enforce a foreign judgement of a reciprocating country. During the pendency of proceeding in a foreign creditor’s country, he may produce the certified copy of the court’s order initiating moratorium period over the assets of the corporate debtor in India. However, its ambit is not broad enough to cover all insolvency orders. The NCLAT in Usha Holdings v Francorp Advisors Ltd. held that AA does not have the jurisdiction to decide the question of legality of a foreign judgement as it is not a court or a tribunal. This judgement implied that only civil courts and High Court have the jurisdiction to look into the legality of a foreign judgement. Section 44A of the CPC lists out the Reciprocating countries and the judgements of only these countries can be enforced in India. Thus, the relief under the CPC has limited scope. Additionally, it does not cover procedural and jurisdictional issues like cooperation between the countries, parallel proceedings, etc.
The proposed bill will enable Indian courts to seek the assistance of foreign courts or representatives during insolvency proceedings pending in India and vice versa. Further, the proposed bill empowers the AA to recognise a foreign proceeding as either a “main proceeding” (proceedings in a country where the debtor has its centre of interest) or a “non-main proceeding” (a country where the debtor merely has an establishment). Once NCLT recognises a foreign proceeding, it has the power to impose moratoriums to preserve the assets of the foreign entity in India. Furthermore, it is proposed that cross-border insolvency provisions should not be applicable on the financial service providers.
That being said, there are certain ambiguities in the proposed framework. The proposed framework does not contain a provision to enforce foreign insolvency-related judgments. The Cross-Border Insolvency Rules and Regulations Committee, in its report, recommended the inclusion of such a provision. Further, the proposed framework recognises some grounds to resist the recognition of foreign proceedings, and public policy is one of the grounds to do so. However, the term public policy has not been defined anywhere. The term has a broad scope, and hence, defining the same will provide clarity to the process.
|Section 4 of the Draft framework: Notwithstanding anything contained in this Part, the Adjudicating Authority may refuse to take an action governed by this Part if the action would be manifestly contrary to the public policy of India.||The term “Public Policy” has a broad scope and hence, an explanation must be provided for the same under Section 2 of the draft framework. The term has been defined in Arbitration and Conciliation (Amendment) Act, 2015. The definition includes fraud, corruption, fundamental policy of Indian law and basic notions of justice and morality. A similar definition can be added in the law to provide more clarity to the framework.|