This blog is written by Anubhav Singh and Yashi Singh. They are third year law students at Maharashtra National Law University, Mumbai.
The world today has fused into a global economic network, and cross-border business has grown substantially, changing the corporate fabric, and due to this, the scope of cross-border insolvency processes has grown significantly. Cross-border insolvency occurs when a single debtor company enters formal insolvency proceedings in more than one jurisdiction, and there is at least the possibility of a conflict of laws affecting the debtor’s operations. A proper cross-border regime is currently not present in India’s legal framework, and due to this, the complexity of resolving insolvency involving corporate organizations has only grown in times of financial difficulties. A proper legislation governing cross-border insolvency would be helpful for both the creditors and the corporate debtors as it would help in restructuring by adequately protecting their interests and guaranteeing fair trade.
The Insolvency and Bankruptcy Code (“IBC”) is a crucial piece of law aimed at strengthening, speeding up, and improving the efficiency of the bankruptcy resolution process. Given the lack of a legislative framework under the IBC to handle cross-border problems, the court’s recent decisions in the cases of Jet Airways and Videocon Industries reflect a positive judicial trend about India’s ability to develop a business-friendly policy. Moreover, the decisions foreshadow and support the apparent drive to enact cross-border bankruptcy rules in the domain of corporate debt. These regulations are likely to pave the way for comparable legislation in the area of personal bankruptcy. Thus, in this article, the authors have examined the problems and potential in the IBC’s cross-border system vis-à-vis, analyzed the landmark judgments of cross-border insolvency in India.
Cross-border Insolvency in India
In recent years, India’s insolvency procedure has been completely overhauled. Due to communications and information technology developments, cross-border trade is no longer the exclusive domain of major multinational corporations. The IBC currently includes two measures to help with cross-border bankruptcy difficulties, but the government has yet to execute them.
- Agreement with Foreign Countries and Letter of Request
Section 234 of the IBC permits the Central Government to enter into bilateral agreements with other countries to administer the cross-border implications of the IBC, and may also direct the application of the IBC when the assets or property of a corporate debtor or personal guarantor are located in any place in the country with which a reciprocal agreement has been expressly signed. When any proof or action relating to a corporate debtor’s or personal guarantor’s assets is necessary during the insolvency resolution process, the resolution professional, liquidator or the bankruptcy trustee must petition the National Company Law Tribunal (“NCLT”) according to Section 235 of the IBC. If the NCLT is satisfied, they will submit a ‘request letter’ to the country which has an agreement with our government. This would only be done by India if our government has a reciprocal agreement with the other country, pursuant to Section 234 of the IBC.
- Approach of the Indian Judiciary in Cross-Border Insolvency proceedings:
1. Initiation of Cross-Border Insolvency proceedings in the Jet Airways case
Jet Airways became the first Indian firm to face cross-border insolvency in 2019, with the National Company Law Appellate Tribunal (“NCLAT”) finding ordering a “Joint Corporate Insolvency Resolution Process” under the IBC, marking a watershed moment in the country’s expanding insolvency law. At the same time, the Jet group was facing insolvency procedures in both the Netherlands and India. The Dutch Administrator was allowed to engage with the Indian Insolvency Resolution Professional and attend the Committee of Creditors meetings after NCLAT overturned NCLT’s judgment. The Dutch Administrator told the NCLAT that Jet Airways’ offshore assets would not be alienated. NCLAT successfully struck a “balance between the relief granted to foreign representatives and the interests of those affected by such relief” in its verdict, which was compatible with the Model Law on Cross-Border Insolvency, 1997 (“Model Law”) framework’s objective, as stated in the order.
2. Videocon Case: First Indian “Group Insolvency” Case
The NCLT approved the consolidation of 13 of the 15 Videocon Group companies, recognizing the concept of “substantial consolidation.” The IBC granted authority for group company consolidation in bankruptcy proceedings for the first time, arguing that it would help the debtor’s asset worth be optimized and thus set a standard for group insolvency. The beginning of the Corporate Insolvency Resolution Process against each entity separately under the IBC failed to attract bids due to a lack of collateral assets. Under the lack of an express provision in the IBC, the NCLT analysed bankruptcy jurisprudence in the United States and the United Kingdom and used its equity jurisdiction to find in favour of the consortium. Though this was the case of “Group Insolvency,” it highlighted the need for a proper cross-border insolvency regime in the Indian legal framework to effectively tackle one of the corporate world’s prominent issues.
- Issues with the current methods
The primary objective to include the aforementioned provisions in the IBC is to maximize the worth of the corporate debtor’s assets. However, India has yet to negotiate any reciprocal agreements for this purpose, and no actual measures to implement inter-government agreements have been implemented. As a result, an NCLT ruling issued in a cross-border insolvency proceeding is not recognised. Adding to this, even if these recommendations are issued, they will fall short of effectively addressing the complex challenges that occur in cross-border bankruptcy proceedings. Furthermore, while Sections 234 and 235 of the IBC provide a framework for dealing with foreign insolvencies, its use in more practical scenarios is fraught with difficulties. The entire procedure entails negotiating bilateral agreements with several countries, each with its own set of requirements that must be worked out over time.
In the absence of a framework for cross-border bankruptcy resolution, some problems remain unresolved and confusing, with the recent Jet Airways and Videocon instances serving as noteworthy examples. One solution to these problems might be a degree of uniformity of insolvency legislation across different nations. In view of the fact that there are numerous substantial differences across the country’s legal systems, the goal of harmonization must be pursued. Considering the paucity of a legislative framework under the IBC to handle cross-border matters, recent court rulings show a positive judicial trend about India’s ability to build a business-friendly approach.
Insolvency Law Committee’s recommendations and efficacy of Model Law
Cross-border insolvency is a legal grey area in India that is unregulated. The Insolvency Law Committee (“ILC”) released a set of recommended suggestions in 2018 to fill this gap in the country’s embryonic insolvency system. The recommendations are based on the modifications to the Model Law of the United Nations Commission on International Trade Law (“UNCITRAL”). It was also recommended by both the “Eradi Committee” and the “N. L. Mitra Committee” to adopt Model Law in the Indian legal framework. The ILC has advocated for cross-border insolvency regulations based on the Model Law to be included in the IBC because of its universality and flexibility in updating local laws with necessary amendments.
The Model Law places a strong emphasis on four significant aspects of cross-border insolvency proceedings, i.e., “access of foreign representatives and creditors to this state’s courts,” “recognition of certain orders issued by foreign courts”, “relief to assist with foreign proceedings,” and “cooperation and coordination with international courts and international representatives.”By integrating national insolvency legislation, the Model Law seeks to develop a standard approach to cross-border insolvency procedures. Furthermore, the Model Law has a public policy exemption clause that allows a court to refuse to recognise foreign proceedings or to take appropriate action against them if admission or recognition would be detrimental to the nation’s public policy.
The case of Jet Airways highlighted the need for a coherent framework where both India and Netherlands haven’t adopted the Model Law, but this case has pushed them to implement a universal framework similar to Model Law to tackle these kinds of cases. Similarly, in the case of Thailand, which has not adopted the Model Law, the foreign creditors face difficulty in cases involving international insolvencies, for instance, in the Thailand Airways case. On the other hand, countries that have adopted Model Law show a completely different scenario in the cross-border insolvency proceedings. They have more debtor-friendly measures that enhance the chance of business survival. Permanent remedies have been implemented in the United Kingdom, in addition to temporary ones, such as the freestanding moratorium, which allows some businesses to postpone creditor action for a period of 20 days, which can be extended.
Adding to this, after the adoption of Model Law in Singapore and Australia, their legal frameworks now permit foreign insolvency proceedings and professionals; due to this, the nature of insolvency proceedings has changed in these countries. Now, it is easier for foreign insolvency professionals to obtain judicial access, allowing them to handle cross-border disputes more efficiently. Similarly, after implementing Model Law in the United States and Greece, they facilitated removing unnecessary uncertainty in international restructurings for prompt recognition and relief by granting foreign representatives access to the courts of the enacting state, transnational cooperation, and coordination of concurrent proceedings.
While the IBC establishes a framework for dealing with foreign insolvencies, its use in more realistic situations is riddled with problems. The entire procedure entails negotiating bilateral agreements with several countries, each with its own set of requirements that must be worked out over time. The burden on the Judiciary will almost definitely be reduced if governments create a consistent framework for cross-border insolvencies. Furthermore, adopting the Model will also help to save resources and avoid duplication of proceedings as a universal framework will be implemented, and the proceedings will be completed in a single court, avoiding lengthy and costly legal processes.
The suggested framework could go a long way toward assuring jurisdictional collaboration and communication in cross-border bankruptcy situations if some procedural and legal barriers are addressed, as we have seen the efficacy of the Model Law in different jurisdictions where they have adopted the Model Law. After the adoption of the Model Law, India can provide some extra time to financially distressed companies to formulate a plan that will help them avoid liquidation, which is the primary objective of the IBC. The adoption of the Model Law will make it easier for foreign administrators to participate in Indian insolvency proceedings and vice versa. Adopting the UNCITRAL Model Law into India’s insolvency law regime would strengthen our insolvency law.
The views expressed in this article are those of the author and in no way do they reflect the opinion of the Centre for Insolvency and Financial Laws.