Overhauling the insolvency and bankruptcy regime, India enacted the Insolvency and Bankruptcy Code 2016 in May 2016. The Code emulates UK’s insolvency laws and is customised for India. While it has been trimmed and strengthened since inception to suit the current needs, a few issues still remain to be addressed. One of them is cross-border insolvency and debt resolution.
Currently, two provisions of the code (Section 234 and 235) deal with cross-border insolvency. They envisage entering into bilateral agreements and issuance of letters of request to foreign courts by adjudicating authorities for enforcing the provisions of the IBC with regard to assets of a corporate debtor located abroad.
However, the Insolvency Law Committee (ILC), constituted by the Ministry of Corporate Affairs to recommend amendments to the Code, has said that the two sections “do not provide a comprehensive framework for cross-border insolvency” and that the “framework is susceptible to delay and uncertainty” for creditors, debtors and courts. It has recommended that India adopt the UNCITRAL Model Law on Cross Border Insolvency (Model Law) with certain modifications. The Model Law, adopted by countries such as Singapore, UK, Japan and the US, is a widely accepted legal framework for cross-border insolvency issues.
The Model Law acknowledges the differences among national procedural laws and encourages cooperation and coordination among countries. Unlike other multinational conventions, the Model Law offers legislative guidance for states, providing only a broad framework—countries may decide on the operational aspects. It offers solutions for instances such as foreign assistance for an insolvency proceeding taking place in a country, foreign representative’s access to courts of the enacting State, recognition of foreign proceedings, cross-border cooperation and coordination of concurrent proceedings.
So now, in Singapore, foreign insolvency proceedings and foreign insolvency professionals are recognised. The country has established a ‘Judicial Insolvency Network’ (JIN) of insolvency judges from across the world. The JIN has issued guidelines, with adjunct domestic laws, for communication and cooperation between courts in cross-border insolvency matters.
The US, too, has accordingly amended its bankruptcy laws to equip itself with a contemporary, consistent and fair legal framework to address instances of cross-border insolvency more effectively.
While the Indian ILC has submitted draft provisions incorporating the Model Law customised for India, they have not yet been incorporated into the domestic law. In the absence of a cross-border legal framework, the adjudicating authorities have resorted to case-by-case resolution. Interestingly, courts have skimmed the provisions of the Model Law structure and have applied the same while deciding cross-border insolvency issues.
For instance, in the case of Jet Airways India Private Limited, the National Company Law Appellate Tribunal (NCLAT) set aside the order of the lower adjudicating authority to allow a Dutch administrator to be a part of, and attend the meeting of the committee of creditors. In accordance with the NCLAT’s decision, Indian Resolution Professional and the Foreign Administrator agreed upon a ‘Cross Border Insolvency Protocol’. India was recognised as the “centre of main interests”; the foreign proceedings were acknowledged as ‘non-main insolvency proceedings’ in line with provisions of the Model Law. Further, keeping the best interests of the company and its stakeholders, the NCLAT even directed the Indian Resolution Professional, in consultation with the committee of creditors to consider the prospect of cooperating with the foreign trustee. The NCLAT paid heed to the concept of modified universalism, as exemplified in the Model Law.
The Supreme Court in Macquarie Bank Vs Shilpi Cable stipulated that foreign creditors shall have the same rights as a domestic creditor to initiate and participate in corporate insolvency resolution process under the Code. The Apex Court expanded the definition of ‘person’ to include persons residing outside India. The Court remarked that discriminatory interpretation would violate the right to equality enshrined in the Constitution of India, which applies to all persons, including foreigners.
Another example is that of Videocon Industries, where the NCLT ordered the inclusion of the diversified group’s overseas oil and gas business in the insolvency process. The Tribunal acknowledged that there is cross creation of the security interest by all lenders in other business assets of the Videocon Group treating it as a single economic entity.
These judgments serve as precedents for future cross-border insolvency disputes. They also demonstrate the need for provisions to deal with cross-border insolvency issues, involving creditors and assets located worldwide.
Strengthening the code
India, like the UK, could introduce ‘debtor-friendly’ measures to give relief to companies and maximise their chances of survival. In addition to temporary measures in the wake of the pandemic, the UK has introduced a slew of permanent measures like freestanding moratorium, according to which some companies may obtain a moratorium for (an extendable) period of 20 days, from creditor action.
During the moratorium, the directors remain in charge but are subject to oversight by a ‘monitor’. The extra time gives financially distressed companies an opportunity to formulate a plan, thereby increasing the chance of rescuing the company as a going concern rather than having to rush into a formal insolvency process. India too must consider such a business rescue strategy to avoid the flood of insolvencies that may occur after temporary Covid-19 relief measures lapse.
Another reform introduced in the UK is the Restructuring Plan: so long as dissenting creditors are not treated unfairly by a proposed restructuring plan, it can be implemented without their consent. Incidentally, similar provisions exist in the IBC as well.
Other countries have advanced swiftly in cross-border insolvency and India must sync with them. Businesses today spread across multiple jurisdictions. Therefore, it is vital for India to formally introduce a cross-border regime in the legal framework soon.
( The authors are Chairman and Director respectively of Nangia Andersen, LLP )