Cross border insolvency: Panel proposes simple trigger for starting proceedings in India

The insolvency law committee (ILC) that recently came out with recommendations on cross border insolvency — essentially based on the UNCITRAL Model Law — has proposed ‘a presumption of default’ trigger to start insolvency proceedings in India. This, if the insolvency proceedings in the corporate debtor’s COMI (centre of main interest) has been recognised in India.

Under the IBC currently, creditors can initiate proceedings on a default of ₹1 lakh—unlike some other jurisdictions which have to establish state of insolvency of debtor first.

Foreign main proceedings

Proceedings in the COMI is recognised as the ‘foreign main proceeding’ (FMP). Recognition essentially implies automatic moratorium such as transferring of assets by the corporate debtor. In cases where India is not the COMI, proceedings can be non-main foreign, if the corporate debtor has an establishment (any place of operations where the corporate debtor carries out a non-transitory economic activity with human means and assets or services—as defined by the ILC) in India.

What is important here is that the ILC has proposed that recognition of a FMP may be presumed to be proof of default by the corporate debtor for the purposes of commencement of insolvency proceedings in India.

“One of the features of insolvency law in India and certain other countries is the criteria that forms the basis for insolvency existence. In India, on a default of ₹1 lakh (under Section 4 of the IBC), a creditor can invoke the provisions of the code and apply for commencement of Corporate Insolvency Resolution Process (CIRP),” says KS Ravichandran, Managing Partner of KSR & Co Company Secretaries LLP.

In short, Insolvency Resolution process gets triggered in different jurisdictions on different grounds “Therefore, it was necessary for the insolvency law committee to make provisions for meeting such different criteria that forms the basis for triggering CIRP,” adds Ravichandran.

Article 31 of the Model Law provides that on recognition of an FMP, the debtor shall be presumed to be insolvent for the purposes of commencement of a domestic insolvency proceeding. The intent of this is to enable a simple trigger for commencing insolvency proceedings in jurisdictions which have to establish a state of insolvency of the debtor to initiate insolvency proceedings.

In India, the test for commencing CIRP does not involve satisfying the adjudicating authority that the corporate debtor is insolvent. Rather, the Code provides an objective criterion which allows initiation of a CIRP on default of ₹1 lakh.

Hence, in cross-border cases, recognition of a FMP may be presumed to be proof of default by the corporate debtor for the purposes of commencement of CIRP in India.

Inability to pay

However, for the purpose of such recognition, it is necessary to show that the FMP has commenced due to a criteria that is similar to the Section 4 in the Code in India. ILC, in its report, states that the FMP being recognised should be borne out of an inability to pay debts or pursuant to a state of insolvency of the corporate debtor.

“The presumption of insolvency is rebuttable. The provision imposes a duty upon the adjudicating authority under the Code which considers the application for recognition of the FMP to be satisfied that the FMP has arisen out of an inability to pay debts on pursuant to a state of insolvency of the corporate debtor,” explains Ravichandran.

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