Ticklish issues in cross-border insolvencies

The way Nirav Modi’s entities have filed for bankruptcy in the US, ominously reveals the ingenious ways in which Indian companies through their multi-layered structures, move cash and other assets to other jurisdictions. Some of the US court filings have clearly suggested that assets of Modi’s entities in the US may have been obtained by using monies fraudulently obtained from Punjab National Bank.

The entire episode has brought to light the urgent need for a robust cross-border insolvency law in India. In this regard, the recent recommendations of the Insolvency Law Committee (ILC) on cross-border insolvency mark a crucial step forward. The committee’s recommendations are essentially in line with the provisions set out in the UNCITRAL Model Law. The Model Law on cross-border insolvency was issued by the secretariat of UNCITRAL in 1997, to assist countries in regulating corporate insolvency and financial distress, involving companies which have assets or creditors in more than one country.

While several recommendations put forth by the ILC are in the right direction, few others may need a review. The definition of ‘establishment’ for instance, may lead to the exclusion of internet-based companies that essentially operate outside the traditional brick-and-mortar model. The Centre, while drawing out the list of indicative factors to help determine the COMI (Centre of Main Interest), will have to extensively draw lessons from global experiences. After all, ascertaining the COMI will be critical to the working of the cross border insolvency law.

On the right path

As rightly laid down in the Committee’s report, adopting the Model Law for cross-border insolvency will ensure cooperation between domestic and foreign courts and help India align with global practices. Rightly using the leeway to incorporate reciprocity provisions, the committee has recommended that initially the Model Law may be adopted on a reciprocity basis in India. Legislative reciprocity indicates that a domestic court will recognise and enforce a foreign court’s judgments or orders only if the foreign country has adopted the same or similar legislation.

Given that our insolvency code is still evolving, a reciprocity requirement is essential to protect the interest of domestic parties. It would be unwise to bring in a legislation at this point in time that in general recognises all foreign bankruptcy judgments and grants access to foreign insolvency representatives to assets in India — leaving aggrieved domestic creditors in the lurch. The committee has also rightly acknowledged that foreign creditors should be treated on a par with domestic creditors, by clarifying that foreign creditors will still be able to initiate, participate in and file claims in proceedings in India under the Code regardless of reciprocity.

The committee’s proposal on providing ample flexibility in the provisions of the cross-border insolvency law to protect public interest and ensuring a framework for commencement of domestic insolvency proceedings, when a foreign insolvency proceeding has already commenced, are also vital.

That said, a rethink on several other aspects is needed.

More clarity

At the core of cross border insolvency proceedings lies the determination of COMI and establishment. This is because proceedings in the COMI are given higher priority — recognised as the ‘foreign main proceeding’. Recognition as a main proceeding essentially implies automatic moratorium — on institution of suits or continuation of pending suits against the corporate debtor, on transferring of assets by the corporate debtor among others.

In cases where India is not the COMI, it needs to be ascertained if the corporate debtor has an ‘establishment’ in India, for recognition of proceedings in India as non-main foreign proceedings. For non-main proceedings, relief lies at the discretion of the domestic court.

Given that non-main proceedings are limited to the proceedings in countries where the corporate debtor has an establishment, the definition of establishment is critical. Here the ILC should have drawn lessons from the US and sought to bring a wider gamut of companies within the definition of establishment. The committee has chosen to go with the definition — “establishment” means any place of operations where the corporate debtor carries out a non-transitory economic activity with human means and assets or services. Retaining the ‘with human means and goods’ phrase may lead to exclusion of e-commerce and internet-based companies.

In the US Code (Chapter 11) “establishment” is defined as any place of operations where the debtor carries out a non-transitory economic activity. Given that there are large e-commerce companies (incorporated in other countries) having a substantial presence in India, it is essential that there is ample scope in the law, for domestic creditors to proceed against such companies, if need be — even if India is not the COMI.

Determining the COMI

While the Model Law does not define COMI, a debtor’s registered office is presumed to be its COMI. Since such a presumption more often than not has led to misuse and forum shopping by various entities globally, it is essential that the adjudicating authority digs deep and considers multiple factors while determining the COMI. After all, if there are issues in ascertaining a debtor’s COMI, then it will open the door for entities to abuse the system and exploit loopholes to forum shop into a jurisdiction with more beneficial laws.

A recent seminal case on COMI was one relating to the Oi S.A. and its affiliates — one of the largest telecommunications service providers in Brazil. Certain members of the Oi Group, including Oi Brasil Holdings Coöperatief U.A., a Dutch subsidiary of Oi S.A., commenced reorganisation proceedings in Brazil. The Southern District of New York Bankruptcy Court granted recognition to the Brazilian proceedings of the Oi debtors, including Dutch Oi, as foreign main proceedings, finding that the COMI of each of the debtors was Brazil. According to the court, Dutch Oi was a special purpose vehicle created to obtain financing for the Oi Group, and the COMI of a special purpose vehicle, such as Dutch Oi, “turns at a location of the corporate nerve center and the expectation of creditors,” which, in this instance, was Brazil.

The ILC has also recommended that the Centre draws up a list of such indicative factors in subordinate legislation which can help while ascertaining the COMI; location of the debtor’s assets, location of those who manage the debtor. etc., will be vital factors.

The Insolvency Law Committee report is a laudatory effort towards cross-border insolvency. It is now for the Centre and the regulator to fine-tune the recommendations and hasten its implementation.

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