India: Cross Border Insolvency: Catching Up With The World

The Ministry of Corporate Affairs, Government of India have released the draft with respect to provisions to be introduced as Chapter for Cross Border Insolvency under the present Insolvency and Bankruptcy Code 2016 (Code). These guidelines are based on the UNCITRAL Model Law. The same was introduced keeping in view the need of such provisions separately available under the Code for ease and reference of Creditor both domestic and foreign to enforce their right over assets of Corporate Debtor situated overseas or in case of foreign proceedings to recognize such insolvency proceedings in India over asset s in India. Further, at times due to foreign proceedings and moratorium it is hard for creditor to enforce its right under domestic proceedings against Corporate Debtor with available options but the proposed provisions once enforced the moratorium under foreign proceedings will not bar commencement of domestic proceedings.

This move will be a welcome step for Indian Creditors as otherwise it was difficult to reach out to the overseas assets of Corporate Debtor. At present the Code has Section 234 and Section 235 (both not yet notified) to deal with such situations.

Section 234 of the code empowers Central Government to enter bilateral agreement with countries to resolve situations pertaining to cross border insolvency and Section 235 empowers the Hon'ble Adjudicating Authority to issue letter to the court of such country with whom bilateral agreement has been signed.

However, the provisions are not effective considering that being a bilateral agreement only the countries with whom the same have been signed can be enforced under the Code. The need for separate bilateral treaties with foreign governments under the present Code will either become a cumbersome task that will never be completed with respect to all major countries, or it will turn into a nightmare for the judiciary and legal fraternity to keep up with all such agreements.

As enumerated in the draft made public, the benefits of cross border insolvency provisions will include reduction in time for exchanging necessary information between countries, increase in credit recovery efficiency, cooperation and coordination will help in preserving Corporate Debtor's assets, Insolvency Professionals can have access to foreign jurisdiction assets though subject to adherence of law of such country. The draft provision strictly provides that any relief given to a foreign insolvency representative in relation to the foreign proceedings shall be subject to protection of domestic creditors and interested persons.

Major takeaways from the draft

  • Section 2 of the proposed draft differentiates between proceedings in a state where the corporate debtor has the centre of his main interests and one where it has an establishment with the former being called 'foreign main proceedings' and the latter, 'foreign non-main proceedings'.
  • Section 3 authorises a resolution professional or liquidator to act in a foreign state.
  • Section 7 entitles a foreign representative to apply to the adjudicating authority to be able to exercise his powers and functions under the Code, in the manner as may be prescribed.
  • Similarly section 8 deals with the foreign representative commencing a proceeding under the code and section 9 deals with the representative's participation in the proceedings under the Code.
  • Sections 10 and 11 make it easier for foreign creditors to become a part of insolvency proceedings in India. Section 10 gives the foreign creditors the same rights, in a proceeding under the Code, as domestic creditors of the same rank.
  • Sections 12-18 give the conditions for recognizing foreign proceedings and give related explanations.

    • Section 12 enables a foreign representative to apply to the adjudicating authority for recognition of foreign proceedings in which the foreign representative has been appointed. Certain court documents and evidences will be needed for the same;
    • Section 13 provides that if the documents/information submitted under Section 12(2) signifies that the foreign proceedings fall within the purview of proceedings as per section 2(g) and the foreign representative is a body or person within the meaning of section 2(h), then the Adjudicating Authority is will so presume.
    • Section 14 refers to one of the main points of discussion in cross-border insolvency issues, 'Centre of Main Interests'. Sub-section (1) presumes that unless it's proven to the contrary, the corporate debtor's centre of main interests is the State in which the registered office of the corporate debtor is located. As per sub-section (2) the presumption as per sub-section (1) only applies if the office has not been moved to another state within 3 months prior to the commencement of the proceedings.
    • Section 15 lays down the conditions for recognition of foreign proceedings by the adjudicating authority and classifies them as foreign main proceedings or foreign non-main proceedings. The conditions to be met are-

      1. Foreign proceedings falling under section 2(g);
      2. Foreign representative falling under section 2(h);
      3. Requirements of section 12 being met.
    • Section 16 states that if there has been any change in the status of foreign proceedings or foreign representative, or any other foreign proceedings related to the same corporate debtor becomes known to the foreign representative, after filling the application for recognition of foreign proceedings, the foreign representative shall inform the adjudicating authority of the same.
    • Section 17 enables the adjudicating authority to, in case of a foreign proceeding being regarded as foreign main proceeding, declare moratorium, subject to section 14 of the Code.
    • Section 18 states that relief, in terms of moratorium, court proceedings, etc, may be granted by the adjudicating authority upon recognition of a foreign proceeding.
  • Section 19 states that the adjudicating authority shall protect the interest of creditors while granting any relief under section 18.
  • Section 20 enables the foreign representative to make applications to the adjudicating authority under sections 43,45,49,50 & 66 of the Code.
  • Section 21 talks about the corporation and communication between the adjudicating authority and foreign courts (or foreign representatives), elaborating on the heart and soul of the UNCITRAL Model Law.
  • Section 22 talks about cooperation and direct communication between the resolution professionals and liquidators and foreign courts (or foreign representatives).
  • Section 23 says that sections 21 & 22 may be implemented by any appropriate means including –

    • Appointment of a person or body to act at the direction of the adjudicating authority.
    • Communication of information by appropriate means.
    • Coordination of administration and supervision of the corporate debtor's assets and affairs.
    • Approval or implementation, by courts, of agreements concerning the coordination of proceedings.
    • Coordination of concurrent proceedings regarding the same corporate debtor.
  • Sections 24-28 explain the law with respect to concurrent proceedings.
  • Section 24 states post the recognition of foreign proceedings as foreign main proceedings, any proceeding under the Code may only commence if the corporate debtor has assets in India and shall be restricted to such assets in India with respect to sections 21, 22 & 23.
  • Section 25 talks about a proceeding under the Code and a foreign proceeding running simultaneously with respect to sections 17,18,21,22 & 23.
  • Section 26 talks about coordination between proceedings under the Code and more than one foreign proceeding.
  • Section 28 states the rule of payment in concurrent proceedings. A creditor under the Code, whether in the corporate insolvency resolution process or liquidation process, who has already received payment from foreign proceedings may not receive any remaining part of his claim from proceedings initiated under the Code, so long as the payment to the creditors of the same ranking is proportionately less than the payment the creditor has already received. Under the liquidation process, the same is without prejudice to secured claims or rights in rem.
  • Section 29 enables the central government to issue notifications under this part in the official gazette.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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