This article analyses India's proposal to adopt the UNCITRAL Model Law on Cross-Border Insolvency.
The Insolvency and Bankruptcy Code, 2016 (IBC) does not prescribe a comprehensive framework for cross-border insolvency resolution. Sections 234 and 235 of the IBC simply provide that: (i) the Central Government may enter into bilateral agreements with other countries to facilitate the enforcement of the IBC; and (ii) the relevant adjudicating authority may issue a letter of request to a competent court or an authority in a foreign jurisdiction1 seeking evidence and, or, action in respect of a corporate debtor's and, or, personal guarantor's assets in connection with cross-border insolvency proceedings under the IBC. These provisions do not address the concerns of investors, both global and domestic, in cross-border transactions.
The parallel insolvency proceedings initiated against Jet Airways (India) Limited (Jet India) in India as well as in the Netherlands highlighted the issues arising from parallel insolvency proceedings in multiple jurisdictions and the hurdles that stakeholders faced in the absence of a robust cross-border insolvency framework. In 2019, an administrator appointed by a Dutch court in connection with Jet India's bankruptcy (Dutch Administrator) was unable to procure a stay on insolvency proceedings later initiated against Jet India in India as Section 234 and 235 of the IBC were not in force and the National Company Law Tribunal (NCLT) could not, therefore, recognise the proceedings in the Netherlands.
On appeal, the National Company Law Appellate Tribunal allowed the Dutch Administrator to be inducted in the committee of creditors (without voting rights), and eventually the resolution professional and the Dutch Administrator entered into a 'Cross Border Insolvency Protocol' to facilitate cooperation between jurisdictions in connection with the parallel insolvency proceedings. A comprehensive cross-border insolvency framework could have eliminated the need for parallel proceedings, and would likely have shifted the onus for cooperation from the resolution professional – a private entity – to the NCLT.
Adopting A More Robust Framework
In October 2018, the Insolvency Law Committee (ILC) published a report on cross-border insolvency2 (ILC Report) which recommended that the IBC be amended to substantially incorporate the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) – the cross-border framework was referred to as Draft Z. In June 2020, the Cross Border Insolvency Rules/Regulations Committee (CBIRC), in its report on the Rules and Regulations for Cross-Border Insolvency Resolution (CBIRC Report),3 recommended certain modifications to Draft Z and the notification of subordinate legislation. These have not translated into law.
In 2021, the Ministry of Finance expressed concerns and highlighted several issues that may arise on account of the ad hoc nature of India's cross-border insolvency framework, and opined that there was a need for clarity regarding:
- The extent to which an insolvency administrator may obtain access to assets held in a foreign country;
- The priority of payments between local creditors and foreign administration in respect of local assets;
- Recognition of the claims of local creditors in a foreign administration; and
- Recognition and enforcement of local securities and taxation system over local assets where a foreign administrator is appointed.
The Ministry of Finance also recognised that the Model Law is the most widely accepted legal framework to deal with cross-border insolvency issues.
India's Approach to the Model Law
The Model Law is founded on the 4 fundamental principles of accessibility, recognition, relief, and cooperation. The ILC and CBIRC have recommended incorporating these principles in the IBC.
Accessibility
As a 1st step towards providing accessibility to foreign courts and foreign insolvency professionals (FIPs), the ILC recommended that the definition of 'corporate debtor' be amended to include foreign companies. The ILC also recommended that FIPs and foreign courts be able to seek assistance in India in connection with foreign proceedings, Indian proceedings, and parallel proceedings in multiple jurisdictions. Per the CBIRC, the principal bench of the NCLT should be the adjudicating authority for insolvency proceedings pertaining to foreign corporate debtors.4
The CBIRC recommended that: (i) FIPs have complete access to adjudicating authorities in India, and should have the right to appear before them;5 and (ii) that FIPs be subject to a code of conduct6 similar to that applicable to Indian insolvency professionals (IPs).
If the Government were to adopt these recommendations, it would eliminate impediments to foreign creditors seeking to secure their interests against Indian debtors, thereby leading to greater cooperation in respect of cross-border insolvency proceedings.
Recognition
Under the Model Law and Draft Z, recognition of foreign proceedings depends on the centre of main interest (Centre) of a debtor. Both presume that Centre will be the location of the registered office of the corporate debtor unless there is another location which objective factors – such as the location of the corporate debtors' assets, books of accounts, senior management and creditors – demonstrate should be considered the Centre.7 However, there have been cases in Singapore8, UK9, and Australia10 where the courts, in spite of other factors, held that the Centre was the location of the registered office of the debtor. It remains to be seen how Indian adjudicating authorities will identify the Centre if Draft Z is adopted.
Relief
The Model Law contemplates 2 kinds of reliefs: interim reliefs, and reliefs on recognition of a foreign proceeding. The CBIRC11 has recommended that the IBC include provisions for interim relief and interim moratorium in accordance with the Model Law.12 Reliefs on recognition are further categorised as mandatory reliefs and discretionary reliefs.
Under the Model Law and Draft Z, the mandatory relief of a moratorium13 is automatically available as soon as a proceeding is recognized as a foreign main proceeding – i.e. a foreign proceeding in the State where the debtor has its Centre.14 On the contrary, these reliefs are not "automatically" available upon recognition of a proceeding as a foreign non-main proceeding.15 In this case, the court has the discretion to grant such relief upon being satisfied that the action relates to assets that, under the laws of the court's jurisdiction, should be administered in the foreign non-main proceeding.16 Draft Z also contemplates other additional reliefs that may be available to a resolution professional under the Code, and provides for entrusting the administration or realisation of the corporate debtor's Indian assets to an FIP.17
The ILC has further recommended that: (i) the adjudicating authority should not have the discretion to terminate or modify the moratorium;18 and (ii) the moratorium should not affect the right to initiate individual actions against the corporate debtor in India or abroad19 to the extent that these are necessary to preserve a claim against the corporate debtor.20
Unlike the Model Law, Draft Z does not provide for the examination of witnesses, and collection of information and evidence regarding the debtor. The ILC Report recommends that should the need arise for such rights, an FIP may apply to the adjudicating authority.21
Cooperation and Coordination
The ILC recommended incorporating the Model Law as is, vis-à-vis cooperation and communication between domestic courts and FIPs, FIPs and local insolvency professionals, and local insolvency professionals and foreign courts.22 While the ILC believes that guidelines should be formulated for cooperation between adjudicating foreign courts and authorities and, or, Indian courts, the CBIRC was of the view that the adjudicating authority should have complete discretion in deciding whether to cooperate with a foreign court.23
The Model Law expressly mandates direct communication between both, domestic and foreign courts, and FIPs and domestic courts,24 and provides that courts in different jurisdictions "shall" cooperate with each other.25 However, the ILC has expressed reluctance to expressly empower adjudicating authorities to coordinate and communicate directly with foreign courts.26 The approach suggested by ILC and CBIRC is similar to the approach adopted in the UK27 and Singapore28, where courts "may cooperate" with foreign courts at their discretion.
The Bottom Line
The ILC and CBIRC have provided a roadmap for a comprehensive cross-border insolvency regime in India. Amending the IBC to incorporate Draft Z is likely to provide relief to foreign investors in parallel insolvencies across jurisdictions as also to domestic creditors who wish to enforce their rights against foreign assets of corporate debtors. In our view, this will lead to a more coordinated approach between FIPs and IPs. However, certain issues might be an impediment to creating a truly accessible and robust cross-border insolvency regime.
The ILC has recommended that the Model Law be adopted only on the basis of 'reciprocity', i.e., India will recognize proceedings in only those jurisdictions that have adopted the Model Law or a similar legislation - although it contemplates diluting this requirement in the future.29 This will likely lead to confusion where a corporate debtor's insolvency spans a number of jurisdictions.
The ILC's recommendations also retain overtones of territoriality by proposing that the Government should have the right to suo moto apply to the adjudicating authority and seek avoidance of any action under Draft Z which, in its opinion, is manifestly contrary to the public policy of India.30 A territorial approach is also reflected in the absence of a right for FIPs to examine and collect evidence in Draft Z. Further, not providing foreign courts direct access to adjudicating authorities might lead to delays in conclusion of insolvency proceedings. In our opinion, such inconsistencies with the Model Law, without further clarifications, will impede the objective of adopting a cross-border insolvency regime based on principles of universalism.
It is crucial that Draft Z be adopted and a framework that addresses the issues highlighted by Jet India's insolvency be established. At the same time, we believe that such urgency should not preclude the Government from revisiting its territorial approach towards the adoption of the Model Law, and amending any material deviations from the same, including, reciprocity requirement, scope for excessive interference by the adjudicating authority in India, and not providing FIPs the right to collect and examine evidence. The proposed steps will not only prevent delays in cross-border insolvency proceedings in India but will also boost the confidence of investors looking to invest in Indian entities and their foreign subsidiaries.
Originally published 29 January 2024
Footnotes
1. With whom the Government has a bilateral agreement.
2. Report of Insolvency Law Committee on Cross Border Insolvency dated 16 October 2018 – available at (https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf) and last accessed at 1758 hours on 17 January 2024.
3. Report on the Rules and Regulations for Cross-Border Insolvency Resolution dated 15 June 2020 – available at (https://ibbi.gov.in/uploads/whatsnew/2021-11-23-215206-0clh9-6e353aefb83dd0138211640994127c27.pdf) and last accessed at 1457 hours on 16 January 2024.
4. CBIRC Report dated 15 June 2020, Page 36.
5. Ibid, Section 4.3.1, Page 39. This is similar to the approach taken by the UK and Hong Kong.
6. Ibid, First Schedule, Draft Insolvency and Bankruptcy Board of India (Cross Border Insolvency) Regulations, 2020, dated 15 June 2020.
7. See Article 16 of the Model Law, and Clause 14 of Draft Part Z, 2018.
8. Zetta Jet Pte. Ltd. [2018] SGHC 16
9. In re Eurofood IFSC Ltd (Case C-341/04) [2006] 1 Ch 508.
10. Legend International Holdings Inc (as debtor in possession of the assets of Legend International Holdings Inc) v. Legend International Holdings Inc [2016] VSC 308.
11. Supra at 3, Para 4.7.1, Page 56.
12. Article 19 of the Model Law.
13. Which includes a prohibition on institution of suits against a corporate debtor, transfer or disposal of the corporate debtor's assets, actions to foreclose any security interest created by the corporate debtor in respect of its property, and the recovery of any property owned by or in possession of the corporate debtor by an owner or lessor.
14. Article 20 of the Model Law.
15. A foreign proceeding taking place in a jurisdiction other than the Centre.
16. Article 21 of the Model Law.
17. Clause 18(1)(e) of Draft Part Z, 2018.
18. Ibid, Para 14.4, Page 37.
19. Ibid, Para 14.7, Page 37.
20. This is consistent with the approach taken by the US, the UK, and Singapore.
21. Supra at 16, Para 14.10, Page 38. This is contrary to the position in the US, the UK, and Singapore.
22. Ibid, Page 14.
23. Ibid at Paragraph E.
24. Articles 25 and 26 of the Model Law.
25. Article 25 of the Mode Law. This approach has also been followed by the United States Bankruptcy Code.
26. Supra at 16, Para 16.2, Page 42.
27. Article 25 of the Third Schedule to the Insolvency and Dissolution Act, 2018.
28. [2014] 2 SLR 815.
29. Supra at 16, Para 1.6, Page 18. Although the reciprocity requirement is contrary to the approach taken by jurisdictions like the UK and the US who do not have reciprocity requirements, the ILC has not provided its rationale for insisting on reciprocity.
30. The ILC has observed that "public policy" should be interpreted in a manner that keeps discretion of courts to a minimum. While noting popular trends such as in the US, the ILC has observed that ordinarily, "public policy" is interpreted narrowly to ensure that relief may be provided to a bigger pool of proceedings – ILC Report, Page 22.
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