Everything you need to know about Cross Border Insolvency

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The adoption of the Insolvency and Bankruptcy Code (“IBC”) in 2016 was a paradigm shift from the then existing deficient legislation to a new period of comprehensive and efficient legislation. This legislation was aimed at defining the rules of the insolvency regime in sufficient detail to simplify the understanding of the structure of insolvency and bankruptcy laws. In essence, to protect the interests of creditors, the Code aims to provide a ‘time-bound insolvency resolution mechanism, wherever possible.’

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However, recent instances, particularly on the issue of cross-border insolvency, illustrate how the IBC acts wherever possible as an entity for the resolution mechanism. It has turned out to be a futile move when it comes to recognizing creditors’ interests across international borders. The purpose of this article is to critically analyze the current legal system dealing with the adjudication of cross-border cases and thereafter attempt to present practical solutions to safeguard the interests of creditors in cases of foreign insolvency.

What is ‘Cross Border Insolvency’?

Cross-border insolvency, or international insolvency as it is alternatively called, refers to an insolvency case involving a foreign entity. It is a type of insolvency where the insolvent debtor has assets in more than one state or where any of the creditors of the debtor are not permitted to come from the state where the insolvency proceedings take place. First of all, it is important to shed some light on the fundamental issues to explore the existing cross-border insolvency mechanism in our country and across various countries.

Everything you need to know about Cross Border Insolvency

Cross Border Insolvency Problems in India

Globally, creditors and companies often conduct business in more than one country with rising competition in the foreign business and the trade industry. Nowadays, even foreign investors are attracted to India as a favourable place for expanding business due to the ‘ease in doing business’ policies of India. Global experience indicates that the country’s insolvency and bankruptcy laws have been greatly influenced by cross-border investment decisions and their performance.

It was, therefore, necessary for the Government of India to draw up a report based on various recommendations from the committees to address the issue of cross-border insolvency and its recognition in various other jurisdictions, with the implementation of the UNCITRAL Model Law, in the light of certain subsequent amendments to the insolvency laws.

A creditor or a contract counterparty may initiate proceedings against a company present outside India and the insolvency professional appointed to the company would be required to incur costs for such proceedings. It would also be illegal at the same time to enforce orders/decrees obtained in such proceedings.

Foreign-element Insolvency Proceedings against an Indian Individual

Foreign-element insolvency proceedings can occur against an Indian individual in the following situations:

  1. If there are international creditors who are wishing to become a part of the insolvency proceedings initiated in India or wishing to initiate insolvency proceedings to ensure the security of their rights.
  2. If the creditors, residing in India, want access to the debtor’s properties located in the foreign jurisdiction,
  3. When insolvency proceedings against the same debtor are launched in several jurisdictions.

Concerning the rights of foreign creditors, Indian creditors and foreign creditors are held on the same pedestal by the IBC, and under the provisions of the Code, any of them may initiate insolvency proceedings against the debtor or may become a part of the ongoing proceedings.

This is done by providing a large range of individuals protection under the term ‘individual’ in Section 3(23) of the Code, ‘individual resident outside India’ is included in the understanding of the word ‘person’. Allowing them, therefore, to be either a financial lender or an operating creditor under the Code. The aforementioned rationale is also adopted by the National Company Law Tribunal (NCLT), which is the adjudicating body for insolvency proceedings in India.

In terms of M/s Stanbic Bank Ghana Limited v Rajkumar Impex Private Ltd. [C.P. No. 670/IB of 2017], the Division Bench of NCLT (Chennai) accepted the plea for initiation of the Corporate Insolvency Resolution Procedure (“CIRP”) against an Indian Debtor by a borrower whose ordinary place of residence was Ghana. The Supreme Court of India, too, permitted a foreign creditor to begin insolvency proceedings.

In the case of Macquarie Bank Limited v Shilpi Cable Technologies [Appeal (Civil) No.15135 OF 2017], the Supreme Court noted that an operational creditor could be a foreign supplier and that the same can be “established from a reading of the definition of ‘individual’ contained in Section 3(23) of the Code read with the definition of ‘operational creditor’ contained in Section 5(20) of the code.”

Section 234 and 235 of the Code- A boon or a bane?

Sections 234 and 235 of the IBC seek to deal with transactions in the cross-border market. Section 234 grants the Central Government the right to enter into bilateral agreements to implement the provisions of the Code with other countries.

After a bilateral agreement has been concluded, the Adjudicating Authority may, in compliance with Section 235, send a letter of request to the foreign court of that country to gain access to the debtor’s properties. The above clauses, added after the recommendations of the Joint Parliamentary Committee, effectively substitute the alternative framework of bilateral agreements for the consideration of substantive provisions.

Although bilateral agreements have been used in the past as a means of cooperation between courts in some cross-border insolvency proceedings, it remains a questionable move to base the entire international insolvency regime of a country on them. This is because bilateral agreements take time to negotiate and it is not a realistic solution to the problem to have to negotiate such an agreement with every country.

Besides, it cannot be denied that India will sign a ‘Uniform’ Bilateral Agreement with each country, having the same terms and conditions. The fact that there would still be space for non-uniformity between such agreements negotiated with other nations suggests that making them investigate the nuances of each such agreement, will only add to the burden of the Adjudicating Authority.

Despite all these apparent procedural flaws the fact that these provisions are yet to be notified by the Central Government, makes it even more cumbersome to appropriately and expeditiously apply.

Recognition of Foreign Judgements in India

The Civil Procedure Code, 1908 (“CPC”) is an alternate method for the adjudication of cross-border insolvency cases. The Code of Civil Procedure helps in getting foreign judgments accepted in the Indian Territory and thus, as a result, helps in protecting the rights of foreign creditors.

The Indian Courts are empowered to impose an international judgment of a reciprocating nation under Sections 13, 14, and 44A of the CPC. A foreign creditor, during the pending proceedings in his country, may produce a certified copy of an order issued by the Court of his country to initiate a period of moratorium on the properties of a debtor in India or may use such an order to initiate a CIRP.

For Adjudication of Debt – Court or the Adjudicating Authority- Where to go?

The only condition for such a judgment to be applied is that the Court should be confident that the judgment is definitive before applying it. However, when it comes to the compliance of international judgments by the Adjudicating Authority in insolvency or bankruptcy matters, this provision is blatantly ignored.

In the Usha Holdings v. Francorp Advisors Pvt Ltd. [Company Appeal (AT) (Insolvency) No. 44 of 2018], the NCLAT discussed the issue of the power of the Adjudicating Authority to review the legality of a foreign judgment. It was concluded that the Adjudicating Body, which is not a court or a tribunal, has no jurisdiction to decide the question of the legality of the property of a foreign judgment and that any exercise of those powers will be a nullity in the eyes of law.

This means that the legality of a foreign judgment can only be tested by a Civil Court or a High Court for it to be a definitive judgment. Furthermore, it should be noted that until such a judgment has been declared ‘conclusive’ by the Civil Court or the High Court, the question of a legally payable debt does not arise and, hence the CIRP cannot be initiated by an enforcer of that foreign judgment.

Further, yet another problem seems to exist with the enforcement of foreign judgments. There is a divergence amongst the adjudicating authority itself concerning the question of enforcement of foreign judgments and there seems to be the absence of a commonly followed precedence. In certain cases, they have enforced foreign judgments while in others, they have declared them as nullity ab initio thus making this whole application of CPC even dicier.

Therefore, although the creditors have a choice to enforce foreign judgments through the Code of Civil Procedure, the remedy is not effective as it is very time-consuming and in cases where the individual seeks an ‘immediate moratorium’ declaration on the assets of the debtor in India, the provisions are not quite helpful.

Conclusion

The UNCITRAL Model Law provides for the introduction of parallel proceedings in the compliance state until international proceedings are accepted as ‘Foreign Main Proceedings’ by the court. However, such proceedings can be launched only if the properties of the debtor remain in the territory of the State of enforcement.

At the same time, Article 29 of the Model Law provides that, to facilitate better access to the properties of the debtor, the International Court and the Court which enforces the Model Law shall cooperate. Thus, the above-mentioned concepts of Model Law help to create a system through which the courts can achieve a better realization of debtors’ assets through cooperation and coordination.

At the same time, the cases would become less time-consuming because the courts would not have to spend time drawing up a bilateral agreement to control cross-border insolvency. The Model Law also aims to lower the transaction costs of insolvency proceedings by promoting a greater exchange of information between the courts.

References for this Blog

  1. The NCLAT in the case of Usha Holdings v. Francorp Advisors Pvt. Ltd [Company Appeal (AT) (Insolvency) No. 44 of 2018]
  2. Hamish Anderson, The Framework of Corporate Insolvency Law 272 (Oxford University Press, New York, 1st ed. 2017)
  3. A K Sikri, Cross Border Insolvency: Court-to-Court Cooperation, 51 Journal of the Indian Law Institute 467, 468 (2009).
  4. The Quarterly Newsletter of the Insolvency and Bankruptcy Board of India Oct-Dec 2016, Insolvency and Bankruptcy Board of India. https://ibbi.gov.in/uploads/publication/IBBI_Newsletter_Web.pdf(last visited December 20, 2019).
  5. the combined matter of- State Bank of India v/s. Jet Airways (India) Ltd.[CP 2205 (IB)/MB/2019], Gaggar Enterprise Pvt. Ltd. v/s .Jet Airways(India)Ltd.[CP 1968(IB)/MB/2019] and Shaman Wheels Pvt. Ltd. v/s. Jet Airways (India) Ltd. [CP 1938(IB)/MB/2019] Para 28.
  6. UNCITRAL Model Law on Cross Border Insolvency, Article 28
  7. Law Audience https://www.lawaudience.com/cross-border-insolvency-regime-in-india-a-critical-analysis/ Last visited 10th

About the Author: Esha Alex is a student from Christ University, Bangalore. She is one of the winners of our Fortnightly Blog Writing Competition.

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Lipi Garg

Lipi Garg

Lipi is the Assistant Publishing Editor of Memo Pundits. For help in publishing details of any event, please email at lipi.garg@memopundits.com

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