[Editorial] Cross-border Insolvency

What is cross-border insolvency?

  • When an insolvent debtor has creditors or assets in multiple countries, cross-border insolvency arises.
  • This type of insolvency transcends the boundaries of a single legal system.

What is the UNCITRAL Model Law on Cross Border Insolvency?

  • To handle cases involving cross-border insolvency, the UN Commission on International Trade Law or UNCITRAL proposed a model law.
  • This model law was adopted at the 13th session of UNCITRAL, in Vienna, in 1997.
  • This model law is now the most widely accepted legal framework for resolving cross-border insolvency issues. 49 countries have adopted it. eg: USA, UK, South Korea, Singapore and South Africa.

Highlights of the UNCITRAL Model Law:

  • In cases where the foreign jurisdiction is considered as COMI (Centre of Main Interest) of the distressed company, it allows automatic recognition of foreign proceedings and rulings from courts.
  • A company’s COMI is adjudged based on the location of its registered office and where it conducts regular business.
  • In cases where the foreign proceedings aren’t the main proceedings, the law leaves the recognition of foreign reliefs and proceedings to the domestic courts’ discretion.
  • The model law can be adopted with various modifications to match the countries’ domestic context.

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What is the current situation in India?

  • In India, foreign creditors can raise claims against domestic companies. However, the IBC doesn’t allow the automatic recognition of insolvency proceedings in foreign jurisdictions.
  • For instance, when one of Jet Airway’s aircraft was grounded over non-payment of dues to a cargo firm in Amsterdam, the NCLT (National Company Law Tribunal) didn’t take the foreign court’s orders on domestic insolvency proceedings on record. However, the NCLAT (the appellate tribunal) permitted its recognition as ‘non-main insolvency proceedings’ and India as the company’s COMI.
  • The IBC provisions don’t allow Indian courts to deal with the issue of a company’s foreign assets being subject to parallel proceedings in a foreign jurisdiction.

What is India doing about this?

  • In January 2020, the Ministry of Corporate Affairs formed a Cross-Border Insolvency Rules and Regulations Committee to give recommendations for draft rules of cross-border insolvency.
  • In November this year, the ministry released a draft of India’s version of the model law.

Highlights of the draft framework:

  • It enables the assistance of foreign representatives and courts in insolvency proceedings pending in Indian courts and vice versa.
  • It enables the government to exclude certain entities from the purview of cross-border scrutiny. Eg: entities providing vital financial services like insurance companies and banks.
  • NCLT, the adjudicating authority in India, will have the power to recognize foreign proceedings as the main proceeding (when the country is the debtor’s COMI) or as the non-main proceeding (non-COMI jurisdiction where the debtor has assets).
  • The NCLT would be able to impose moratorium to preserve a foreign entity’s assets in India.

What are the shortcomings?

  • Lack of provisions for enforcing the judgements.
  • The term ‘public policy’ has been included as one of the grounds for resisting the recognition of foreign proceedings. However, the term hasn’t been defined and leaves open a wide ambit.

What is the way ahead?

  • The draft framework is a work in progress. It needs to have provisions to enable the enforcement of insolvency related judgements. It also requires a streamlining of the scope of ‘public policy’ provision to lend clarity.
  • The recent cases of Jet Airways and Videocon Group has underlined the need for an Indian legal framework that is in harmony with the international best practices.
  • Our current practice of entering into bilateral arrangements for recognition of insolvency proceedings on a reciprocal basis isn’t a permanent solution. This practice is time consuming, incongruous and requires multiple negotiations.
  • A legal framework gives a mechanism for coordination among the courts in different jurisdictions. It also provides for the identification of the company’s creditors and their claims.
  • A common set of principles to govern international trade is necessary given that business interface now transcends national boundaries. For instance, the success of international commercial arbitration for resolving cross-border disputes can be attributed to the New York Conventions (also called the UN Convention on Recognition and Enforcement of Foreign Awards). This Convention made arbitral awards in a signatory country enforceable in other signatory countries without the need for separate proceedings.
  • Similarly, a uniform set of guidelines for insolvency could help smoothen international trade.

Conclusion:

The draft rules from the MCA have the right intentions but it’s still a work in progress. Putting a legal framework for cross-border insolvency in place would help avoid extended proceedings (the likes of the Videocon case) in the future.

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