CROSS BORDER INSOLVENCY LAWS: NEED OF THE HOUR
3rd Year BA LLB,
Christ School of Law Bangalore
ABSTRACT
Insolvency refers to a financial crunch situation in which any individual, whether natural or legal, is unable to pay his debts. The insolvency situation gives rise to complicated legal issues and in order to deal with these issues every modern state either has put in place an efficient and effective legal regime or is moving in that direction. From a legal point of view, a very interesting situation occurs in a scenario where a company that has its properties and shareholders in a multi-jurisdictional domain is stuck in an insolvency condition. The United Nations Commission on International Trade Law (UNCITRAL) has developed a specific mechanism for coping with cross-border insolvency problems in its model legislation on cross-border insolvency, which deals with the harmonization and integration of world trade law, promoting cross-border remedies, identification of international litigation and cross-border collaboration. Many countries have incorporated the model law in their insolvency laws to deal with cross border issues. But at present there is no explicit legal framework in India that deals with cross border insolvency and issues with regard to cross border insolvency like of jet airways depicts the need for a separate code on cross border insolvency adapting the model law to govern the same.
Key Words: Insolvency, legal regime, model law, harmonization, Cross Border
I. INTRODUCTION
Insolvencies can be seen in every modern state or nation since the Roman Empire, as early as 118 A.D. An inevitable consequence due to the growing globalization based on the free flow of information, capital, energy, labor and transnational corporate economic growth, cross-border insolvencies and global defaults. One of India’s current problems is insolvency at the cross-border point. In its model law on cross-border insolvency, adopted by agreement at the thirtieth session of UNCITRAL on 30 May 1997, the United Nations Commission on International Trade Law (UNCITRAL) developed a clear framework for coping with cross-border insolvency matters[1]. Cross-border insolvency rules deal with securing overseas investors ‘ access to the debtor’s properties that are in different jurisdictions, helping the borrower who wishes to include the debtor’s assets that have them in different jurisdictions in the insolvency proceedings. In its Study of The Advisory Group on Bankruptcy Laws, the Mitra Committee (2001) noted several issues that arise around cross-border insolvency[2]. If a portion of a company located in one nation becomes insolvent, should creditors be permitted to begin insolvency proceedings in that country while the entire business stays solvent? If the company as a whole is insolvent, will independent lawsuits are initiated against the different countries where its subsidiaries are located? Alternatively, should the nation in which the head office or place of incorporation is situated have a specific procedure? If there is one liquidator or trustee for each nation where the company has a place of business or properties? For one nation, should the appointed liquidator or trustee be able to recapture fraudulently exchanged properties from the claimant to another government? And in the current legislation there is a lack of clarity to cope with those problems. Therefore, the current paper deals with the current framework regulating the topic of cross-border insolvency in India and the outline of model law supplemented by a study of the issues facing the conflicting characteristics of current legislation. The paper further discusses the draft chapter issued by the Insolvency Law Committee, and the modifications in which it could be applied. A distinction is drawn on the lines of UK and US insolvency legislation where the author suggests what adoptions can be rendered to the draft chapter from the international insolvency laws.
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p; CURRENT LEGAL FRAMEWORK IN INDIA AND AN ANALYSIS IN TO DRAWBACKS OF THE SAME
p; CURRENT LEGAL FRAMEWORK IN INDIA AND AN ANALYSIS IN TO DRAWBACKS OF THE SAME
Cross-border insolvency is generally governed under Articles 234 and 235 of the IBC. Article 234 of the Code provides that, with a view to initiating the insolvency process, the Central Government can enter into any arrangement with any foreign country[3]. Central government will do so with those countries with which reciprocal agreements occur. While further section 235 of that code specifies that the letter of inquiry may be sent pursuant to section 234 to the foreign national authority with which such reciprocal agreements are made. This application should be forwarded to the competent authority that is an adjudicating body in a given country for evidence of the debtor’s property in the county[4]. Only those countries which have mutual agreements with India may submit the order. Nevertheless, negotiating mutual agreements with different countries is itself a rather cumbersome process, as this solution will take a long time and the object of the code would not be fulfilled, i.e. timely debt recovery. Reciprocal agreements would also render the insolvency procedure much more difficult when the assets are situated in different countries. According to these provisions the arrangements may extend when prosecutions in India need acknowledgement, help abroad and when international trials need the same in India. The Civil Procedure Code, 1908 is essential to the approval of international prosecutions in India, along with concepts established in English common law. The rule of that nation shall apply in order for Indian prosecutions to be accepted abroad. If the nation followed the Model Rule, they will usually be able to recognize the trials without allowing India to follow the l.aw Model. Countries which have not implemented the Model Law or those which have adopted the Model Law with modifications may have reciprocity provisions[5]. That would imply appreciation, collaboration, would be given by such other nation. In favour of Indian insolvency proceedings only if the domestic Indian legislation meets those criteria.
When further examining the manual, contractual agreements do not recommend the protocol to be established for performing the insolvency proceedings. Since the insolvency situation does not have a proper procedure, the law is incomplete. It does not address the cross-border insolvency issue by only providing the right to make mutual agreements with countries through the act. There should be a proper procedure in place for the same. When there is a case where some nations have entered into mutual agreements and there is a different process for each country then it would not work properly as there would be a point of conflict if there were investors from different countries or company assets in different countries in one insolvency proceeding. Since reciprocal agreements have no function in conducting insolvency proceedings affecting multiple jurisdictions. So there should be a transparent insolvency mechanism that would be regulated with all foreign nations for all creditors participating from different nations to have proper structure and justice.
No establishment is being made of the current process for recognizing foreign cases in India. This means that different measures, such as approval of international cases and cooperation between Indian and foreign courts, would not be feasible unless there are clear provisions in the bilateral treaties. This can be a disincentive for foreign creditors, who in India may seek help, acknowledgment, etc. to their home proceedings. Under the Law, the existing cross-border insolvency system depends on India entering into bilateral agreements with foreign governments. Finalizing such bilateral treaties requires long-term negotiations and any treaty that would create uncertainty for foreign investors would be distinct. This would also generate confusion for Indian courts and jurisdictions under. In a situation where an Indian debtor’s assets are located in a foreign jurisdiction with which there is no bilateral agreements, there would be no guidance on remedies available to an Indian insolvency professional to obtain proof or take action in respect of such debtor’s assets. The procedure for applying international judgments under the 1908 Code of Civil Procedure is not broad enough to include all insolvency orders, such as orders involving reorganization procedures, administrative and provisional orders, etc. ‘ This will render certain decisions and orders in India unenforceable in the insolvency process. Where several jurisdictions are involved, it would be appropriate to invoke reciprocal arrangements with each nation which may cause legal and operational complications and needless administrative complexities. While when the situation arises where India has no bilateral agreement with that particular country and Indian debtors ‘ assets are in that nation, no assistance will be given on recourse to eligible insolvency in order to have evidence of such properties.
III. OVERVIEW OF THE MODEL LAW AND THE BENEFITS OF INCORPORATING THE SAME IN TO INDIAN LEGISLATION
UNCITRAL issued the substance of the Model Law on Cross-Border Insolvency Problems on 30 May 1997 and was subsequently adopted by the United Nations General Assembly on 15 December 1997. Until now, 44 states have adopted this model law[6]. The need for this model legislation stirred up because of the dilemma that each country has its own particular way of dealing with the issues of too varying Cross Border Insolvency and insolvency rules. Several nations had made arrangements with each other but there was still no standard way of dealing with the Cross Border Insolvency issues. It focuses on approving, promoting collaboration and alignment between jurisdictions, rather than seeking to unify comprehensive insolvency regulations, and recognizes the discrepancies between national procedural laws. It was introduced as model legislation and not as a standard in order to make it more versatile, so that nations would make necessary amendments to their domestic laws on cross-border matters as per the pattern. The fundamental purpose behind this model legislation is to insure that transboundary insolvency cases protect the interests of the banks and persons involved, including the creditor. In formulating these laws there will be a significant increase in fusions and acquisitions, thus increasing the economy of the country. Model law applies in cases where: an international court or a global insolvency practitioner requires State support; both foreign and domestic proceedings are under way simultaneously; insolvency proceedings must be launched in the State by foreign creditors and other interested parties; foreign State assistance is provided in conjunction with domestic proceedings[7].
The benefits of following model legislation are that it gives claimants the right to access court aid and international insolvency cases members, offers a simple procedure for acknowledging global proceedings and naming a foreign representative, provides temporary relief and mandatory stay at the court’s discretion, as well as arrangement of litigation and collaboration between courts of States where debtor properties are held. The implementation of efficient cross-border insolvency legislation would render India an attractive investment destination for foreign creditors due to the increased predictability and consistency of the foreigners ‘ insolvency system. Even though the Legislation does not actually discriminate between foreign creditors and domestic creditors, the Model Law provides much more detail in procedural terms and outlines the remedies available to foreign entities. The Model Law’s popularity has increased in recent years, and such acceptance will also help India to know and follow global best practices in this field. The Model Law is designed to be versatile to compatible with regional insolvency act discrepancies. Therefore, exceptions from the Model Law may be rendered in compliance with domestic circumstances and compatibility with domestic insolvency. The Model Law allows countries to deny approval in international prosecutions or other support if such conduct is explicitly contradictory to domestic public policy. The Model Law scheme is that any relief given to an international insolvency agent in conjunction with the global proceedings is subject to the security of domestic creditors. This prioritizes insolvency proceedings in the home country over international proceedings. Therefore, the initiation of domestic insolvency proceedings will not be barred by a suspension owing to consideration of an international event. It underlines the importance the Model Law gives to international and private prosecutions. Indian insolvency members shall be allowed in such jurisdiction to enter international jurisdictions and shall have recourse to acceptance, collaboration, etc., subject to comply with relevant foreign jurisdiction. The Model Law provides specific guidance in terms of direct collaboration and communication between the judiciary and insolvency practitioners, in international jurisdiction and at home. In the case of parallel trials, this may make for clear decisions and more efficient and successful assistance.
In India the current rules of cross-border insolvency, i.e. Sections 234 & 235 of the IBC are insufficient and require time to implement this model law by the State, as this will strengthen the insolvency resolution mechanism. Model legislation for foreign entities in terms of the solution and the protocol adopted, is much simpler than the IBC. State can make improvements as the model law is more flexible in terms of circumstances and local laws on insolvency.
IV. REVIEW OF THE DRAFT CHAPTER RELEASED BY THE INSOLVENCY LAW COMMITTEE
On 20 June 2018 the Ministry of Corporate Affairs released a public notice seeking input on a draft chapter on cross-border insolvency, which is based primarily on the United Nations Commission on International Trade Policy’s Cross-Border Insolvency Model Rule, 1997. It is worth noting that some of the nations that have significantly implemented the Model Legislation are the United Kingdom, the USA, Japan, Canada and Australia.
Sections 234 and 235 of the IBC effectively authorize the State to conclude bilateral agreements with other countries to enforce the IBC and the National Company Law Tribunal (NCLT) to file an appeal letter to a foreign court requesting judgment on debtor land. Once a bilateral arrangement is signed and those terms are informed, an international proceeding will be recognized in India in compliance with the 1908 Code of Civil Procedure, whereas an Indian proceeding will be recognized in the foreign country in accordance with its rules of procedure.
The proposed amendment is in the right direction as it acknowledges and seeks to fill the gaps in IBC re-operation of NCLT judgments outside India, and India’s mutual duty to link foreign assets to International Court / Creditors and Indian creditors. The public notice for the proposed amendment, however, is not empty of reservations or limitations, especially with regard to the versatility of the NCLT in view of the Foreign Procedures. In a major deviation from the Model Law, the draft chapter adopts the principle of reciprocity by applying it to countries that have adopted the Model Law. In addition, it would provide foreign delegates and creditors with access to the CIRP and information regarding notifications sent to a domestic creditor.
A global proceeding could be classified as the domestic key or non-main proceeding. This is important when agreeing on the right to relief that may be given by the NCLT. The Model Law embraces the Center of Principal Interest (COMI) principle for deciding the core case position. Under the draft chapter the COMI is supposed to be the debtor’s designated office location. The updated chapter calls for the international court to consult with the NCLT. Coordination between concurrent insolvency proceedings (for the same debtors) should insure that the relief granted in an international non-main proceeding is compatible with the relief offered in a global primary proceeding.
The proposed chapter calls for the foreign court to comply with the NCLT. Coordination between concurrent insolvency proceedings (for the same debtors) should insure that the relief granted in a foreign non-main proceeding is compatible with the relief offered in a foreign primary proceeding. Where the COMI comes beyond India the relief depends on the laws and tribunals of foreign countries. In a foreign context the chapter suggested silences the rights and duties of an insolvency practitioner.
V. COMPARISON DRAWN ON LINES OF UK AND US INSOLVENCY LAWS AND NECESSARY ADOPTIONS TO BE MADE INTO INDIAN LEGISLATIONS
The English law on insolvency dates back to 1542 and first referred only to persons there in the 17th and 18th centuries preceded a sequence of laws consistent with handling a bankrupt person with seriousness. The English and U.S structures share the common principle of payment equity for borrowers, yet reorganization over liquidation is a distinct priority in the US.
UK
The main routes in the United Kingdom for coping with cross-border insolvency problems are as follows:
The EU Insolvency Act applying to all mutual insolvency proceedings and certain dissolution proceedings pertaining to a company with its core European Union concerns, the EU Insolvency Act calls for the compulsory identification of England. It provides for the structure of insolvency proceedings concerning different members of the same society to facilitate cooperation and coordination in the multiple key processes between the liquidators and the courts involved. It does, however, include the legal means for the liquidators involved in such proceedings to order a stay of the various other proceedings and to devise a rescue plan for insolvency proceedings target group members. The United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency Proceedings – where proceedings are started outside the European Union, an insolvency officeholder may petition for approval under the UNCITRAL Model Law in England[8].
Insolvency office holders in a limited number of designated jurisdictions (mainly Commonwealth countries) may apply for some restitution and aid to England’s courts under the 1986 Insolvency Act. In cases where the EU Insolvency Regulation, UNCITRAL Model Law and national legislation are not being provided for, the insolvency officeholder may still petition for relief in England on the basis of common law rules established by the courts.
US
The 2005 Bankruptcy Fraud Prevention and Consumer Protection Act (2005 Act) came i
nto force in October 2005 and modified several essential laws regulating company reorganizations under Chapter 11, in particular cross-border restructurings and insolvencies. The 2005 Act supersedes existing US Bankruptcy Code section 304 with a completely new chapter in the Bankruptcy Code, Section 15.
nto force in October 2005 and modified several essential laws regulating company reorganizations under Chapter 11, in particular cross-border restructurings and insolvencies. The 2005 Act supersedes existing US Bankruptcy Code section 304 with a completely new chapter in the Bankruptcy Code, Section 15.
Chapter 15 governs not only U.S. court proceedings that are ancillary to a foreign case, but also U.S. plenary circumstances involving significant transboundary problems. Chapter 15 followed, to a large extent, the Cross-Border Insolvency Model Law (Model Law) established by the UN Commission on International Trade Law (UNCITRAL), that realized long ago the need for a mechanism to govern transnational insolvency behaviour. The Model Legislation was also introduced in Britain, Eritrea, Japan, Mexico, Montenegro, Poland, Romania, South Africa and the United Kingdom (including Northern Ireland), and is being enforced in many other nations. To begin a case in Chapter 15, a “representative” of the international insolvency proceeding must file an application for approval, followed by a copy of the document authorizing the global proceeding and naming the representative, or some other acceptable form of confirmation of the presence of the foreign proceeding. The complaint must include a declaration outlining any identified legal cases concerning the applicant, and the international agent has to translate the supporting documents into English. Chapter 15 allows US bankruptcy courts to consider a foreign case when each of the following conditions is fulfilled: international cases are primary or non-main. The international delegate is a person or an entity. The petition contains the much needed paperwork. Furthermore, a foreign insolvency proceeding is only recognized in the US if the foreign representative and the foreign proceeding are qualified by Chapter 15[9]. International Practice, there has been an extension of the reach of international prosecutions and international delegates entitled to US acknowledgement. If the event is a mutual criminal or disciplinary proceeding in a foreign country, then a foreign court always appeals in the US for approval.
This requires an administrative process under an insolvency or debt restructuring law in which the debtor’s accounts and operations are subject to foreign court oversight or control for liquidation or partnership purposes. The latter is a major breakthrough as many nations do not have a bankruptcy court structure like in the United States, and many overseas regulatory cases will now have the right of prosecution. A foreign representative shall include an individual or entity, including an interim person or entity, allowed to supervise the reorganization or liquidation of the debtor’s properties or liabilities in a foreign proceeding or to act as a delegate of that foreign proceeding. In this manner, attention was again expanded to include provisional representatives who may, for example, be appointed in a case of compulsory insolvency, as well as constitutional bodies such as a debtor-in-possession or the board of directors of the debtor-in-possession. An applicant may still file a plenary lawsuit under Chapter 7 (liquidation) or Chapter 11 (reorganization) of the US Bankruptcy Code as long as it meets the eligibility requirements. The eligibility requirements are restricted − a simple “peppercorn” of an object is appropriate for most US judges. Nonetheless, the options and implications of a possible plenary jury under Chapter 7 or Chapter 11 will change in some situations once a international lawsuit has been approved.
VI. CONCLUSION
The introduction of a cross-border insolvency system into the current Insolvency and Bankruptcy Code would enhance the code by raising its effect on all insolvency-related matters as a one-stop-shop law. Adopting the draft law will be a crucial factor in rebuilding the confidence of borrowers in effectively reclaiming their dues and thereby improving the domestic lending environment. After following the 2016 Code of Insolvency and Bankruptcy, the cross-border insolvency rules, the Indian insolvency system is becoming gradually transnational. Getting a law focused on the UNCITRAL Model Law reassures the expectations of overseas investors in India, as considerations such as unfamiliarity and unpredictability of the law are excluded and as a consequence international investment would rise as the law provides for clarity and uniformity. Nonetheless, as the scope of the above topic should be emphasised, merely following the cross-border insolvency system should not be misunderstood to suggest that the Code’s rules will be introduced or that its purpose will be implemented in international jurisdictions.
Model legislation facilitates coordination in cross-border insolvency proceedings between the courts and other eligible State and foreign state entities involved. It also gives greater legal clarity to the trade and investment. The draft chapter released by the Ministry of Corporate Affairs should be adopted by the State with necessary changes and adoptions from UK and US insolvency laws for fair and effective enforcement of Cross Border Insolvency Laws protecting the interests of all creditors and other stakeholders along with the debtor. Adopting the Indian system’s draft chapter and model legislation will not only protect insolvent debtors from evasio
n by hiding or shifting their funds to foreign jurisdictions but also promote international exchange and investment. If completed, this adoption move will represent a significant leap in economic growth in the country.
n by hiding or shifting their funds to foreign jurisdictions but also promote international exchange and investment. If completed, this adoption move will represent a significant leap in economic growth in the country.
[1][1]UNCITRAL, available at http://www.uncitral.org/uncitral/en/uncitral_texts/insolvency/1997Model.html
[2] A K Sikri, CROSS BORDER INSOLVENCY: COURT-TO-COURT COOPERATION Author(s): Journal of the Indian Law Institute, Vol. 51, No. 4 (OCTOBER-DECEMBER 2009)
[3]Insolvency and Bankruptcy Code, 2016
[4]Ibin 3
[5]Public Notice; Government of India; Ministry of Corporate Affairs; 20/06/2018
[7]
Gerald I. Lies, Sale of a Business in Cross-Border Insolvency: The United States and Germany, 10 AM. BANKR. INST. L. REV. 363 (2002)
Gerald I. Lies, Sale of a Business in Cross-Border Insolvency: The United States and Germany, 10 AM. BANKR. INST. L. REV. 363 (2002)
[8]Look Chan Ho; Cross Border Insolvency: Principles and Practice
[9]Edward Bailey, Corporate Insolvency Law and Practice (Fourth Edition)