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October 2018

Cross Border Insolvency – An analysis of the draft chapter

by Roshni Menon

Introduction

In the last few years, India’s banking sector has been fraught with an alarming number of non-performing assets. To this end, the Insolvency and Bankruptcy Code of 2016 (Code) strives to resolve the problem by allowing creditors to recover their dues and appropriately deal with loan defaulters. Akin to insolvency, its cross-border variant is one where the insolvent debtor has assets in more than one jurisdiction. The Code however lacks an extra-territorial application and the same is heralded as its biggest drawback. Insolvency proceedings spilling over several jurisdictions leads to a heap of issues such as multiplicity of laws, overlapping interests, etc. Since its inception, several Indian origin multinational corporations undergoing insolvency proceedings under the Code have foreign assets and stake in subsidiaries in foreign jurisdictions, however, these remain untouched during the insolvency process. This begs the question: How are such assets outside India to be treated under the Code? Can foreign creditors access the domestic insolvency proceedings? To what extent can foreign creditors enforce their debt? While the business world may have quickly embraced globalisation, the legislature is still attempting to answer these questions and stay on top of things in terms of its regulatory reach.

In times of bad financial climate, the law must provide for an uncomplicated insolvency process and consider the interest of all stakeholders. The foremost step in addressing such a scenario is to have an effective cross-border insolvency legislation. Apart from removing financial difficulty, having a cross-border insolvency law is an economic fundamental. The incumbent government is keen on improving India’s rank on the ‘Ease of Doing Business’ index; and having an effective cross-border insolvency law will help in this regard as it improves the credit recovery rate and reduces the delay in information exchange. Moreover, Government programmes like ‘Make In India’ are tailor-made to tap more foreign investment into the country and in order to increase foreign investment levels, providing exemptions and tax breaks alone will not suffice. Foreign investors are more likely to invest in a country that has a system in place they can rely on in the event of financial distress, such as insolvency.

Presently, Section 234 and 235 of the Insolvency and Bankruptcy Code remotely deals with the subject of cross-border insolvency by enabling the Government to enter into reciprocal agreements with foreign States. Where the insolvent debtor has assets in a foreign jurisdiction, the relevant court or tribunal can merely only send a Letter of Request to a foreign court or tribunal and seek its assistance with respect to said foreign assets. Moreover, entering into separate reciprocal agreements with individual foreign States is time consuming, costly and can contain varying terms. Thus, the current legal framework is limited in its scope and must be replaced by a comprehensive law. Recognising the urgency to plug the gaps in our legal system, the Eradi Committee Report in 2000 and the IBC Joint Committee Report in 2015 recommended the adoption of the UNCITRAL Model Law on Cross Border Insolvency (Model Law) but this did not materialise. The Model Law is widely recognised and applied in as many as 44 States including United Kingdom, United States of America and Singapore. Nonetheless, India has recently witnessed lot of deliberations and the Insolvency Law Committee Report of 2018 branded Sections 234 and 235 as an incomprehensive framework to deal with this subject.

aking note of these inputs, the Government put forth a positive measure through the Ministry of Corporate Affairs and released a Draft Chapter on Cross Border Insolvency (Draft law) on June 20, 2018 and opened it for comments. The Draft law is based on the Model Law but is modified to the extent necessary to meet the needs of an Indian setting. The Model Law aims to bring uniformity in legal proceedings, at the least amongst States that have adopted it. If the Draft law is adopted, it will help India coordinate better with nations that recognise the Model Law.

 

Overview of Draft Chapter

The cross-border insolvency provisions presently only pertain to corporate debtors. Based on the experience, similar provisions for personal insolvency will be formulated in due course of time]

The draft cross-border insolvency law will apply to a corporate debtor where:

(i) in relation to foreign insolvency proceedings, the foreign courts or foreign representatives seeks assistance in India; or

(ii) in relation to Indian insolvency proceedings, assistance is sought in the foreign State; or

(iii) concurrent proceedings are underway in the foreign State and in India, in respect to the same insolvent corporate debtor; or

(iv) creditor(s) in a foreign State have an interest in requesting the commencement / participation in Indian insolvency proceedings. The scope of the legislation being widely worded allows it to apply to all plausible cross-border insolvency scenarios.

 

Creditors in a Foreign State

Presently, under Section 10 of the Insolvency and Bankruptcy Code, foreign creditors and Indian creditors are placed on an equal footing. The Draft law, however, goes a step further with an express statement to that effect; albeit such equal rights only pertain to commencement of, and participation in, an insolvency proceeding.

Further at the time of liquidation, the payment to creditors is subject to a hierarchical waterfall mechanism i.e. the order of priority of claims in distribution of assets and accordingly, the Draft law states that the claim of foreign creditors shall not be ranked lower than the class of ‘Remaining debts and dues’. This provides assurance to foreign creditors that their claims will be appropriately considered and won’t go overlooked. Then again, this does not apply where the claim is concerning tax and social security obligations.

Furthermore, in all circumstances where creditors in India are sent notifications in relation to the proceedings, the same shall also be sent to known creditors who don’t have an address in India. Hence, foreign creditors have a right to stay informed about the proceedings.

 

Rights of Foreign Representatives

Under Section 7 of the Draft law, representatives of the foreign proceedings have the right to apply to the Adjudicating Authority in India (National Company Law Tribunal or NCLT) and gain direct access to the Court. Foreign representatives are defined in the Draft law as persons who act on behalf of the foreign proceedings or who administers the liquidation of the corporate debtor’s assets. Firstly, by knocking on the door of the NCLT, the representative can exercise the powers and functions available to him under the Code. Secondly, foreign representatives are also entitled to commence proceedings under the Code if the corporate debtor has assets in India or the representative has an interest in obtaining relief.  Thus, Section 8 introduces a new category of persons to whom the right to commence applies. Previously this right was limited to creditors (both financial and operational), debtors, authorised members, person in charge of managing the operations and in control and supervision of the debtor. While making an application, either for accessing the authority or for commencing a proceeding, the prescribed format shall be followed.

 

Recognition of Foreign Proceedings and Relief

The Draft law bestows upon the tribunal the power to give recognition to foreign proceedings and requires the qualifying foreign proceeding to be described as either a main proceeding (where the debtor had its centre of main interests) or a non-main proceeding (where the debtor has an establishment). Further in Section 17, the Draft law accords recognition to the orders issued by foreign courts commencing qualifying foreign main proceedings and appointing the foreign representative of those proceedings; by submitting certifiable evidence of the same. Once it has been recognised, the foreign representative is entitled to participate in any proceeding concerning the corporate debtor under the IBC. After giving recognition, the Court shall provide relief by passing an order declaring moratorium (automatic stay). It may also give other reliefs such as permitting examination of witnesses, taking/delivering information about the debtor’s assets, rights, liabilities, etc. However, the doubt persists whether the declaration of moratorium under Section 17 is applicable to only foreign main proceedings as the section is silent about foreign non-main proceedings. If requested, Section 18 even allows representatives to be entrusted with the task of realising and distributing the assets located in India, in certain circumstances.

It is important to note that, giving recognition to foreign proceedings or declaring moratorium does not affect the right to request commencement of proceedings under Code. Creditors and other entities will continue to enjoy their right to file an insolvency petition under the Code against the corporate debtor.

 

Concurrent Proceedings

In some circumstances, there may be concurrent proceedings against the same corporate debtor in both Indian and foreign jurisdictions. Albeit simultaneous proceedings are underway in different jurisdictions, they shall progress parallelly and shall not subsume into each other. Even in situations where joint hearings are necessarily to be conducted to avoid multiplicity, the proceedings in India and the foreign jurisdiction shall remain independent of each other. In other words, consequences of the Indian law will not be exported into the foreign State and vice-versa. Nevertheless, in times of concurrent cases, it is paramount that all Courts directly communicate and cooperate with each other. This will help the concerned Courts to amicably achieve the best outcomes.

Section 24 mandates that to commence any proceeding under IBC after giving recognition to a foreign main proceeding, the assets of the corporate debtor must mandatorily be located in India.

(a) If an application for recognition of foreign proceeding is made at a time when a proceeding under the Code is taking place, then the reliefs granted must be consistent with the Indian proceeding.

(b) Alternatively, if the Indian proceeding commences only after applying for recognition, then the reliefs under Section 18 and moratorium under Section 17 shall be modified or terminated if inconsistent with the proceeding under the Code.

Also, for commencing a proceeding under IBC, the recognition of a foreign main proceeding is proof that the corporate debtor is insolvent. This however does not affect the burden to prove the existence of a debt in relation to the corporate debtor.

It is also noteworthy that in concurrent proceedings (during corporate insolvency resolution process or liquidation), creditors who have received part payment towards their claims in the foreign proceedings may not receive payment for the same claim from the Indian proceedings. However, this is subject to whether the payment to other creditors of same class, is proportionately less than the payment already received from the foreign proceedings.

 

Conclusion

Incorporating a cross-border insolvency framework into the existent Insolvency and Bankruptcy Code will strengthen the legislation by heightening its impact as a one-stop-shop legislation for all insolvency related matters. Adopting the Draft law will be a crucial factor in reinstating the creditors’ confidence in retrieving their dues successfully and thereby, changing the landscape of domestic lending. By enacting the cross-border insolvency provisions, the Indian insolvency framework stands to gain global acceptance and recognition as businesses increasingly become transnational. Having in place a law based on the UNCITRAL Model Law reassures overseas investors’ interests in India, as factors such as unfamiliarity and unpredictability of the law are done away with and as a result, foreign lending will increase as the law provides for certainty and uniformity

[The author is an Associate in Corporate law practice, Lakshmikumaran & Sridharan, Bangalore]

 

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