Navigating the labyrinth: Cross-border insolvency regime in India

The necessity for effective cross-border insolvency management methods has grown along with the ever-expanding web of international trade and investment. Cross-border insolvency (CB insolvency) is a complicated phenomenon that occurs when a business that has assets and liabilities dispersed across several jurisdictions goes bankrupt. Such cases present special issues since they require coordinated action between courts and insolvency professionals in many nations.

India is seeing a surge in CB insolvency cases as a result of its growing economic connection with the rest of the world. With the significant overhaul of India's insolvency framework, the Insolvency and Bankruptcy Code 2016 (IBC), domestic insolvency issues have been effectively addressed. The IBC does, however, include few provisions for CB insolvency.

This article examines the current situation of cross-border insolvency in India, highlighting the shortcomings of the current legal system and proposing possible fixes for a better working order. We will look at the drawbacks of depending only on bilateral agreements as well as the possible advantages of taking a more all-encompassing strategy modelled in line with the global best practices.

The roadblocks

To address CB insolvency, the Central government may enter into bilateral agreements with foreign jurisdictions under Section 234 of the IBC. Section 235 gives the adjudicating authority the power to send letters of request to courts of the nation with which the bilateral agreement was signed under Section 234 in order to address the disposition of the corporate debtors' assets that are located outside of India.

Although the most crucial aspects of CB insolvency involve ensuring uniformity across various insolvency laws and procedures, the very reliance upon bilateral agreements opens up a wider scope of negotiations that would ultimately lead to complexities and inconsistencies while handling such cases.

One of the challenges for the adjudicating authority is to balance the contradictory provisions of several treaties entered into with different nations because the corporate debtor's assets are located in multiple locations. Finding and securing assets that are situated in other countries might be difficult. Enforcing Indian insolvency orders on assets located overseas may involve navigating various insolvency systems and possibly encountering opposition from local creditors.

The National Company Law Appellate Tribunal (NCLAT), in the matter of Jet Airways, has shed he much required light upon how coordinated proceedings result in convenience. The NCLAT had recognised an Insolvency Protocol prepared by the Resolution Professional in India and the Dutch administrator. Interestingly, in the matter of Stanbic Bank Ghana, the adjudicating authority, while admitting a Section 7 IBC application filed on the basis of a foreign decree, had observed that the authority does not have the jurisdiction to enforce such decree, and only took cognisance of the same. The said admission was also upheld by the NCLAT as well as the Supreme Court of India.

The half-marched path

The Insolvency Law Committee (ILC), constituted by the Ministry of Corporate Affairs (MCA), in its October 2018 report, visited various facets of the Indian CB insolvency regime. It came up with several recommendations after noting that the IBC fails to provide a comprehensive framework to address the concerns pertaining to CB insolvency. It recommended aligning the Indian setup with that of the UNCITRAL Model Law on Cross-Border Insolvency (UNCITRAL-CBI), adopted in 1997.

"The Model Law is a modified universalist concept with significant territorialist elements, and envisions that one court will coordinate the insolvency proceedings of a multinational enterprise, no matter where its assets and creditors are found." [Edward S. Adams & Jason K. Fincke, 'Coordinating Cross-Border Bankruptcy: How Territorialism Saves Universalism', (2008) 15 Colum.J.Eur.L. 43, 46.]

Because of the UNCITRAL-CBI’s inherent mobility, required variations can be made to preserve conformity with national insolvency laws while implementing an internationally recognised framework. It offers adequate latitude to safeguard domestic public interest by permitting the denial of recognition of foreign proceedings or provision of any other aid on the grounds of inconsistency with domestic public policy. Domestic insolvency proceedings take precedence over international actions under the UNCITRAL-CBI. Finally, UNCITRAL-CBI’s strong structure for coordination and collaboration between courts and bankruptcy specialists across jurisdictions would enable concurrent processes to be conducted more quickly and efficiently.

Based on the above, the ILC came up with a Draft Part Z, seeking to address the shortcomings of the current cross-border insolvency process. Notably, Draft Part Z lays down the determination of Centre of Main Interests (COMI). As per Section 14, provided that the corporate debtor has not relocated to a different jurisdiction during the three months prior to the initiation of the insolvency proceedings, it is assumed that the COMI for the corporate debtor is located at its registered office. Draft Part Z also provides for foreign main proceedings, which refers to a foreign proceeding that is being conducted in the corporate debtor's COMI state, and foreign non-main proceedings, which takes place where the corporate debtor has an establishment. However, it has been recommended by the ILC that the initial applicability of Draft Part Z is only extended to corporate debtors.

MCA also constituted a Cross Border Insolvency Rules and Regulations Committee (CBIRC) in 2020 and appointed Dr KP Krishnan as its Chairperson to formulate the subordinate legislation under Draft Part Z. The CBIRC submitted its report in June 2020.

Simplifying the processes for cooperation and communication between Indian courts and foreign authorities would be a critical benefit. This can entail appointing certain authorities or focal points to handle cross-border insolvency cases, creating uniform communication guidelines and maybe looking into ways to recognise insolvency rulings between nations.

Conclusion

The complexities of CB insolvency present a big problem in our age of growing interconnectedness. The existing legal system in India supports CB insolvency cases to some extent, but its shortcomings prevent effective resolution. There are delays and inconsistencies when bilateral agreements are relied upon, and confusion results from the lack of a specific framework.

Establishing a specific CB insolvency regime under the IBC or adopting the UNCITRAL Model Law on CB insolvency could offer a more extensive framework for collaboration with foreign jurisdictions. Efficient case management requires developing experience in CB insolvency and streamlining communication methods.

Resolving individual cases is only one aspect of a strong CB insolvency framework; another is creating an environment that is more predictable and conducive to investment for India's international economic engagement. India can successfully manage the intricacies of CB insolvency and establish itself as a leader in managing such cases by aggressively seeking solutions and taking note of best practices. This will open the door to a more just and efficient system that will benefit all parties - creditors, borrowers, and foreign investors alike.

Moiz Rafique is an advocate practicing at the Gujarat High Court and Managing Partner at Privy Legal Service LLP. Abhishek Sadhwani is a paralegal at the firm.

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