contributed by Aparna Ravi, who is a Bangalore-based lawyer and
was a member of the Bankruptcy Law Reforms Committee. The views expressed here
and Bankruptcy Code, 2016 (IBC), that recently got past both houses of
Parliament and is now awaiting presidential assent, is cross border
insolvency. The Report
of the Joint Parliamentary Committee on the IBC notes this absence, but its
proposal — that the government address cross border issues by entering into
bilateral agreements with other countries — is very limited. This blog post considers how India could go
about incorporating cross-border insolvency issues into its domestic legal
framework, including the advantages of adopting the UNCITRAL
Model Law on Cross-Border Insolvency and the issues to be considered if
India were to adopt a version of the Model Law.
financial distress has assets, business operations or creditors in more than
one country. Such cases typically
involve one or a combination of three situations. First, the insolvent company
may have a number of foreign creditors who want to ensure that their rights are
protected even though they may not be based in the country where the insolvency
resolution is taking place. Second, an
insolvent company may have assets located in another jurisdiction, which its
creditors may want to access as part of the insolvency proceedings. Finally,
insolvency proceedings with respect to the same debtor may be commenced and
ongoing in more than one country. The
last situation is particularly common when corporate groups face financial
difficulties and proceedings against different legal entities within the group
are commenced in different jurisdictions.
as it does not discriminate between domestic and foreign creditors. By including “persons not resident in India”
in the definition of persons and, as a consequence, in the definition of
creditors, the new legislation permits foreign creditors to commence and
participate in the proceedings under the IBC. Foreign creditors also have the
same rights as similarly situated domestic creditors regarding distribution of
assets on the liquidation of an insolvent company.
IBC, which currently lacks any mechanism for cooperation between jurisdictions
or for an Indian court or tribunal to seek the assistance of a foreign court or
insolvency authority when an insolvency proceeding may have implications across
national borders. The Joint Parliamentary Committee’s Report introduced two new
clauses (Sections 234 and 235) to address these situations. Section 234 states
that the Central Government may enter into bilateral agreements with other
countries for purposes of enforcing the IBC. Section 235 allows the relevant
court or tribunal in India to issue a letter of request to a foreign court or
tribunal seeking its assistance in situations where a debtor’s assets may be
located abroad. While these two clauses are an acknowledgment of the existence
of cross border concerns in insolvency, they, in essence, postpone
consideration of substantive provisions on cross border insolvency to bilateral
agreements with other countries.
deal with cross border insolvency concerns. In fact, even before procedural
frameworks for cooperation were embedded in domestic laws or treaties, courts
in different jurisdictions developed protocols to cooperate with each other in
specific cross border insolvency cases. Such a protocol was first developed
between the English and American courts in 1991 during the insolvency
proceedings of Maxwell Communications Corporation, a U.K.-based media
corporation with significant assets in the U.S.
This case involved simultaneous Chapter 11 proceeding in the U.S. and an administration
proceeding in the U.K. The courts
developed a cooperation protocol on the basis that information flow and
cooperation between the two proceedings was essential for an efficient
resolution of the insolvency and the preservation of the debtor’s estate.
need to be negotiated individually with different countries, an extremely
laborious process. Cross border insolvency treaties are also difficult to
negotiate as different countries have wide variations in their substantive
insolvency law regimes. Further, there could well be situations where a
country’s bilateral agreement with one country varies substantially from its
agreement with another country, which could lead to uncertainties in implementation.
substantive insolvency laws across jurisdictions, but instead sets out a
procedural framework for information exchange, cooperation and coordination in
cross border insolvencies. As it is a model legislation rather than a treaty or
convention, countries may adopt it into their domestic laws with any changes
that they see fit. It has intentionally been drafted with flexibility so that
it can be adopted by countries with vastly different substantive laws on
insolvency. Since its endorsement by the U.N. General Assembly in 1997, 41
countries, including the U.S, the U.K., Canada, Australia and Japan, have
adopted the Model Law.
are collective proceedings under the insolvency law of any state which have the
purpose of reorganization or liquidation of the debtor. With respect to such
collective insolvency proceedings, the Model Law contains four types of
creditors and foreign insolvency representatives to domestic insolvency
foreign insolvency proceedings and the granting of certain reliefs: A foreign proceeding may be recognized either
as a “foreign main proceeding” (a proceeding taking place where the debtor has
its “centre of main interest) or as a “foreign non-main proceeding” (a
proceeding other than a foreign main proceeding taking place in a state where
the debtor has an “establishment”). The types of relief that are then granted
depend on whether a proceedings has been recognized as a main or non-main
direct communication between courts and insolvency representatives in one state
with their counterparts in a foreign state.
concurrent insolvency proceedings of the same debtor in more than jurisdiction.
India as opposed to relying on bilateral agreements alone. First, it is a
widely accepted standard that has already been adopted by other countries and
one with which foreign creditors are familiar. Adopting the Model Law would,
therefore, bring much needed certainty for foreign creditors on the rules of
access and recognition of foreign insolvency proceedings. Second, it would be
much quicker to adopt and would save the cumbersome process of negotiating
bilateral agreements, at least with those countries that have already adopted
the Model Law. Further, India would be permitted to make any changes to suit
its particular needs when enacting legislation based on the Model Law. The
Model Law itself foresees such changes, including the exclusion of certain
kinds of institutions and exceptions based on public policy. It is perhaps for
these reasons that two prior committees that looked into insolvency law reform
in India – the Eradi Committee in 2005 and the N.L. Mitra Committee in 2001 –
also recommended that India adopt the Model Law with suitable modifications,
though this was never carried out.
looked into carefully if India were to consider adopting the Model Law into its
domestic legislation. Below is a non-exhaustive list of such considerations:
coordination and cooperation provisions in the Model Law hinge on whether an
insolvency proceeding is a foreign main or non-main proceeding, the
determination of a debtor’s “centre of main interests” or “COMI” assumes
special significance. However, COMI may not always be easy to determine,
particularly when it comes to multinational corporations that may have assets
and business operations in a number of jurisdictions. The Model Law does not
define COMI, but states that there is a rebuttable presumption that COMI is the
location of the debtor’s registered office.
As the Model Law does not provide guidance on the factors that could rebut this
presumption, courts have provided a wide range of interpretations on what
this context, it would be useful if the Indian legislation that adopts the
Model Law spells out some of the factors that could help determine COMI. In
particular, while COMI could be presumed to be the place of incorporation of
the debtor, this presumption should be rebuttable based on factors such as the
principal place of the debtor’s economic activities and operations and the
location of its assets. Such provisions could help minimize the confusion over
the determination of COMI and also provide guidance to Indian courts and
tribunals making this determination.
of reciprocity between States. There is no condition or requirement that a
foreign representative wishing to access facilities under the Model Law must be
from a state which has itself enacted the Model Law. Thus, if India were to
incorporate the Model Law in its original form into its domestic legislation, a
foreign representative from a state that has not enacted the Model Law could
gain access to Indian insolvency proceedings. However, an Indian representative
would not similarly gain access to foreign insolvency proceedings in that state
under the Model Law, though there may be other provisions in the laws of that
state enabling access. While a few
countries have included a reciprocity requirement in adopting the Model Law,
many others have adopted it in its original form with the hope that more
countries would adopt the Model Law in coming years.
Control Requirements: An important and rather India-specific issue is how
adopting the Model Law would affect domestic capital control laws, such as the
Foreign Exchange Management Act and RBI capital control requirements. For
example, while it is all very well to say that foreign creditors would be
entitled to the same distribution rights as domestic creditors, their ability
to receive cash or assets located in India would depend on a host of other laws
or regulations. This is most likely an issue that would have to be considered
afresh as most developed countries that have already adopted the Model Law do
not have similar capital control requirements.
carefully reviewed in determining how to adopt the Model Law to suit India’s
specific needs. However, these are not
reasons against adopting the Model Law, but rather areas where the Model Law
may need to be tweaked to ensure its implementation is effective. The Model Law
provides a good starting point as India considers adopting cross-border issues
into its domestic legislation by, at the least, providing a robust procedural framework
for addressing the complexities that arise in cross border insolvencies.
re Maxwell Communications Corporation plc, 170 BR 802, 802 (Bankr SDNY 1994).
for example, the European Court of Justice ruling in Eurofood IFSC Ltd.,
EU: Case C-341/04, 2006 WL 1142304, ¶ 17 (May 2, 2006) in contrast to the U.S.
Bankruptcy Court’s judgment in Bear Stearns High-Grade Structured Credit
Strategies Master Fund, Ltd., 389 B.R. 325 (SDNY 2008).