Implications of India Adopting the UNCITRAL Model Law on Cross-Border Insolvency

[Aastha Kaushal (B.A.,LLB (Hons.)) and Saurav Gurjer (BB.A.,LLB (Hons.)) are 4thyear students from School of Law, Christ(Deemed to be University), Bengaluru]

The management of international insolvencies are aimed to be resolved through a formal cross- border approach through the UNCITRAL Model Law on Cross-Border Insolvency (Model Law) which was approved by the United Nations General Assembly through a resolution in 1997. The Model Law is the product of lengthy deliberations and was passed as a model law and not a convention to allow for greater flexibility in terms of nations adopting the same into their domestic laws. This allows for nations to alter, exclude or include certain provisions in addition to the existing model, thereby giving states the choice to adopt the model law in the manner they deem fit for their national convenience.

Prevailing scenario in India

The present cross- border insolvency-related provisions under sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 (IBC), which were included following the recommendations of the Joint Committee on the Insolvency and Bankruptcy Code, 2015, require bilateral agreements to be entered with other countries to administer the cross- border ramifications of insolvency proceedings. This calls for the application of the doctrine of reciprocity, whereby letters of request may be issued by the National Company Law Tribunal (NCLT) or the authorized court to a foreign court or tribunal where the corporate debtor’s assets are located. However, at present, India has not entered into any bilateral treaty with any other nation to further the development of the same. Furthermore, the uncertainty in the implementation of the cross- border bilateral treaties stems from the assumption that treaties with different nations would have varying provisions entailed. The burden on the judiciary will no doubt be lessened if the reciprocal arrangements are adopted in a uniform manner. However, this would require lengthy negotiations between nations in their individual capacities with the question of achieving cooperation being left uncertain and which would consequently complicate the insolvency proceedings of the corporate debtors.

India’s approach towards adopting the Model Law

The Model Law clarifies the extent of coordination and cooperation between courts beyond borders and the recognition of the insolvency proceedings commenced in multiple jurisdictions. The adoption of the Model Law in India has been recommended in the past by the Eradi Committee and the N.L. Mitra Committee in the years 2000 and 2001 respectively, but the same have not been taken into consideration by the legislators. The Model Law has laid down the most widely accepted practices in cross-border insolvencies and has been adopted by 44 states. If India is to adopt the Model Law, then the assistance sought in India by a foreign court or a foreign representative in respect of a foreign proceeding,and the converse in connection with proceedings under the 2016 Code, would be granted. Further, several corporate debtors have establishments in more than one country. While facing insolvency, the foreign proceedings and the proceeding under the IBC may be carried out concurrently without giving rise to a conflict of laws. The impact of globalization on the economy has direct and consequent impact on the restructuring of companies under financial distress, which in turn impacts the nation’s economy. In June this year, the Government of India released the suggested draft chapter on cross-border insolvency as an addition to the IBC.

Provisions of the Model Law and the consequent impact on the Indian scenario, if adopted

The Model Law specifies the following key components for the orchestration of cross-border insolvencies:

(a)  Access to courts in an enacting state;

(b)  Recognition of foreign proceedings, as either a foreign main proceeding or a foreign non-main proceeding;

(c)  Relief that is to be given for the fair and orderly conduct of the cross-border insolvency; and

(d)  Co-operation and co-ordination between courts where the debtor’s assets are situated and the court in which concurrent proceedings are being carried out. 

The Model Law lays down circumstances when the foreign proceedings are to be recognized and how they should be recognized. The recognition is granted based on where the debtor has its center of main interests (COMI) which is in turn dependent on its place of establishment. Further, the proceedings may be recognized as foreign main proceedings if the debtor has its COMI in the jurisdiction of the country in which the proceedings are being carried out, or as a foreign non- main proceedings if the COMI is not in that country. COMI has not been defined under the Model Law. However, there is a rebuttable presumption that the COMI of a debtor is where the debtor’s registered office is located. The court is not compelled to recognize a proceeding unless the COMI has been proved. Chapter 15 of the US Bankruptcy Code facilitates co-operation between US and foreign courts and to clarify administration of international insolvency proceedings. It is not a blanket rule that recognition is granted to all insolvency proceedings;rather it is the discretionary power of the court or tribunal in which recognition is being sought. For instance, the US courts have been denied recognition on several occasions such as in the case of SEC v. Stanford International Bank. The rebuttable presumption against the COMI being in the place of the registered office, is contingent on the ascertainment of the COMI by third parties objectively. Hence, a major issue that will be faced by Indian courts and tribunals is ascertaining the COMI to grant the recognition of insolvency proceedings as either foreign main proceedings or foreign non-main proceedings.

The relief that is provided for after recognizing foreign-main proceedings is generally in the form of granting a stay on local proceedings by creditors against the debtor undergoing insolvency. This suggests that a moratorium would be imposed on the assets of the debtor and the administration of the debtor’s assets in that State are to be entrusted to the foreign representative. Article 21 of the Model Law is similar to the provisions of section 14 of the IBC, thereby not prejudicing the assets of the debtor, whether in a foreign main proceeding or a foreign non-main proceeding. This confers certain automatic and discretionary rights to the foreign proceedings, thereby making the recovery of the local assets of the debtor by the foreign representative uncomplicated.  Furthermore, additional discretionary relief may also be granted by the court or tribunal. The extent of the relief is to be determined based on the principle of comity and assistance, although the Model Law does not hinge on the need for reciprocity. This implies that if the Model Law is to be incorporated into Indian law, then Indian representatives (resolution professionals or interim trustees) cannot seek access to foreign insolvency proceedings of a state that has not adopted the Model Law. Nevertheless, a state that has not adopted the Model Law may seek access to the insolvency proceedings of a State that has adopted it. The principle of reciprocity that has currently been included in the IBC may however continue to exist even if the Model Law is to be adopted.

The Road Ahead for the Indian Insolvency regime

The Government of India has proposed to adopt the Model Law, with certain modifications,into the existing IBC. This would facilitate the access to insolvency proceedings that are being carried out in foreign jurisdictions, accordingly reducing the burden on the judiciary, such that the objectives of completing the resolution process in a time- bound manner and to maximize the value of the assets of the corporate debtor are upheld. The suggested draft chapter does not provide for the bankruptcies of individuals, which restricts the scope of cross- border insolvencies to corporate debtors. Reciprocity per se is not a requirement of the Model Law, but adopting the same will not restrict India from preserving the current provisions pertaining to cross- border insolvencies.

Cross- jurisdictional issues are bound to arise considering the difficulties that courts in the US, UK and other countries adopting the Model Law have faced while proving the COMI of the corporate debtor. The application for the recognition of foreign proceedings in India will have to be made to the NCLT by the foreign representatives pursuant to the Model Law as the tribunal is not compelled to automatically recognize the concurrent proceedings. Foreign main proceedings are granted recognition by courts or tribunals once the foreign representative satisfies the burden of proving where the COMI of the corporate debtor is located. Broad parameters for the use of discretionary powers of the tribunal in respect of granting moratorium in case of foreign non-main proceedings need to be laid down to prevent an abuse of the powers. The adoption of the Model Law will no doubt help in the ease of doing business and significantly increase the inflow of FDI. Finally, the Model Law should be adopted in order to achieve harmonization of insolvency laws, through international co-operation and co-ordination.  

Aastha Kaushal & Saurav Gurjer

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