[Rahul Kanoujia and Tharun Chowdary are 3rd-year law students at Gujarat National Law University]
Chapter 15 of the United States (US) Bankruptcy Code provides a framework through which bankruptcy courts recognize foreign insolvency proceedings. In 2005, the US adopted the Model Law on Cross-Border Insolvency introduced in 1997 by the UNCITRAL to encourage the treatment of multinational bankruptcy as a single process. This way, bankruptcy courts of various countries assist each other in a single proceeding instead of initiating separate insolvency cases in multiple countries. The objectives of this Model Law are to enhance co-operation among countries, ensure legal certainty of trade and investment, efficient administration of cross-border insolvencies, and protection of the value of the debtor’s assets.
The US Bankruptcy Code, section 1517, provides for an order granting recognition to a foreign proceeding as a foreign main proceeding, if the petition according to section 1504 meets the requirements of section 1515. This requires that a foreign representative must file a petition before the court for recognition of a foreign proceeding along with a certified copy of the judgment commencing the foreign proceeding and appointing the foreign representative, a certificate affirming the existence of such foreign proceeding by the foreign court, and a statement identifying all foreign proceedings with respect to the debtor.
Recognition of India’s Proceeding
On 4 November 2019, the U.S. Bankruptcy Court for the District of Delaware recognized the case of SBI v. SEL Manufacturing Company Limited pending before the National Company Law Tribunal, Chandigarh Bench as a foreign main proceeding within the meaning of section 1502(4). This recognition was given owing to the petition made by the Foreign Representative, indicating India as the Centre of Main Interests of SEL Manufacturing Co. Ltd., i.e., the foreign debtor. This is the first instance where the Indian Insolvency and Bankruptcy Code, 2016(IBC) was recognized under Chapter 15 of the US Bankruptcy Code.
The Court held that recognition of the Indian proceeding as a foreign main proceeding is not contrary to the public policy of the United States. Further, the Court stated that the Foreign Representative and the Foreign Debtor are entitled to all the reliefs available under section 1520, without limitation, so as to protect the assets of the Foreign Debtor and the interests of its creditors.
Consequently, sections 361 and 362of the US Bankruptcy Code provide adequate protection towards the property of the debtor within the territorial jurisdiction of the United States. Section 361 empowers the court to order the trustee of a property to make periodic cash payments to an entity which would result in the decrease in the value of an entity’s interest in such property. Section 361 of the US Code is in consonance with section 125 of the IBC, which provides for the appointment of an insolvency professional as the bankruptcy trustee.
Sections 363, 549 and 552 of the US Code apply to a transfer of the interest of the debtor in property to secure the creditors’ interest over such property. In addition, the foreign representative may operate the debtor’s business and exercise the rights and powers of a trustee, unless ordered otherwise by the court. This is in consonance with section 25 of Part II of IBC, which lays down the duties of the insolvency professional. Section 549 of US Code states that a trustee cannot transfer assets after the commencement of the case, if he has the knowledge of the same. This provision is similar to section 14 the IBC, which prohibits the corporate debtor from alienating or transferring any of his assets.
However, the transfer would be considered valid if done upon the authorization of the court, and in cases where the trustee had no knowledge of the commencement of the case, but before the order of the relief passed by the court. By virtue of section 552(b) of the US Code, the securing interest extends to rents, fees, charges, accounts, other payments acquired by the estate following the commencement of the case if the security agreement extends to the property of the debtor acquired before the commencement of the case and to the amounts specified earlier. This provision increases the scope of debt recovery and such an agreement is generally not made between the creditor and the corporate debtor.
With the non-performing assets (NPA) in the Indian banks at an all-time high of US $61.5 billion representing 90% of the total NPA in India, the cross-border recognition of the IBC by the US Bankruptcy Code leads to enhanced recovery in cases where the debtor holds assets in the US, thereby benefitting at least a segment of NPAs. Thus, even if the debtor is declared insolvent by an Indian Court, but there exist any assets in the US, the insolvency professional appointed by the Indian court may act as the Foreign Representative and file a petition for the recognition of the Indian proceeding as a foreign main proceeding, providing relief to the creditors.
The reliefs provided by the US Bankruptcy Code are similar to and in consonance with the IBC. However, the relief sought by the party cannot be enforced in the US if it differs significantly from the relief that would be available under the US law.
The Jet Airways Case: First Indian Cross-Border Insolvency Case
Similar to the recognition given to SEL Manufacturing by the US, the National Company Law Appellate Tribunal (NCLAT) in Jet Airways v. SBI allowed the Dutch administrator to be a part of the Jet Airways’ Committee of Creditor meetings and cleared the way for cross-border insolvency protocol for Jet Airways. The NCLAT ordered for parallel insolvency proceedings in India and the Netherlands. The appellate tribunal also asked the Indian resolution professional to cooperate and reach an agreement with Dutch creditors.
Such cross-border recognition given by countries facilitates bankruptcy proceedings by imposing moratorium abroad and assisting the resolution professional in that jurisdiction. It also helps in avoidance of multiple proceedings, shifting the focus to resolution.
The reliefs provided under section 1520 of the US Code, being similar to those under the IBC, do not conflict with each other. Thus, it can be safely concluded that the recognition of Indian proceeding as a foreign main proceeding under Chapter 15 of the U.S Bankruptcy Code is an effective tool to recover loans from assets located in the US. Moreover, such recognition is not only in the interest of the creditors, but also the Indian economy, as it provides relief against the rising trend of NPAs in the banking sector. The recognition does not affect the Indian proceeding, and in fact, gives more clarity as to the resolution plan.
– Rahul Kanoujia & Tharun Chowdary