The Limits of Comity: Refusal to Recognise Foreign Insolvency Proceedings

[Aditi Mozika is a IV year B.Sc. LL.B. (Hons.) student at Gujarat National Law University]

The recent decision of the National Company Law Appellate Tribunal (NCLAT) in the Jet Airways case has ushered in the era of cross border insolvency in India.[1] Accordingly, the Resolution Professional and the Dutch Trustee – the administrator in bankruptcy of Jet Airways appointed by the Dutch Bankruptcy Court – have come up with a ‘Cross Border Insolvency Protocol’ to govern the resolution process of Jet Airways and to extend cooperation to each other in the process.[2]

History of Cross-Border Insolvency in India

In October 2018, the Insolvency Law Committee constituted by the Ministry of Corporate Affairs submitted its Report, wherein it recommended amendments to the Insolvency and Bankruptcy Code, 2016, as the existing provisions in the Code (sections 234 and 235) did not provide a comprehensive framework to effectively deal with cross-border insolvency matters.[3] It suggested the adoption of the provisions of the UNCITRAL Model Law on Cross Border Insolvency, with certain modifications to suit the Indian insolvency environment. The Model Law is designed to provide an internationally uniform approach to the recognition of foreign insolvency proceedings based upon the concepts of ‘foreign main proceedings’ and ‘foreign non-main proceedings’.[4] Recognition is based on the principle of comity, which is “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.”[5]

The Interpretation of “Public Policy”

The Insolvency Law Committee recommended the inclusion of a new chapter- Part Z- in the Code to specifically govern cross-border insolvency in India. The proposed law bestows upon the National Company Law Tribunal (NCLT) the power to grant recognition to foreign proceedings and describe them as either a main proceeding (where the debtor has its “centre of main interests”, or COMI) or a non-main proceeding (where the debtor has an establishment or place of operation). Clause 4 of the draft Part Z mirrors article 6 of the Model Law that provides countries receiving applications for recognition the right to deny recognition or relief, if such action would be “manifestly contrary to the public policy” of the country.[6]

The UNCITRAL Guide to Enactment explains that article 6 does not attempt to define public policy because the notion of public policy is grounded in national law and may differ from state to state.[7] Further, it recommends that the interpretation of the term must be narrow.[8] Accordingly, the Model Law states that the relevant action must be “manifestly” contrary to public policy for a court to deny recognition under this provision. Several countries like the United States (US),[9] United Kingdom,[10] and South Africa[11] have retained the word “manifestly”. However, certain countries such as Singapore[12] have omitted it. The Committee noted that the Indian law should also follow a narrow stance and thus recommended retention of the term.[13]

How the Indian courts would interpret “public policy” when actually faced with an application for recognition is yet to be seen. According to the Committee, the judiciary must rely on two considerations: existing international jurisprudence along with domestic interpretations of public policy.[14] This post seeks to provide an overview of the existing international jurisprudence, focusing mainly on the jurisprudence that has developed in the US.

Existing International Jurisprudence

In the few cases in the US to date in which attempts have been made to avail public policy violations and invoke § 1506 of the Bankruptcy Code (Public Policy Exception), courts have to a great extent respected the intent of the Congress and almost always rejected the claims, indeed regarding the provision as a “safety valve”.[15] The District Court for the Eastern District of Virginia in Qimonda AG[16] has delineated a three-part test to assist courts in determining whether an action is manifestly contrary to US public policy. First, the mere existence of a conflict between foreign and US law, in the absence of other considerations, “is insufficient to support the invocation of the public policy exception.” Second, a court should refrain from submitting to a foreign proceeding if “the procedural fairness of the foreign proceeding is in doubt or cannot be cured by the adoption of additional protections.” Lastly, “[a]n action should not be taken… where taking such action would frustrate a US court’s ability to administer the Chapter 15 proceeding and/or would impinge severely a US constitutional or statutory right.”[17] A District Court in Ephedra Prods. Liability Litig. held Canadian procedures to not be contrary to public policy even though they were deficient in certain common components of a US proceeding, such as a jury trial.[18] Likewise, the fact that the British Virgin Islands proceeding did not provide unfettered access to court records did not warrant the conclusion that recognizing the proceeding would be contrary to public policy.[19]

On the opposite side of the spectrum, it is observed that an action that would thwart a US court’s ability to administer the proceeding or encroach upon constitutional or statutory rights would violate public policy and merit the invocation of the exception.[20] In Gold & Honey,[21] recognition of the foreign proceeding was refused due to violations of US procedural requirements in the appointment of the representatives. In Toft,[22] the Bankruptcy Court for the Southern District of New York refused to recognise a German insolvency proceeding as a foreign main proceeding, on the ground that the chapter 15 proceeding had been initiated by the foreign representative solely to gain access to a German debtor’s email accounts stored on US servers. The Court held that “the relief sought would directly compromise privacy rights subject to a comprehensive scheme of statutory protection, available to aliens, built on constitutional safeguards incorporated in the Fourth Amendment as well as the constitutions of many States.

In Vitro, the Court of Appeals for the Fifth Circuit had occasion to decide a case involving the enforcement of a Mexican plan of reorganisation that extinguished objecting creditors’ guarantee claims under an indenture issued in the US against non-debtor subsidiaries of the debtor.[23] In addressing this issue, the Fifth Circuit first noted that a “central tenet of Chapter 15 is the importance of comity in cross-border insolvency proceedings.”[24] However, the Court went on to affirm the decision of the Bankruptcy Court to enforce the plan, holding that the relief claimed was not warranted under §§ 1521, 1507 and 1506 of the Bankruptcy Code.[25] The Court also held that the protection of third-party claims in an insolvency proceeding is a fundamental public policy of the US, and that because the Mexican plan does not recognise such rights, the “plan is manifestly contrary to such policy of the United States and cannot be enforced here”. Further, in Jaffé, the Court of Appeals for the Fourth Circuit broadly invoked the public policy defence in a situation where relief under § 1521 would have imposed relief on other creditors not available within the US law.[26]

The most recent decision involving this aspect was delivered in 2019 in Zetta Jet Pte Ltd.[27] Here, the Singapore High Court had initially granted only limited recognition to foreign insolvency proceedings, on the ground that the trustee flouted a Singapore injunction by pursuing US bankruptcy proceedings, thereby undermining the administration of justice in Singapore. Subsequently, the injunction was discharged by the consent of all parties, after which it was observed by the High Court that “[n]o reason remains to deny recognition on the basis of public policy following the consensual discharge of the injunction.” Although the breach of the injunction formed a ground for contempt, the Court held that this would not in itself form a ground to continue refusal of recognition under the Singapore Model Law.

Conclusion

As manifested in the above-mentioned cases, the burden to surmount the presumption in favour of recognition of a foreign proceeding based on the public policy exception is difficult to meet. It is not sufficient that a different result or outcome would be allowed to the creditor under the domestic law. Likewise, even the fact that there is a conflict between the domestic law and the foreign law in question is not enough. It is only in cases depicting elements of egregiousness and lack of fundamental fairness that this burden has been and can be met.

As the Insolvency Law Committee recommends retention of the term “manifestly” in relation to the public policy exception, it will become mandatory that Indian courts follow suit, applying this provision narrowly and invoking the exception only where a fundamental public policy is implicated. Indeed, as the proposed Part Z, or the law on cross-border insolvency, is based on the principle of comity, applying clause 4 to deny recognition to a foreign proceeding or a foreign ruling in a broad array of circumstances would defeat the main purpose of Part Z, which is the promotion of international cooperation and collaboration.

– Aditi Mozika

[1] Jet Airways (India) Ltd. v. State Bank of India , CA (AT) (Insolvency) No. 707 of 2019 (NCLAT, 26 September 2019).

[2] Ibid.

[3] Ministry of Corporate Affairs, ‘Report of Insolvency Law Committee on Cross Border Insolvency’ (2018), at p. 5.

[4] Neil Hannan, Cross-Border Insolvency: The Enactment and Interpretation of the UNCITRAL Model Law (1st edn, Springer Singapore, 2017), at p. 23.

[5] Hilton v. Guyot 159 US 113, 164 (1895).

[6] Ministry of Corporate Affairs, ‘Report of Insolvency Law Committee on Cross Border Insolvency’ (2018), at para. 3.1.

[7] UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment (1997) U.N. Sales No. E.99.V.3 [30].

[8] Ibid.

[9] 11 U.S.C. §§ 1506 (2016).

[10] Cross-Border Insolvency Regulations art 6 (2006) (UK).

[11] Cross-Border Insolvency Act s 6 (2000) (SA).

[12] Companies Act, art 6, tenth schedule (2006) (Singapore).

[13] Ministry of Corporate Affairs, ‘Report of Insolvency Law Committee on Cross Border Insolvency’ (2018), at para. 3.4.

[14] Ibid.

[15] Re Basis Yield Alpha Fund (Master) 381 BR 37 (Bankr. SDNY 2008); See also, Re Ernst & Young, Inc. 383 BR 773, 781 (Bankr. D Colo 2008).

[16] Re Qimonda AG Bankr. Litig. 433 BR 547 (EDVa 2010); Re Qimonda AG 462 BR 165 (Bankr. EDVa 2011) (Appeal); See also Look Chan Ho (ed), Cross-Border Insolvency: A Commentary on the UNCITRAL Model Law (4th edn, Global Business Publishing 2017), at p. 623.

[17] Qimonda AG Bankr. Litig. (above).

[18] 349 BR 333 (SDNY 2006).

[19] Re Fairfield Sentry, Ltd. 714 F.3d 127, 139 (2013).

[20] Re Gold & Honey, Ltd. 410 BR 357, 373 (Bankr. EDNY 2009).

[21] Ibid, at 367.

[22] Re Toft 453 BR 186 (Bankr SDNY 2011).

[23] Re Vitro SAB De CV 701 F3d 1031, 1053 (5th Cir 2012).

[24] Ibid.

[25] Ibid.

[26] Jaffé v. Samsung Elecs. Co. 737 F.3d 14 (4th Cir 2013); See also Re OAS S.A., 533 BR 83, 103 (Bankr. SDNY 2015).

[27] [2018] SGHC 16.

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