Reciprocity Requirements in India’s Adoption of the UNCITRAL Model Law on Cross Border Insolvency

[Soham Chakraborty is a II year, BA LLB (Hons.) student at NALSAR University of Law, Hyderabad]

The corporate insolvency resolution process (CIRP) of Jet Airways was one of the first instances of cross border insolvency in India. In the case, the National Company Law Tribunal (NCLAT) enabled a Dutch Court Administrator appointed by the Noord District Court in Holland to participate in the meetings of the committee of creditors (CoC) besides giving effect to a “Cross Border Insolvency Protocol” entered into between the Dutch Administrator and the Resolution Professional. This case gave rise to calls for India to accept the UNCITRAL Model Law on Cross Border Insolvency, 1997 framed by the United Nations Commission on International Trade Law (UNCITRAL). The Government had already set up the Insolvency Law Committee (ILC) on Cross-Border Insolvency headed by Mr. Injeti Srinivas to make recommendations on the adoption of the Model Law. Of the many recommendations suggested by the Committee was one that a condition of reciprocity be adopted in the cross border provisions. This post focuses on this particular recommendation and assesses the ramifications of accepting such a proposal in in view of the ongoing proceedings in Jet Airways.

Existing Mechanism for Cross-Border Insolvency under the Insolvency and Bankruptcy Code, 2016

As mentioned in a previous post, although the Insolvency and Bankruptcy Code, 2016 (IBC) does not discriminate between foreign and domestic creditors, permitting both to commence and take part in the proceedings under the IBC gives rise to complexity. The current regime lacks mechanisms for an Indian tribunal or court to seek assistance from a foreign court or insolvency authority when an insolvency proceeding may have implications across national borders.

The IBC, as it stands now, contains two provisions (sections 234 and 235) that deal with cross-border insolvency. However, under the said provisions, cooperation between India and the said jurisdictions is premised on the existence of a bilateral agreement between them. Currently, India has not entered into a bilateral agreement. Moreover, the said provisions have not yet been notified. This gives rise to several uncertainties for foreign creditors as to the rules of recognition of foreign insolvency proceedings. To make sure there is greater certainty in such cases, it becomes imperative to adopt the Model Law to effectively deal with cases like Jet Airways, which may arise in the future.

Reciprocity: What is it?

The Model Law envisages cooperation between different jurisdictions in cases involving companies having assets in more than one jurisdiction or debtors having creditors who are not from the jurisdiction where the insolvency proceedings are taking place. Towards this end, it requires that courts in one jurisdiction accord recognition to proceedings in another jurisdiction. To ensure predictability and certainty for investment and trade, it does not provide for any reciprocity requirement for according such recognition. However, of late some jurisdictions, while adopting the Model Law have included reciprocity requirements. Although the term reciprocity may be used in a number of ways, the two major ways it is used in countries adopting the Model Law are set out below

Substantive Reciprocity: The courts will recognize foreign proceedings from only those jurisdictions which accord similar recognition to its proceedings. These types of reciprocity requirements may require that proceedings from only those foreign countries can be recognized which have either entered into special treaties with them or have been notified by the authorities as reciprocating jurisdictions.

Legislative Reciprocity: The courts in one jurisdiction will accord recognition to foreign proceedings from only those jurisdictions which have adopted either the Model Law or similar legislation.

Reciprocity Requirements: How Beneficial Are They?

The ILC Report recommends the adoption of a ‘legislative reciprocity’ clause. Thus, it would mean that the adjudicating authority in India will recognize proceedings carried on in foreign countries only if the country in question has adopted the Model Law or any similar legislation. This is evident from section 1(4)(a) of the proposed provisions set out under Part Z of the ILC Report. In addition to this, section 1(5) of the proposed provisions also includes countries with whom the Government may enter into agreements for enforcing the provisions of the IBC. According to the UNCITRAL website the Model Law has been adopted in just 46 out of 193 countries that are members of the United Nations. Thus, such a provision of a legislative reciprocity will limit the adjudicating authority’s power to recognize foreign proceedings to only these 46 countries. The ongoing Jet Airways case involves foreign proceedings carried on in the Netherlands. However, the Netherlands has still not adopted the Model Law. Thus, had the recommendations of the ILC been accepted before the initiation of the Jet Airways case, it would have seriously limited the power of the adjudicating authority to bring about a resolution of the case in cooperation with the Dutch court.

The ILC report cites South Africa, Mexico and Romania as three jurisdictions which have included a reciprocity requirement in their legislation incorporating the Model Law. Article 280 of the Mexican Insolvency Law of 2000 which contains the reciprocity requirement has been interpreted by the Mexican Court in Xacur Eljure to mean that:

  • An international treaty on commercial insolvency must exist;
  • The cross border insolvency provisions will be applied only when the existing treaty on insolvency does not provide an alternative; and
  • International reciprocity must exist due to this treaty
Thus, the requirement of the entering into a treaty for a foreign jurisdiction to be classified as a reciprocating state brings us back to sections 234 and 235 of the IBC which envisage the entering of such treaties. Similarly, Article 18 of the Romanian Law provides that foreign proceedings will be accorded recognition only on the existence of a reciprocal arrangement for recognition of decisions in the foreign country.

South Africa was one of the first countries to have adopted the Model Law in 2000. However, under the same, the recognition of foreign proceedings could only be extended to countries that had been designated as such by the Minster. As of now, no such countries have been designated and the Act incorporating the Model Law in South Africa, though adopted in 2000, still lies dormant. Thus, it is evident that these three countries which have been cited in the Report provide no guidance as to how the inclusion of a reciprocity agreement will help India develop a better cross-border insolvency regime.

Several countries like Nepal, Bangladesh, Germany, Netherlands, some countries of ASEAN and the European Union with whom India shares large trading relations are yet to adopt the Model Law. Thus, the legislative reciprocity provision would refuse recognition to foreign proceedings in such countries. This will cause serious disadvantages as many multinational companies have assets in both India and these countries and also many companies registered in India such as Jet Airways have creditors, financial and operational, situated in these countries. Thus, such a provision will defeat one of the key objectives of the Model Law, i.e., fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the corporate debtor.

Adopting the Model Law with a legislative reciprocity requirement will be akin to punishing the stakeholders in an insolvency proceeding for the actions of the Government. It is notable to mention that many countries have not adopted the requirement of legislative reciprocity in their adoptions of the Model Law. The Cross-Border Insolvency Regulations, 2006 of the UK and Chapter 15 of the US Code make no mention of any reciprocity requirements.

Conclusion

Considering all these factors, it is advisable that India adopts a Model Code without any reciprocity requirements. The Model Code provides ample checks and balances to prevent abuse of the entire process. Under the Model Law proposed by the UNCITRAL Working Group, Article 17 allows the adjudicating authority to ensure that the court in the foreign proceeding is acting under the correct jurisdiction and also allows for “modification or termination  of  recognition  if  it  is  shown  that  the  grounds  for granting it were fully or partially lacking or have ceased to exist”. The adjudicating authority may also refuse to recognize the foreign proceeding if such recognition will go against the public policy of the recognizing State under Article 6 of the Model Law. Because of all these factors, there is no need for a reciprocity requirement which will unnecessarily restrict the ambit of the Model Law, preventing the adjudicating authority from recognizing the foreign proceedings from certain countries even if they satisfy all other requirements.

The UNCITRAL Working Group gave countries the freedom to incorporate reciprocity provisions. It is this consideration as well as other considerations of overall economic development and development of the insolvency infrastructure in India that the ILC decided to recommend adoption of reciprocity requirements. However, as this post points out, the inclusion of such a provision will be detrimental to India’s economic development as well as defeating the entire purpose of adopting the Model Law. In fact, India’s adoption of the Model Law without any reciprocity provision may act as an impetus for other countries in the region to do the same. Thus, it  is important to see that the wrong message is not sent out to these countries thus resulting in consequences which defeat the very purpose of adopting the Model Law. 

Soham Chakraborty

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