[Vishrut Kansal is a Principal Associate at the Delhi office of Shardul Amarchand Mangaldas, and Mohd Fahad Ansari is a 4th year B.A., LL.B. (Hons.) student at NUSRL Ranchi]
In cross-border commercial transactions that involve parties from India and other jurisdictions, it is common to include a clause which specifies that any dispute arising shall be subject to the exclusive jurisdiction of the courts of specific jurisdiction. If such jurisdiction is not India, a scenario may arise where the aggrieved party may seek to initiate insolvency proceedings against the defaulting party in that identified jurisdiction and not take recourse to tribunals in India. This results in a conflict, as courts in certain jurisdictions (viz., Hong Kong, England and the European Union) uphold the exclusive jurisdiction clause (EJC), while Indian courts and tribunals may not. Under Indian jurisprudence, if this scenario unfolds where the aggrieved party takes recourse to foreign courts or tribunals, then any judgment or order that results from such proceedings in foreign jurisdictions may not be considered as conclusive or enforceable in India if such proceedings are held to be based on a refusal to recognize the law of India in cases in which such Indian law is applicable – which is one of the criteria that is outlined in section 13 of the Civil Procedure Code, 1908 (CPC) for conclusiveness of foreign judgements.
This post argues for India’s acknowledgment of the EJC, examining how the legal system must seize the chance to adopt it. It further explores the development of the EJC in prominent legal systems across the globe.
Key Factors Shaping Forum Selection in Cross-Border Insolvency
The choice of forum is typically guided by two key factors: first, selecting a jurisdiction that enables the parties to optimize their advantages while minimizing explicit costs and procedural complexities; and, second, opting for a jurisdiction that aligns with the convenience of the parties involved.
The 2020 Report on the Rules and Regulations for Cross-Border Insolvency Resolution commissioned by the Insolvency and Bankruptcy Board of India (IBBI) highlights specific circumstances where parties tend to favour foreign jurisdictions over domestic ones. These include, for instance:
a) when the corporate debtor possesses assets abroad;
b) when the insolvency framework abroad is more effective; and
c) when different groups of debtors receive preferential treatment based on the established priority rules applicable to them.
For insolvency proceedings to yield practical results, particularly when managing assets across multiple jurisdictions, adjudicating bodies should consider the parties’ intentions when establishing jurisdiction, thereby allowing flexibility to accommodate cross-border complexities.
The Impact of Jurisdiction in Insolvency: Insights from the Excel Metal Ruling
For the first time in an insolvency proceeding, India applied the EJC in the matter of Excel Metal Processors Limited v. Benteler Trading International GMBH. This ruling of the National Company Law Appellate Tribunal (NCLAT), New Delhi, was based on two key considerations.
To begin with, the relevant agreement contained a clause stating that “only the Court in Germany has jurisdiction over any suit or case.” However, the tribunal determined that insolvency proceedings do not come under the definition of a“suit”, “litigation”, or a “money claim”, and do not involve a recovery (which is an individual effort by the creditor to recover the dues through a process that has creditor and debtor on opposite sides), but rather is a resolution so that company does not default on its dues. However, one can argue that the judgment focused narrowly on interpreting the term “suit” and did not delve into the broader scope of the term “case”, which ideally warranted a more expansive analysis. As a result, the ruling remains highly fact-specific, and can perhaps be easily differentiated if the term “suit” is substituted by words such as “legal proceedings”, for instance, in otherwise similar scenarios.
Black’s Law Dictionary defines a “legal proceeding” as any action permitted or governed by law, initiated in a court or legal forum to assert a right or seek a remedy. In the Indian context, insolvency cases brought before the National Company Law Tribunal (NCLT) or appellate bodies derive their authority from the Insolvency & Bankruptcy Code, 2016 (Code), thereby falling within the ambit of legal proceedings. Moreover, Indian courts have unequivocally affirmed that insolvency proceedings are encompassed within the definition of “legal proceeding”.
Moreover, the tribunal concluded that, in accordance with section 60(1) of the Code, the existence of a registered office in Mumbai grants the NCLT, Mumbai (which is constituted pursuant to section 408 of the Companies Act 2013) the authority to exercise jurisdiction. In this regard, the tribunal also held that the party cannot derive advantage of the terms of the contract to exclude the jurisdiction of NCLT (or appellate authorities) which flows from said provisions of applicable Indian laws. However, the tribunal did not delve into the potential for the corporate debtor to possess assets or otherwise have a centre of main interest in a foreign jurisdiction, such as Germany. Considering the growing significance of cross-border insolvency proceedings in key jurisdictions and the participation of international creditors, the tribunal should have examined this dimension in greater depth.
Global Recognition of Exclusive Jurisdiction Clauses in Insolvency
Recently, the courts in Hong Kong have acknowledged the importance of EJC. Not only this, courts of England and the European Union have also extended recognition to EJCs, albeit with fulfilment of specific conditions. The Hong Kong judiciary ruled that, unless compelling factors are present, which includes potential insolvency implications for third parties or disputes that are frivolous or amount to an abuse of process, the EJC should generally be upheld. The court further noted that its discretion to override such clauses should primarily hinge on matters of public policy rather than private contractual terms. The court went on to held that in cases which involves forum non-conveniens, the court should refrain to entertain insolvency petitions, even if it has proper jurisdiction to do so.
Article 6(1) of the Recast European Insolvency Regulation (REIR), guided by the principles of the “closely connected” and “deriving directly” tests, establishes that jurisdiction should be given to those entities which are most closely associated with the insolvency proceedings. Based on this framework, English courts have ruled that those EJCs deserve appropriate recognition which align with these principles.
IBC’s Cross-Border Framework: Delayed Implementation and Limited Scope
While significant strides have been made to simplify insolvency procedures in India, the Code still lacks provisions for initiating proceedings where debtors hold adequate assets to satisfy debts. Initially, the Code overlooked the complexities of cross-border insolvency. To address this gap, the Bankruptcy Law Reforms Committee (BLRC) proposed a framework leading to the inclusion of sections 234 and 235 in the Code.
Section 234 authorizes the Central Government to establish agreements with foreign nations to implement the Code, while section 235 permits the adjudicating authority to request assistance from foreign courts in nations that have such agreements with India. However, these provisions have not yet been notified, which render them non-functional. As a result, a practical regime for cross-border insolvency remains absent. It is also pertinent to highlight that sections 234 and 235 restrict their application to countries with reciprocal arrangements, which limits their scope.
Section 60(1) of the Code designates territorial jurisdiction to file insolvency applications, which specifies that such matters must be brought before the NCLT where the corporate debtor’s registered office is situated. The Code’s primary goals include to ensure a timely resolution process and to maximize the value of assets. Allowing applications to be directly filed in the relevant foreign jurisdiction where the debtor’s centre of main interest is located could align more effectively with these objectives. However, the enforceability of such jurisdictional flexibility faces challenges under Indian law, as evidenced by the Supreme Court’s ruling in Tata Consultancy Services Limited v. SK Wheels Private Limited where, despite the existence of an arbitration agreement specifying the forum for insolvency related dispute, the Court declined to enforce the clause and instead referred the dispute to the NCLT under section 60(5)(c) of the Code. This decision underscores the reluctance of Indian courts to recognize forums other than the NCLT for initiating insolvency proceedings, thereby creating a significant impediment to the enforcement of EJCs in India.
Cross-border insolvency is currently governed by sections 234 and 235 of the Code, which require the establishment of bilateral agreements with foreign nations and a formal request to the corresponding authority. However, despite this structure, if an amendment to section 60(1) is made allowing recognition of EJCs, then it could present a more streamlined pathway, which will help to achieve the Code’s underlying purposes.
Conclusion
The concept of EJCs plays a very important role in cross-border insolvency proceedings, and its recognition would mark significant progress toward broader implementation. Globally, most major jurisdictions engaged in commercial activities with India have already acknowledged the importance of EJCs. However, India is yet to follow the similar path, as its tribunals have declined to uphold such clauses.
Although the Code was enacted in 2016 to facilitate cross-border insolvency proceedings, its provisions remain underutilized even after eight years. In Excel Metal Processors, the NCLAT had a golden opportunity to at least advance the dialogue on EJCs. Rather than addressing the broader implications and specific facts comprehensively, the tribunal adopted a narrow approach as it overlooked the potential to set a precedent or initiate meaningful discussions on the matter.
What is currently needed to enhance the recognition of cross-border insolvency resolutions is perhaps a legislative amendment to section 60 of the Code, if not a full chapter on cross-border insolvency (while bringing sections 234 and 235 in the Code into effect). The recognition of EJCs would be a crucial step in this process and would significantly contribute to the effective integration of cross-border frameworks within the existing framework of the Code.
– Vishrut Kansal & Mohd Fahad Ansari
