A Critical Analysis of The Proposed Draft Model Law For Cross-Border Insolvency

[Jayesh Karnawat & Kritika Parakh]

The authors are 3rd year students at NLU, Jodhpur.

Abstract

The globalization of business enterprises has evolved with time, leading to businesses having assets and liabilities which are spread over the globe. This, in turn, has raised complex issues and intricacies pertaining to cross-border insolvencies in different situations. For these situations, ascertainment of the law to be applied, the jurisdiction where the proceedings are to be conducted and enforcement of the orders regarding the assets are crucial for the settlement of the dispute. A uniform cross-border insolvency law in different countries would enable a smooth resolution of these complexities. Therefore, the United Nations Commission on International Trade Law adopted in 1997 a Model Law to assist states in framing their cross-border insolvency law. This article discusses the intended transformation of Indian Cross-Border in consonance with the Model Law.

Introduction To The Indian Cross-Border Insolvency Law

The Indian cross-border insolvency matters, which are presently governed by Sections 234 & 235 of the Insolvency and Bankruptcy Code, 2016 [“IBC”] does not provide sufficient and comprehensive legal framework to deal with different types of matters.[i] In order to smoothen the process of cross-border insolvency by increasing the cooperation between the domestic and the foreign courts, and domestic and foreign insolvency professionals, the Insolvency Law Committee[ii] has proposed a draft law which is in consonance with UNCITRAL Model Law of Cross-Border Insolvency, 1997 [“Model Law”]. The adoption of the Model Law in India has been recommended in the past by the Eradi Committee[iii] and the N.L. Mitra[iv] Committee. However, the same has not yet taken the form of legislation. The authors seek to analyse the lacunae in the proposed draft with the hurdles faced by different countries in implementing the Model Law.

Urge For A Comprehensive Framework

The provisions of IBC regarding cross-border insolvency require bilateral agreements with other countries and issuance of request letters to foreign courts leading to delay and uncertainty. Uncertainty further lies with the implementation of bilateral treaties as well because of varying provisions with different nations, which escalates the burden of Judiciary.

Till date neither India has any bilateral agreement with any country, nor there exists any specific provision under the Code of Civil Procedure, 1908 for enforcing foreign insolvency orders (the extant general provisions to recognize and implement foreign judgments and orders on a reciprocal basis given in the Code of Civil Procedure shall apply to insolvency proceedings as well in the interim). A robust framework to deal with cross-border insolvency will lead to ease in doing business resulting into increase in the entry of foreign companies and investment.

Hurdles & Lacunae In The Proposed Draft

The Model Law provides a framework only for individual companies and not for enterprise groups. With the increase in financial integration in the world and increasing multinational companies, the present model framework is expected to have limited applicability.
It is pertinent to note that Part III of the IBC has not been yet notified. This restricts the application of Model Law to corporate debtors only and not to partnerships and individuals. Initially, Singapore had also followed a similar approach. However, in the UK and US, the application of the law is not restricted to corporate debtors.
The proposed draft allows the authority to refuse to take action if it is of the opinion that it is manifestly contrary to public policy. A similar approach has been followed by all the other jurisdictions as well. The proposed draft uses the term ‘manifestly’ in order to narrow down the ambit of ‘public policy’. In the absence of any guidelines to exercise this discretion, the same becomes quite vague and gives a lot of discretion to the authority, which indicates a need to monitor its application by NCLT.
Section 375(3) (b) of the Companies Act, 2012, deals with the insolvency of Unregistered Companies, which may include in its ambit foreign companies as well. According to this provision, an unregistered company may be wound up if it is unable to pay its debts. In the US, Section 220 of the Companies Act, 2006 (US), deals with the insolvency of all the types of enterprises. However, in the UK there is no such provision and insolvency of every type of enterprise is governed by the Insolvency Law only. This multiplicity of provisions leads to the duplicity of regimes and confusion reigns. There is a need to harmonize these sections by introducing necessary amendments to bring all the insolvency proceedings under a common
Section 17 of the proposed draft allows the tribunal to declare moratorium (a legal authorization to debtors to postpone payment) in respect of foreign main proceedings. A foreign main proceeding means a foreign proceeding in the country where the debtor has the center of its main interests, such as its headquarters or its place of incorporation. A foreign proceeding is “non-main” proceeding if it is filed where the debtor has only an establishment or place of operation.

The applicability of Section 17 of the proposed draft to foreign non-main proceedings is still a question. Moreover, if not, the committee has not given satisfactory reasoning for the same.

The draft proposes to provide foreign representatives with direct access to domestic courts. Here one major issue is that India does not allow foreign lawyers and law firms to practice in India.[v] However, the Committee has proposed that foreign representatives similar in nature to insolvency professionals may form a separate class of professionals.
The committee recommended the adoption of the Model Law on the principle of reciprocity. It means that Indian Courts will recognize and execute the foreign court’s judgment, only if that foreign country has adopted similar legislation or entered into a bilateral agreement. However, with subsequent economic development in future and the successful experience of the Model Law’s implementation, this requirement may be withdrawn.

Furthermore, neither the US nor the UK has such a requirement of reciprocity. Such provision would limit the application of the Indian law on cross-border insolvency to specific countries which have similar legislation or bilateral agreement with India, such as Mexico, Romania and South Africa, as mentioned in the Report.[vi]

The proposed draft defines ‘foreign proceeding’ as a proceeding in a foreign country pursuant only to ‘a law relating to insolvency’[vii] [as it is defined in the Model Law[viii]]. However, in contrast, countries like the US and Singapore have given a wider ambit to the definition of ‘foreign proceedings’ by including proceedings governed by law relating ‘to the adjustment of debt’, as well. The Report has failed to explain the reason behind not accepting the broader approach where the Indian Court/tribunal could be provided with an opportunity to solve the matters of debt without commencing the formal corporate insolvency resolution proceedings.
The determination of the Centre of main interests [“COMI”] of the debtor company is crucial because the proceedings initiated in a country where the debtor has its COMI will be foreign main proceedings. However, the Report has not clarified the criterion to determine the COMI of a company, other than the place where the registered office of the company is established. However, companies like MNCs have multiple registered offices and discretion is left with the tribunal to decide. Moreover, no deadline is set to challenge the COMI, as it is set in the US Bankruptcy Code.
The proposed draft does not incorporate the additional mechanism available in the US Bankruptcy Code. For instance, the power to give equitable reliefs as it is provided in Section 105 of the US Bankruptcy Code. Further, with regards to foreign non-main proceedings, the US Court may require the granting of security or bond at its discretion,[ix] thereby strengthening the trust of the creditors by guaranteeing. However, there is no such provision in the proposed draft for India.

Prospective Look

Despite the above-mentioned hurdles in the application of the proposed draft, India waits for the brighter and comprehensive cross-border insolvency regime. Though cooperation with different jurisdictions, legislations and courts is the key for an efficacious implementation, yet there is further need to provide a well-built bundle of tools to the tribunal to provide relief against all kinds of enterprises. Finally, the legislation for cross-border insolvency should be drafted considering the loopholes and hurdles in the proposed draft and those faced by the insolvency regimes in different countries, for a smooth experience of cross-border insolvency proceedings.

[i] Report of the Insolvency Law Committee, Ministry of Corporate Affairs, Government of India, March 2018, p. 5 available at http://www.mca.gov.in/Ministry/pdf/ILRReport2603_03042018.pdf (last visited on 20.12.2018).

[ii] Committee chaired by Mr. Injeti Srinivas, submitted ‘Report of Insolvency Law Committee on Cross Border Insolvency October, 2018’, hereinafter, referred to as “the Report”, available at www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf (last visited on 20.12.2018).

[iii] Committee chaired by Shri Justice V. Balakrishna Eradi, submitted ‘Report of The High Level Committed on Law Relating to Insolvency and Winding Up of Companies 2000.

[iv] Committee chaired by Dr. N. L. Mitra submitted ‘Report of The Advisory Group on Bankruptcy Laws – May 2001.

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