[By Aashka Zaveri & Aditya Panuganti]
The authors are students of Symbiosis Law School, Pune and National Law School of India University (NLSIU) respectively.
Introduction
India’s first International Financial Services Centre (“IFSC”) was set up in 2015, in Gandhinagar, Gujarat, and christened Gujarat International Financial Tec-City (“GIFT City”). The IFSC was established to transform India into a global financial services hub. While the Union has taken steps to ensure that GIFT City enjoys a predictable and simple regulatory framework, the lack of a robust cross-border insolvency regime in India is a striking lacuna in empowering India’s IFSC.
In this piece, the authors will analyse the current insolvency regime in GIFT-City and highlight the shortcomings inherent in the same. Subsequently, the authors compare the regulatory regimes in Dubai and Hong Kong before arguing for the adoption of a more robust framework in India.
Current Regulatory Regime
Section 31 of the International Financial Services Centre Authority Act (“IFSCA”) gives the Union government the power to exempt financial products, financial services or financial institutions in an IFSC from the application of any other Act, Rules or Regulations passed by the Union. Since the IFSCA has not notified any special provisions relating to insolvency or the bankruptcy process, the Insolvency Bankruptcy Code, 2016 (“IBC”) will apply in IFSCs until specified otherwise.
The IBC is not fully capable of addressing the needs of entities situated within the IFSC. Unlike other jurisdictions, the Indian IFSC neither enjoys a designated insolvency court or tribunal that has exclusive jurisdiction over the Centre, nor a robust cross-border insolvency regime, but continues to rely on the IBC process. Sections 234 and 235 of the IBC provide for bilateral or multilateral arrangements with other countries to bring transnational assets belonging to the corporate debtor within the Code’s purview. This is a far cry from the UNCITRAL Model Law on Cross Border Insolvency framework that was recommended by the Insolvency Law Committee. Uncertainty surrounding the treatment of foreign creditors and the discretion-based system of cross-border insolvency that prevails in India may potentially deter cross-border investment, defeating the IFSC’s stated purpose of being a business-friendly regulatory zone.
There has been a consistent call for adopting the UNCITRAL Model since it is a credible framework that has been widely adopted globally. The UNCITRAL Model Law is founded upon the doctrine of modified universalism– a belief that a court should cooperate in the distribution of a debtor’s assets on a worldwide basis in a single judicial proceeding, subject to such proceedings being consistent with territorial law and public policy
The Model Law would bring about a sense of predictability and certainty for both foreign and domestic creditors. A consolidated Insolvency regime that incorporates the UNCITRAL Model law is essential to bring GIFT City on par with other global financial hubs, and perhaps even surpass them.
A Comparative Perspective
Dubai
The Dubai International Financial Centre (“DIFC”) enacted the DIFC Insolvency Law, Law No. 1 of 2019 to bring about a comprehensive and singular insolvency regime for the DIFC. The new legislation was adopted in the wake of Abraaj Capital’s collapse. The Venture Capital firm, based in Dubai and registered in the DIFC, entered into liquidation in 2019. The firm once managed $14 billion in assets in many emerging markets around the world. After it entered into liquidation in the Cayman Islands, cross-border cooperation allowed the firm to consolidate its assets and preserve their value, ensuring the maximum payout to its creditors.
Dubai adopted the UNCITRAL Model Law in Part 7 of the Insolvency Law in 2019, a year after the Abraaj scandal. It is, however, interesting to note the 2023 Bankruptcy Law applicable to the United Arab Emirates at large, does not include these provisions. This amounts to a situation where the UAE’s onshore insolvency law and its offshore DIFC insolvency regime are different. Such a situation allowed foreign investors and businesses to shed the stigma attached to failed businesses and the insolvency process in the onshore insolvency regime. This allows the UAE to hold off on recognising the principle of comity inherent in the Model Law for onshore insolvency proceedings but ensures that the DIFC enjoys a regulatory regime that improves the ease of doing business and is considered to be a global best practice.
Hong Kong
The Companies (Winding Up and Miscellaneous Provisions) Ordinance (“CWUMPO”) is the applicable Insolvency statute in Hong Kong. The region has not adopted the UNCITRAL Model Law and creditors must rely on the courts’ discretion to apply common law principles to give effect to foreign insolvency proceedings. In Re CEFC Shanghai International Group Ltd, the Court laid down the test for recognising cross-border insolvency proceedings, and Hong Kong courts have also recognized cross-border restructuring proceedings, thus adopting the common law doctrine of universalism in liquidation proceedings.
However, courts can aid foreign insolvency proceedings only to the extent that Hong Kong law allows them to do so. In Joint Administrators of African Minerals Ltd v Madison Pacific Trust Ltd, the administrators of a company sought the recognition of English insolvency proceedings and a stay on the enforcement of securities held by a Hong Kong security trustee. The court affirmed the principles of modified universalism and indicated the courts’ ‘generous’ attitude in recognizing and assisting foreign liquidation proceedings. However, it noted that the relief sought by the UK-based administrators could not be granted. The Court held that since no Hong Kong legislation or common law principle provides an equivalent to ‘administration’, the relief could not be granted. The administrators had not argued their case on the principles of equity but rather sought the court’s recognition and assistance under the principles of modified universalism.
Article 21 read with Article 25 of the UNCITRAL framework provides courts with the power to order a stay on the execution of a debtor’s assets upon a request by a foreign representative. Had Hong Kong adopted the Model Law, Madison could have been decided differently- an outcome that would have given effect to the principle of modified universalism in spirit.
The Way Forward
Dubai and Hong Kong are leading Financial Centers in the Middle East and Asia respectively. A comparison of these two regulatory regimes is instructive in developing a regulatory framework for Indian IFSCs.
In Dubai, the DFIC enjoys a dispute resolution system based on common law, similar to India’s Corporate Insolvency Resolution Process (CIRP), which is separate from the law governing other parts of the UAE. The DIFC regime focuses on treating distressed enterprises as going concerns rather than forcing them towards liquidation. This has ensured that the DFIC is a consolidated and comprehensive offshore Financial Centre dedicated to serving the needs of its international clientele. India should chart a path that is similar to the Dubai experience rather than the Hong Kong scheme. India’s courts are already burdened by heavy caseloads, with judicial pendency posing a significant hurdle in improving the ease of doing business in India. With the IFSC attracting clients with global portfolios, a distressed enterprise may face insolvency proceedings in multiple countries with assets spread across multiple jurisdictions, as seen in the Abraaj case.
Akin to the situation in the UAE, India does not need to adopt the UNCITRAL Model Law for the country at large, it can make it applicable only to the IFSCs. Since only 63 jurisdictions have adopted the UNCITRAL Model law to date, such a framework can act as a hedging mechanism against the fact that the success of the Model law is dependent on widespread adoption and adherence to the principles of comity.
The Jet Airways saga is an apposite example to argue for a clear, and effective cross-border insolvency regime that avoids the pitfalls of Hong Kong’s common law approach. In 2019, the Mumbai bench of the National Company Law Tribunal held that insolvency proceedings initiated in the Netherlands and an order passed by the Dutch District Court were a nullity ab initio and that the Dutch Court did not have jurisdiction over the matter since Jet Airways’ registered office and place of business was in India. The Tribunal further reasoned that sections 234 and 235 only allowed for giving effect to an agreement between India and another country and that there was no such agreement between India and the Netherlands. In September of the same year, the National Company Law Appellate Tribunal (“NCLAT”) disposed of the matter by allowing the Dutch Administrator to attend the Committee of Creditors’ meeting, and giving its sanction to the Protocol/Agreement agreed upon between the Resolution Professional and the Dutch Administrator. The NCLAT did not comment upon the NCLT’s reasoning.
The NCLT’s reasoning indicates that Indian courts’ approach to international insolvency proceedings could be bogged down by the limitations of the IBC and a desire to protect Indian creditors. A dedicated dispute resolution mechanism that empowers the courts to recognize proceedings in other jurisdictions without being forced to allow creditors to initiate another set of proceedings in India will be a step forward in ensuring that the IFSC regulatory framework is robust and easy to navigate.
Conclusion
This piece puts forth arguments for the enactment of a robust cross-border insolvency framework applicable to IFSCs in India. The authors described the application of the current regulatory regime in India to argue the adoption of a cross-border insolvency framework is essential for Indian IFSCs. The examples of the Dubai International Financial Centre and the regulatory regime in Hong Kong present two alternatives that India can adopt. The Dubai framework ensures predictability and certainty and is better aligned with the principles of modified universalism than Hong Kong’s framework. The recent Jet Airways saga is an appreciable step in the right direction but also serves as an indication that India may suffer from the same shortcomings in Hong Kong. Making the UNCITRAL Model Framework or introducing a robust cross-border insolvency regime applicable to IFSCs is the need of the hour.