Cross-Border Insolvency Problem in India: The Jet Airways Conundrum

[By Shantanu Lakhotia]

The author is a student of Jindal Global Law School, Delhi and can be reached at shantanulakhotia@gmail.com.

Introduction

Defunct airlines, Jet Airways has a gross debt and liability that adds up to more than Rs. 36,000 crores. This includes money owed to both domestic as well as foreign lenders, employees, vendors etc. However, currently, the major issue that is critically being debated in the National Company Law Appellate Tribunal (“NCLAT”) is regarding the question of jurisdiction of the bankruptcy court in Netherlands to try matters as well as pass orders of a company registered and incorporated in India. The present article will provide a history of the account that led to such a dispute being raised in the NCLAT as well as try to provide a possible answer to the same.

History

In June 2019, a consortium of banks led by State Bank of India well as other creditors had approached the National Company Law Tribunal (“NCLT”), seeking declaration of Jet Airways as bankrupt and to initiate Corporate Insolvency Resolution Process against it.

During the hearing scheduled on 20th June 2019, NCLT was apprised of the fact that in April 2019, two European creditors, H.Esser Finance Company and Wallenborn Transport had filed a bankruptcy petition in the Noord-Holland District Court of Netherlands, against Jet Airways citing unpaid claims worth nearly Rs. 280 crores. The Dutch Court, claiming jurisdiction under Article 2(4) of the Bankruptcy Court of Netherlands, had passed an order dated 21st May 2019, declaring Jet Airways bankrupt and had ordered seizure of one of Jet Airways’ Boeing 777 aircraft that was parked in the Schiphol airport in Amsterdam.

The Administrator appointed by the Noord-Holland District Court to manage the assets of Jet Airways had approached the NCLT, requesting it to withhold the bankruptcy proceedings going on in India, as a competent court in Netherlands had already initiated the same proceeding against Jet Airways in Netherlands. The Administrator raised the contention that if two parallel proceedings take place, it would lead to a great detriment to the Creditors of Jet Airways. The NCLT refused to withhold the proceedings in India, as according to them, the relief provided under Section 234 and 235 of the Insolvency and Bankruptcy Code of India (“IBC”) for cross-border insolvency could not be used as the two sections had yet not been notified by the Government of India, and in the absence of such notification, an order passed by a foreign Court would not be binding to the NCLT. To the contention raised by the Administrator, the NCLT had categorically stated in para 29 of its order that, ‘The order passed by Noord Holland District Court, Netherland for the company registered in India is nullity ab-initio’.

Aggrieved by the order passed by the NCLT, the Administrator approached the NCLAT in appeal. The NCLAT, on the assurance of the Administrator that he would not alienate any offshore assets of Jet Airways in his possession, stayed the order of the NCLT, and listed the matter for arguments. The NCLAT further passed an order that in the pendency of the present Appeal, the Administrator will co-operate with its Indian Counterpart, to collate the claims of the offshore creditors. Furthermore, the NCLAT through its order also allowed the Administrator and its Indian Counterpart to negotiate a settlement in the best interest of Jet Airways and all of its stake holders.

Analysis

Countries have broadly tried to tackle the problem of cross-border insolvency, through two different and contrasting principles. The first principle is one in which one Court is provided with the jurisdiction to try a bankruptcy matter in regard to a debtor and the administrator appointed by the Court has the power to take charge all the assets of the debtor, located throughout the globe. According to this approach the Courts and laws of the country in which the debtor is domiciled or has his registered office should be given preference. This is known as the principle of unity or universality. On the other hand, there exists a principle that the Court in whose jurisdiction the bankruptcy proceedings has commenced, has jurisdiction on assets present only within its country’s state boundary. The consequence of this is that the Court, cannot pass an order against any asset of the debtor abroad and the administrator appointed by the Court can also only take charge of these limited assets. Furthermore, Court will follow its local laws on the matter. This is known as the principle of territoriality.

A complication that is present in the Jet Airways case is that, both India as well as Netherland’s follow different principles of cross-border insolvency law. Netherland’s insolvency regime does not perfectly fit into any one of the above-mentioned two principles, but incorporates the tenants of both of them and hence essentially forms a different kind of principle which can be described as limited-universalism principle.

In India, the Joint Parliament Committee Report, 2016, in its report had clearly stated that the Insolvency and Bankruptcy Code, 2016 was brought forth to solve, the question of bankruptcy and insolvency purely limited to the domestic scenario of India. In so far as Section 234 and 235 of the IBC is concerned, it needs to be realized, that it was not added by the Viswanathan Committee to tackle the bigger picture of cross border insolvency or provide a comprehensive framework for it, but simply to allow Indian Administrator to take control of assets of a corporate debtor situated in a country outside of India as well as provide foreign Administrator with the reciprocal arrangement. The foundation of such a mutually benefit arrangement, lies in Section 234 of IBC through which the Government of India, can enter into a treaty with other countries to bring forth the principle of universality. However, in the absence of such a treaty, India will abide by a principle of territoriality. Regardless, as of this moment Section 234 and 235 of IBC, has not been notified by the Government of India and hence unenforceable, which essentially means that India at the moment practices the principle of territoriality. This essentially means that, technically the Administrator of India cannot take charge of any of Jet’s assets outside the borders of India.

To add to the woe of following the principle of territoriality the NCLAT in the case of Usha Holdings LL.C v. Francorp Advisors Pvt. Ltd, had laid down another obstacle. The NCLAT in the case held that the NCLT not being a Court, has no jurisdiction to decide whether a foreign decree is legal or illegal according to Section 44A read with Section 13 and 14 of Code of Civil Procedure, hence, of this day, it can be said that the power to even examine the legality of an order passed by the Dutch District Court is also not present with the NCLAT.

In Netherlands, it is not the law as is embodied in the Dutch Bankruptcy Act which provides for the principle to be followed by Courts during cross border insolvency, but the judgement laid down by the Supreme Court of Netherlands in 2008. The Supreme Court of Netherlands in the case of Yukos Finance v. Liquidator, OAO Yukos Oil Company, had held that a foreign administrator can manage the assets of the company located in Netherlands, based on the condition that the foreign administrator’s actions are in accordance with the law of the country in which the bankruptcy proceeding is being commenced and that the action of the foreign administrator does not lead to the detriment of the creditors located in Netherlands. This decision of the Court was subsequently followed in another judgement pronounced in 2013. Hence, the Courts of Netherlands follow the principle of universality, till the time the action of the foreign administrator does not negatively affect the creditors of the debtor in Netherlands.

This however, cannot be treated as a boon for Indian creditors, as Netherlands being a country that follows the principle of civil law is not bound by the principle of stare-decisis and hence, cannot be compelled to follow its precedent but only persuaded.

Conclusion

As of this day the only possible solution to the conundrum, is to allow the Indian Administrator to take control of the assets Jet Airways in Netherlands and in return allow the Dutch creditors to be part of the Committee of Creditors so that they can come to a solution that is in their benefit, hence, would be acceptable by the law of Netherlands. The simple reasoning for this is that, India currently following the principle of territoriality in it purity, will not allow the order of the Dutch Court to override the jurisdiction of the NCLT/NCLAT and hence provide any remedy apart from this to the Dutch Administrator or creditor. However, this is more easily said than done, the Indian Administrator derives his power to take control of foreign assets of the Jet Airways by operation of Section 235 of IBC, since, the section has not yet been notified, the Netherland Court can easily come to the conclusion that the Indian Administrator has not been provided with the power yet, hence, is in breach of one of the conditions of Dutch Jurisprudence to allow the Indian Administrator to take control of the foreign assets of Jet Airways.

It is of utmost importance that the Government first and foremost issues a notification under Section 234 and 235 of the IBC, to allow the Government to enter into a possible agreement with Netherlands to find a mutually beneficial arrangement. This matter should be treated as one of national significance especially since, more than 22,000 employees of Jet Airways have been affected.. Furthermore, it would be beneficial for the government to consider adopting the recommendation proposed by the Insolvency Law Committee constituted by the Ministry of Corporate Affairs in its Report on Cross Border Insolvency, 2018, so that such a dispute does not ever rise again the future.

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