With the rapid growth in technology, the number of MNC firms has increased which had led to the creation of borderless transactions among countries and businesses. Cross-border insolvency occurs when the debtors have assets in more than one country or when the creditors are residing in a foreign country different from that of the debtor and outside the jurisdiction of the home country. When the debtor’s assets are being managed and disposed, the Insolvency Laws protect both debtor and the creditor. Some of the companies have assets in foreign countries, and it becomes difficult to handle those assets. Thus, cross border Insolvency is international insolvency which administers the protection of debtors who are in financial trouble and have their assets and creditors residing in a foreign nation. Whenever an MNC is operating in a foreign country or in different Jurisdiction then the Cross Border Insolvency comes into the picture. The rules of cross-border insolvency have a global basis and are focused on the nation that provides aid for another country and then disposes of the debtor firm’s assets. Cross-border insolvency refers to situations where a financially distressed company or individual is involved in insolvency proceedings in multiple jurisdictions. It deals with the legal framework and procedures for addressing insolvency issues when the debtor’s assets, creditors, or operations are located in different countries. In India, the provision for cross-border insolvency is governed by the Insolvency and Bankruptcy Code, 2016 (IBC), along with the Cross-Border Insolvency Rules, 2019.
The IBC provides for the recognition and enforcement of foreign insolvency proceedings in India, as well as the cooperation and coordination between Indian and foreign insolvency authorities. The Cross-Border Insolvency Rules, 2019, provide the procedural framework for implementing the provisions of cross-border insolvency under the IBC.
Corporate Insolvency Resolution (CIRP) under Indian Insolvency and Bankruptcy Code
In India, the jurisdiction to initiate an insolvency resolution process lies with National Company Law Tribunal. When a company defaults in making payments to the creditor it gives rise to a situation of filing a petition for CIRP. Under Section 7 of the IBC, 2016 a creditor can initiate the Corporate Insolvency Resolution process and under Section 8 of the IBC 2016 a corporate applicant of the corporate debtor can initiate the Corporate Insolvency Resolution Process.
Thus, cross-border Insolvency is the means to deal with an organization which has become insolvent and has assets or creditors which are present in the jurisdiction of another country. The Law on Cross border insolvency protects the rights of foreign creditors against the corporate debtor’s assets who are residing in a different jurisdiction.
To understand the concept of cross-border insolvency we can refer to the provisions of the Insolvency and Bankruptcy Code 2016.
- Agreement with foreign countries- When we refer to Section 234 of the IBC, under this section the central government has been given the power to enter into agreements of foreign countries for implementing the provisions of the code. The section further has extended the power of the Central government for extending the provisions of the IBC over the assets of a corporate debtor that are located in a foreign country. The power is subject to reciprocal agreements that exist between India and other foreign countries.
- When we refer to Section 235 of the IBC provides that if the insolvency resolution professional is of the opinion that if they have to deal with the assets of the corporate debtor which are located in a foreign country, the insolvency resolution professional can make an application to the deciding authority for the same. Thus, power has been given to the adjudicating authority to send a letter requesting the court in the nation with whom an agreement has been formed under Section 234 of the IBC requesting the assets which are located in the country to be handled in a specified way.
Drawbacks In The Current Framework
Under the IBC, the cross-border insolvency framework depends on bilateral treaties India is entering with foreign countries. It takes long-term negotiations to finalise a bilateral treaty which would create ambiguity for the court as the Indian court have to deal with each treaty separately. The bilateral treaties will have to be invoked in multiple jurisdictions owing to the legal and procedural complexities and unnecessary organizational burdens. In cases where there are no bilateral agreements between countries, and assets of the Indian debtor are located in a foreign country, no guidance is provided on remedies available to Indian solvency professionals so that they can take action against such assets of the debtor. The report was presented by the committee where the emphasis was Laid down on the need for a broader cross-border insolvency framework. The committee reflected on Cross Border Insolvency and noted that the existing two provisions in the code (Section 234 & Section 235) have not been able to provide a comprehensive framework for cross-border insolvency matters. A draft was proposed based on the UNCITRAL Model Law on Cross-border Insolvency and its provisions for adaptation in India. 44 countries had adopted the UNCITRAL Model Law and it has helped them resolve their issues of financial distress and insolvency about cross-border trade the world over. The prime issue regarding Cross-border insolvency is the determination of the Centre of Main Interest (COMI).
The Insolvency Law Committee (ILC) of India has planned the adoption of a draft that includes a rebuttable presumption regarding the determining centre of main interests (COMI) for corporate entities. This presumption suggests that the place of incorporation or legal domicile of a corporate person may be considered as its COMI. Many jurisdictions around the world have already established indicative lists of factors for determining COMI.
The ILC recommends that India follows a similar approach and incorporates the rebuttable presumption in its insolvency framework. By doing so, India aims to provide clarity and consistency in determining the COMI of corporate entities in insolvency cases.
Additionally, the ILC suggests that India should enter into bilateral agreements with major trading partners such as the UK and the US. These agreements would simplify reciprocity and establish clear provisions for resolving cross-border insolvencies with these trading partner countries. The proposed bilateral agreements would enhance cooperation and coordination in dealing with insolvency matters, ultimately benefiting the overall insolvency regime and cross-border trade.
United Nations Model Law
United Nations Model Law on Cross Border Insolvency is an effective way to handle cases involving Cross Border Insolvency formulated by the United Nations Commission on International Trade Law.
The following are the principles on which United Nations Model Law Is based
- Direct access is provided to domestic courts for foreign insolvency professionals and foreign creditors as well ability to participate in and initiate proceedings against a debtor. The central government has been given power by the commission to formulate a procedure within the current Indian Legal framework that enables international insolvency practitioners to enter Indian courts.
- The Local court has been given the power to give recognition to international proceedings and provide remedies based on the recognition. Recognition Leads to granting of relief automatically such as a moratorium on the transferred debt assets.
- The model Law is successful in establishing cooperation and collaboration between domestic and international courts and insolvency practitioners. Though the infrastructure of code is still growing it is proposed that the rules issued by the central government would govern the collaboration between the adjudicating authorities and foreign courts.
- When the process of foreign insolvency has already begun the Model Law offers a framework for domestic insolvency proceedings to begin. It also encourages courts to collaborate and coordinate two or more insolvency procedure simultaneously occurring in multiple nations.
State Bank of India vs Jet Airways
In the present case, it took over a period of 2 years in 3 different courts for the case to begin with the commencement of corporate insolvency proceedings against the Jet Airways and the present case ends with NCLT’s finally approving of a resolution Plan. While stating the facts of the case, three petitions were filed against Jet Airways, who is the corporate debtor in this case, so that the Corporate Insolvency proceedings could be initiated as there was a large outstanding debt. During the first hearing, NCLT was informed about the insolvency proceedings against Jet Airways going on in the Dutch District court a month before. In this regard, the council gave the decision that if a simultaneous proceeding on the same issue goes on it would lead to delays and distort the proceedings in this case.
When we refer to the two sections i.e., Section 234 and Section 235 of IBC it states recognising the orders of a foreign jurisdiction which sets out the requirement for the Government of India to enter into reciprocal agreements with foreign countries. The court found out that there was a lack of mutual agreement with the Dutch authorities in this case. So, the bench believed that NCLT has the necessary jurisdiction over the matter as Jet Airways had its registered office and the majority of its assets in India. The bench annulled the Netherland District court’s proceedings and declared them null and void.
NCLT Accepted The Commencement Of Corporate Insolvency Proceedings In India Against Jet Airways
Jet Airways, an Indian airline, underwent insolvency proceedings in both India and the Netherlands. The decisions made by the NCLT Benchmark, an Indian authority, regarding certain aspects of the Dutch insolvency process were challenged by the Dutch Trustees before the NCLAT, an Indian appellate authority. The NCLAT reviewed the appeal and instructed the Resolution Professional (RP) appointed for Jet Airways to collaborate with the Dutch Trustee to explore the possibility of a joint Corporate Insolvency Resolution Process. Following this instruction, the RP and the Dutch Trustee reached an agreement on a proposed model of cooperation to speed up the settlement process. This final agreement was submitted to the NCLAT for approval, which was granted on September 26th.
Additionally, the bank allowed Dutch court officials to participate in Jet Airways’ meetings. In the protocol established, it was acknowledged that Jet Airways is an Indian company with its primary operations in India, making the Indian insolvency proceedings the main proceedings, while the Dutch proceedings were considered non-main proceedings. Consequently, Indian laws were deemed applicable to the company’s foreign assets located in the Netherlands.
NCLAT permitted the Dutch authorities to participate in the creditor’s committee but they would not possess any voting rights. Thus, instructions were given to the Resolution professionals and creditor’s committee to cooperate with the Dutch trustees and to enter into such cooperation agreements so that the insolvency proceedings can be conducted jointly. So according to the NCLAT order, both sides had joined the cross-border insolvency protocol. According to the protocol, both sides the Insolvency Professional and the Dutch Trustees.
Final approval of the resolution plan was submitted before the NCLT Mumbai bench. The bench accepted the windup plan and gave the consortium 90 days to obtain the necessary regulatory approvals and approvals from the Directorate General of civil aviation who had ordered for establishment of a monitoring board who will look after the entire process. This was India’s first ever concluded cross-border insolvency case under the Insolvency and Bankruptcy Code 2016.
Videocon Industries Case- First Indian Case Of Group Insolvency
The Mumbai Bench of NCLT recognised the principle of “substantial consolidation” and allowed to combine 13 of the 15 Videocon Group companies. It was for the first time when group companies being consolidated for insolvency proceedings received a green signal under IBC given the basis that it would help in maximising the asset value of the debtor, thereby, setting a standard for group insolvency. The doctrine of “substantial consolidation” is, primarily, an enabling doctrine, by way of which, deciding authority combines the assets and liabilities of the individual corporate entities and proceeds with a common insolvency resolution and restructuring process in order to achieve a fair value for the stressed assets of group companies while keeping in mind the interests of the creditors.
In December 2017, SBI filed an insolvency application against Videocon Industries at NCLT, Mumbai Bench, where it was seeking to admit and initiate CIRP proceedings. Soon after the admission of Videocon Industries to CIRP, SBI led consortium moved an application seeking “substantial consolidation” of the 15 companies belonging to the corporate debtor, where the consortium was the common creditor. Meanwhile, separate CIRP proceedings were introduced against all the individual entities, however, it failed to obtain any attractive bid because of the lack of collateral assets and their inability to survive individually. In the absence of any express provision in the Code, the Tribunal analysed bankruptcy jurisprudence in the US and the UK and subsequently using its equity jurisdiction decided in favour of the consortium.
Interestingly, in February 2020, NCLT allowed the second round of group insolvency of Videocon Industries with 4 foreign-based companies. The Tribunal ordered to club overseas oil and gas businesses in the ongoing insolvency proceedings on a plea filed by the managing director of the Videocon Group for an extension of the moratorium, thereby questioning the extraterritorial applicability of IBC and the procedure involved in the collation of foreign subsidiaries assets with the ones in India. This case, all over again, voiced the issues surrounding coordination theory in cross-border insolvency and expressed the need for legislation.
The current Law for cross-border insolvency is still in the preliminary stage for most countries. In India, the Insolvency Law Committee has submitted reports for incorporating the model Laws of UNCITRAL but they are yet to be passed. In the present scenario, there is no absolute clarity regarding the cross-border insolvency Laws, there are procedural challenges dealing with these types of cross-border insolvency cases. We can see that cross-border Insolvency Law has flaws as there is no proper Law that governs the code. Though a draft was recommended by the Insolvency Law Committee for the draft to be implemented there requires a formulation of a bill. We can refer to the case of the Jet Airways dispute that underlined the need for a robust cross-border insolvency mechanism in India and there is an imminent need felt so that the Legislative gap is filled.
This article is written and submitted by Vidushi Joshi during her course of internship at B&B Associates LLP. Vidushi is a second year LL.B. student at UPES Dehradun.