India set a milestone with the enactment of the Insolvency and Bankruptcy Code (IBC) in 2016. It is the law, which consolidates the rules relating to insolvency resolution of corporates, partnership firms, individuals, etc. It provides for a time bound manner of resolution. With effectiveness in Insolvency law, we see the timely realization of insolvent’s assets before their obsolescence.

Cross Border Insolvency

“Cross border insolvency is triggered in cases, in which, the insolvent debtor has assets and/or creditors in more than one state.”

Cross border insolvency is triggered in cases, in which, the insolvent debtor has assets and/or creditors in more than one state. For example, an MNC having assets in another country, a creditor filing a case on an MNC having its office in another country, etc. The list of cases where Cross Border Insolvency issue arises are as follows:

1. Indian Debtor + Indian Creditor + Foreign Assets
2. Indian Debtor + Foreign Creditors + Indian/Foreign Assets
3. Foreign Debtors + Indian Creditors + Indian/Foreign Assets

In these cases, domestic IBC provisions are not enough to resolve the IBC proceedings. We need a cross-border insolvency framework.

The widely accepted cross-border insolvency framework is that of the UNCITRAL model law on cross-border insolvency. Cross-border insolvency framework incorporates new terminologies. Let us understand some of those terminologies used in Cross border insolvency:

• Foreign proceeding: It is a collective judicial or administrative proceeding in a foreign state, which is for the purpose of reorganization or liquidation.
• Foreign main proceedings: Foreign proceedings take place in the state where the corporate debtor has Centre Of Main Interest (COMI). It is also known as ‘primary proceedings’ in European Union.
• Foreign non-main proceedings: Foreign proceedings, other than ‘Foreign main proceedings’, take place where the corporate debtor has an establishment. EU calls it secondary proceedings.
• Foreign representative: An Insolvency Professional.
• Establishment: A place where the corporate debtor carries on non-transitory economic activity with human means and goods and services. Only assets located in a state cannot be termed as the establishment.
• COMI (Centre of Main Interest): In simple words, it is the habitual place of residence of the debtor. It is similar to the concept of Place Of Effective Management in international taxation and is a subjective area of discussion. It is the location of the registered office of the corporate debtor.

Important factors which are to be considered while determining COMI as per UNCITRAL:

1. Where does the central administration of the corporate debtor take place? For example, if a corporate debtor is incorporated in America by two Indians residing in UAE and all the decisions are taken in UAE the COMI is said to be UAE.
2. Place which is readily ascertainable by the creditors: For Example – The state or place, which the creditors, reasonably believe is the place of business of the corporate debtor at the time of grant of credit.

Besides these several other factors has to be taken into consideration while determining the COMI of a corporate debtor:

1. Location of those who actually manage the debtor, the place of supervision or the general oversight and the strategic oversight of the group.
2. The location of debtors’ primary assets.
3. The location of most debtor’s creditors or of the majority of creditors who would be affected by the case.
4. The jurisdiction whose laws would apply to most of the disputes.

“A separate exercise for identification of COMI of all subsidiaries needs to be carried out. In other words, COMI is decided separately for each and every debtor, under UNCITRAL Model Law.”

COMI of a subsidiary company is independent from the COMI of parent company. A separate exercise for identification of COMI of all subsidiaries needs to be carried out. In other words, COMI is decided separately for each and every debtor, under UNCITRAL Model Law.

Theories of Cross Border Insolvency

Today, we see the presence of different theories governing cross border insolvencies. The use of theories affects the judgement by the competent authorities. The decision of courts will differ if theories would be changed. So, theories are also an important part of the international insolvency process. There are three major theories governing cross border insolvency issues. They are:

• The territorial approach: Whereby each country exercises own domestic insolvency laws in relation to all the debtor’s property and all of the creditors located within its jurisdiction. This approach does not recognize any extraterritorial dimension to insolvency law.
• The universalist approach: Whereby any cross-border insolvencies are administered pursuant to a single global insolvency regime, and all of the debtor’s assets are distributed by a single insolvency office holder, regardless of where the assets or claimants are located.
• The modified universalism: Whereby individual countries seek to identify the most relevant jurisdiction in which to conduct the proceedings, and all other states cooperate with and facilitate such proceedings. UNCITRAL tries to go with the last approach, i.e., the modified universalism approach, whereby it tries to identify COMI and foreign main proceedings.

A brief discussion on Principles of Cross-Border Insolvency

What makes a cross border insolvency necessary, effective and complete is that a framework is made in such a way that it incorporates the basic principles of access, recognition, relief and cooperation in today’s global world. The same principles are highlighted by the UNCITRAL model law.

UNCITRAL Model Law, which is applicable both on Corporate Debtors and personal guarantor to Corporate Debtors, has incorporated a principle based ruling framework. The major outline for the UNCITRAL model convention of 1997 can be explained in 4 principles words:

1. Access

Foreign creditors or their representatives such as the foreign Insolvency Professional have direct access to the domestic court/ tribunal. Direct ability is with respect to initiation and participation in a proceeding but not with respect to the administration of or control over assets of the corporate debtor. The article that deals with the same are mentioned in Chapter II. They are:

• Article 9: Right to Direct access
• Article 10: Limited jurisdiction
• Article 11: Application by a foreign representative to commence proceeding under the laws of the enacting state relating to insolvency
• Article 12: Participation by a foreign representative in a proceeding under the laws of enacting state relating to insolvency
• Article 13: Access of foreign creditors to a proceeding under laws of the enacting State relating to insolvency
• Article 14: Notification to foreign creditors of a proceeding under laws of the enacting State relating to insolvency

2. Recognition

It is about the recognition of foreign proceedings. It is of utmost importance to recognize the proceedings going on in a foreign state, else the whole concept of cross border insolvency would go in vain. If the domestic court or tribunal determines that the COMI of the Corporate Debtor is in a foreign state say the UK, proceedings in such a foreign state will be treated as foreign main proceedings. Proceedings in all other states will be foreign non main proceedings and thus provide a way for recognition of the main proceeding by other states. Chapter III deals with recognition principles. Relevant articles under the Chapter are as follows:

• Article 15: Application for recognition of foreign proceedings
• Article 16: Presumptions containing recognition
• Article 17: Decision to recognize a foreign proceeding

3. Relief

Relief for foreign main proceedings is automatic under the law. Whereas relief for foreign non-main proceedings is discretionary. Chapter III also talks about relief. The main articles are:

• Article 19: Relief that may be granted upon application for recognition of a foreign proceeding
• Article 20: Effects of recognition of foreign main proceedings
• Article 21: Relief that may be granted upon recognition of a foreign proceeding.

4. Cooperation and Coordination

Requires cooperation between all bodies, like:

1. Between domestic courts and foreign courts
2. Between Domestic IP and Foreign courts
3. Between foreign IP and domestic courts
4. Between foreign IP and domestic IP

Chapter IV deals with this principle. The Articles covered are:

• Article 25: Cooperation and direct communication between the court of the state and foreign courts or foreign representatives
• Article 26: Cooperation and direct communication between the IRP and foreign courts or foreign representatives.
• Article 27: Forms of cooperation

What a Cross Border Insolvency framework would look like?

To understand the main provision of cross border insolvency, let us include country India inside the model law of UNCITRAL. Then, the main provisions can be read as follows:

• Article 5, if followed by India, authorizes the Insolvency Professional of India to act in a foreign state on behalf of the proceeding under the Indian IBC code.
• Article 12, if followed by India, provides a way for foreign creditors to sit in proceedings of an Indian Debtor in an Indian Court.
• Article 15, if followed by India, allows foreign creditors to file an application of recognition of a foreign proceeding with the NCLT.
• Article 20, if followed by India, states that if a foreign proceeding is recognized as a foreign main proceeding, then individual actions against debtors’ assets in India is stayed. So, it provides a way for the foreign main proceeding to inculcate the resolution plan for all assets around the world.
• Article 23, if followed by India, states that there should be no actions that are normally detrimental to the rights of a foreign creditor.
• Article 31, if followed by India, provides that debtors are considered insolvent in India if the same is proved under foreign main proceedings.
• Article 32, if followed by India, provides that a foreign creditor is entitled to receive payment subject to a proportionate amount of payment to all creditors of the same level. So, if a foreign creditor receives some amount from foreign assets, it is not entitled to receive an amount from India, unless all creditors of that level are paid up to that proportion as the foreign creditor has received.

Thus, we see that the model framework incorporates principles of natural justice and common business practices concerning insolvency resolution.

IBC and Cross-border Insolvency

In India, we have a law that is effective for domestic insolvency resolution. We are currently lacking a law for cross-border insolvency resolution. In today’s world, globalization has created a cross-border presence of entities. So, one nation cannot alone declare the insolvency of a multinational company operating in more than one geography or jurisdiction. The concurrence with the laws of other nations is also required to dispose of the assets present in other nations. Moreover, the manner of disposal of claims among different stakeholders of different nations in accordance with the principle of natural justice and business customs requires consent between states. There cannot be an ideal cross-border insolvency regime if one nation prefers payment to their claimants over and above claims of stakeholders belonging to other nations.

It is not that the Indian IBC lawmakers were not aware of cross border insolvency. While drafting the IBC, the committee were concerned about cross-border insolvency. However, they delayed it for a while to be taken up in future. The Bankruptcy Law Reforms Committee (“BLRC”), which recommended the design of the IBC, noted the following in its report in November 2015:

“The Committee has taken up, and attempted to comprehensively solve, the question of bankruptcy and insolvency insofar as it is a purely domestic question. This is an important first milestone for India. [emphasis added]

The next frontier lies in addressing cross-border issues. This includes Indian financial firms having claims upon defaulting firms which are global, or global financial persons having claims upon Indian defaulting firms.”

Yet, the present laws still cover international aspect so far it relates to:

• foreign holders of corporate bonds issued in India, or
• borrowing abroad by an Indian firm

The Joint Parliamentary Committee which was set up in December 2015 to review the Insolvency bill were of the opinion that the Code had nothing to do with cross border insolvency and in this era of globalization, failure to incorporate cross border insolvency would result in major ineffectiveness of the law. The report of The Joint Parliamentary Committee on The IBC, 2015 presented to Parliament on 28th April, 2016 mentions:

“The Committee deliberated the issue and noted that ‘The Code at present does not explicitly deal with issues and text related to cross border insolvency.’ The report warned that in the globalized world, the implications of cross border insolvency could not be ignored for too long. The failure to incorporate cross-border elements would lead to an incomplete Code.”

Presently, Section 234 and 235 inculcate the elements of cross border insolvency:

• Section 234: gives power to the central government to enter into an agreement with a foreign country for enforcing the provisions of the Code and facilitate cross border insolvency reciprocal arrangements.
• Section 235: gives power to the Adjudicating Authority to issue a letter of request to a court in a country with which an agreement under Section 234 has been entered into, to deal with assets situated in that country.

The above provisions give way for cross-border insolvency resolution. But, there are inherent limitations in the implementation of these provisions. The major problem with the enactment of these sections would be that they would require a separate agreement with each country or each group of countries. These agreements would make cross-border insolvency a cumbersome task and would lead to much of agreement-specific inclusion and exclusions. Moreover, these could lead to a larger issue. A multinational company could have branches elsewhere and could actually go for liquidation somewhere else based on a case filed by its creditors.

The solution to this would lie in having a model code for cross-border insolvency which would be acceptable to a majority of nations of the world. We today have that model framework, as discussed earlier, in name of “UNCITRAL Model Law on Cross-Border Insolvency”, which was initiated in 1997. This model convention is adopted by more than 50 countries and that includes large and more developed countries such as the UK and the USA.

India is planning to adopt this model framework. It is working on its adoption since the enactment of IBC laws in 2016. The government had set up several committees to conduct research and enact a framework for the adoption of the model law of UNCITRAL and as result bring a law on cross border insolvency.

The Insolvency Law Committee in its first report released in March 2018 (accessible at page 6 of: https://ibbi.gov.in/ILRReport2603_03042018.pdf) noted the importance of adoption of UNCITRAL model law on cross border insolvency. The report highlighted the weakness of the existing two provisions (Section 234 & Section 235) for cross border insolvency matters. Their suggestion was to insert a new chapter on cross-border insolvency in existing code based on some framework developed in line with the UNCITRAL model law on Cross Border Insolvency.

For enactment of the UNCITRAL model law, MCA issued an introductory note and a draft legal framework for cross-border insolvency and invited comments and views from stakeholders in June 2018. Thereafter the Insolvency Law Committee has included detailed recommendations on a legislative framework for cross-border insolvency in India, in its second report of October 2018. This draft law is popularly referred to as “part Z”. It had undertaken a clause-by-clause analysis of UNCITRAL Model Law.

The present status of draft is that it is on its way to be completed into an amendment bill and to be passed by parliament. MCA had re-constituted a cross-border insolvency rules/regulations committee (“CBIRC”) in January 2020. Some modifications were made in the draft (part Z) and public views were invited on it.

It is clear to all stakeholders of the IBC ecosystem that to further confidence of international investors, foreign governments and foreign stakeholders in our insolvency resolution framework, timely and robust enactment of cross-border law would be very necessary.

The Existing cross-border Insolvency cases: The Jet Airways Precedent

There is a number of examples where cross-border resolution is taking place in India. One such example is that of Jet Airways.

Jet Airways is an Indian Company which has operations in other countries also. Creditors of the Netherlands filed a case against Jet Airways and the company was declared bankrupt in the Netherlands as per their Dutch law. Later, in India, the NCLT took up the Insolvency resolution admission petition for that company.

NCLT denied the recognition of Dutch proceedings citing that the foreign judgement does not apply to our country. The matter moved to NCLAT. NCLAT, allowed the Dutch trustees to sit in the meetings of the committee of creditors and put in place a protocol for cooperation between the Dutch liquidator and the Indian resolution professional.

Thus, for the first time, India recognized cross-border insolvency judgement under IBC laws.

Jet Airways case is conclusive enough to show us that stakeholders are ready to deal with the challenges posed by the nascent stage of cross border insolvency law in India. At the same time, it shows that the need for a law on cross border insolvency is based on present reality. Stakeholders expect the same breakthrough law on cross-border IBC as the Code enacted in 2016.

It’s time for us to be prepared for Cross-border Insolvency law

The resolution professional should get ready and be prepared to act when the cross-border law is enacted. The following are dimensions relevant for our preparedness:

• To adopt a modern risk approach
• To develop a mindset and behaviour to promote and encourage cooperation and coordination
• To develop techniques and skills to protect assets in other jurisdictions
• To develop skills to promote a viable resolution process
• Work to strengthen the legal framework, not to work to hinder it.

Conclusion

India is preparing for the adoption of Cross border insolvency but at the same time, it realizes that the law is at a nascent stage for India to adopt. Many developing countries are yet to adopt it and Brazil too has adopted it in the year 2020 only. So, with due precaution and analysis, along with country to country and case to case analysis, Government is ready to go for the adoption of the law on Cross Border Insolvency. The law may get delayed a bit but whenever it is enacted, it would be there with sound and supportive provisions. Insolvency professionals must be ready and willing to support effective implementation of the same.

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References & Resource Documents

• Insolvency Law Committee draft provisions on cross-border insolvency for insertion in the Code (“Draft Part Z”): https://www.mca.gov.in/Ministry/pdf/crossborderInnsolvencyReport_22102018.pdf
• UNCITRAL Model Law on Cross-Border Insolvency (1997) with Guide to Enactment and Interpretation (2013): https://uncitral.un.org/en/texts/insolvency
• Insolvency and Bankruptcy Law of India (IBBI): https://ibbi.gov.in/en/legal-framework/act
• Report of Joint Parliamentary Committee on IBC, April 2016: https://ibbi.gov.in/16_Joint_Committee_on_Insolvency_and_Bankruptcy_Code_2015_1.pdf

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Author may be reached at: nktulsyan32@gmail.com and eboard@icai.in