Cross Border Insolvency denotes a situation where the insolvent debtor has assets or creditors in more than one country, thereby transcending the confines of a single legal system. With the advent of sophisticated communications technology, new sectors have emerged and cross-border activity is no longer the preserve of only big companies.
In order to devise a mechanism to handle cases involving cross border insolvency, the United Nations Commission on International Trade Law proposed the UNCITRAL Model Law on Cross Border Insolvency. The proposal was adopted on May 30, 1997 and the thirteenth session of UNCITRAL held in Vienna. The Model law has since, emerged as the most widely accepted legal framework to deal with cross-border insolvency issues and can be adopted by countries with modifications which suit their domestic context. It has provisions allowing foreign insolvency courts and officials access to domestic courts (and vice vera) and also provides for recognition of orders and judgments passed by insolvency courts located in foreign jurisdictions. The Model Law has till date been adopted by 49 countries such which include the US, UK and Singapore.
On November 24, the Ministry of Corporate Affairs released a notice inviting comments from the public on India's proposed version of the Model Law. The Draft Rules were first released in October 2018 by the Insolvency Law Committee (ILC) but had been lying in cold storage until January 2020, when the MCA constituted a Cross Border Insolvency Rules and Regulations Committee (CBIRC) to make recommendations to the Draft Rules prepared by the ILC in 2018.
After witness the almost never-ending saga surrounding the insolvency proceedings of the Jet Airways and the Videocon Group, two companies which had assets and claims outside India, that were required to be considered by the Indian Courts, the need for enacting a law, harmonious with the international best practices is being felt. It was even noted in the ILC’s first report released in March 2018 that “the existing two provisions in the Code (Sections 234 & 235) do not provide a comprehensive framework for cross-border insolvency matters.”
The draft legal framework proposed by the MCA is surely a step in the right direction. Our Code, as it currently stands, which provides for entering into bilateral arrangements with each country for recognition of its insolvency proceedings was never going to be a permanent solution. Entering into separate agreements with countries is incongruous, time-consuming and involves multiple negotiations. In today's day, where data is porous and business interface transcends national borders, it is critical for countries to adhere to a common set of principles governing cross-border trade. Take for instance, the growth of international commercial arbitration as a means of settling cross-border disputes. The success of arbitration as a premier mode of dispute resolution can be largely attributed to the United Nations Convention on Recognition and Enforcement of Foreign Awards, popularly known as the New York Convention. It has been signed by 167 countries meaning thereby that an arbitral award passed in any of the signatory countries will be readily enforceable in the other signatory country without having to initiate separate proceedings for the same. If a uniform set of guidelines can work for arbitration, then there is no reason to believe that it cannot work for insolvency.
The draft framework does have its heart in the right place. It covers situations where assistance is sought by a foreign court or representative in an insolvency proceeding pending in India and vice versa. It also enables the central government to exclude certain class of entities, such as those providing critical financial services (Banks, insurance companies etc.) from being subjected to cross-border scrutiny. Under the proposed law, the Indian Adjudicating Authority (NCLT) shall be vested with the power to recognize a foreign proceeding as either a "main proceeding" (the country where the debtor company has its center of interest) or a "non-main proceeding" (the country where the debtor merely has an establishment). That upon recognizing foreign proceedings in India, the NCLT has been vested with the power to impose moratoriums to preserve the assets of the foreign entity in located in India. The power is mandatory in case of "main proceedings" and discretionary in case of "non-main proceedings".
However, the proposed rules, as welcome as they are in current context, appear to be very much a work in progress. There is no provision for enforcement of insolvency related judgments. The CBIRC, has, in their report recommended the inclusion of provisions enabling enforcement of insolvency-related orders and judgements. The term public policy, which has been included as one of the major grounds to resist the recognition of foreign proceedings has not been defined. Considering the wide ambit of the term, the lawmakers would be better placed to streamline its scope so as to lend clarity to the process.
It's been 5 years since India enacted its insolvency law and its about time we give it wings to fly across borders, even though Jet Airways isn't flying anymore.
By - Arush Khanna