India is one of the fast developing nations in various fields. It has taken many farther steps in various fields to develop as a nation. Whereas there has been many foreign nations supporting India by investing in India. Only getting money through investment doesn’t completes the duty of the nation. As a nation India has to protect the investments of the foreign investors. When a company becomes insolvent there are necessary steps to be taken in order to protect the foreign investors to protect their rights. But looking at the aspect of cross border insolvency, there has been limited laws dealing with it.
The present laws related to cross border insolvency are Section 234 and 235 of Insolvency & Bankruptcy Code, 2016 (hereafter referred to as “IBC”). India can ratify bilateral treaties in relation to insolvency proceedings with particular country with which reciprocal arrangements and further can make a letter of request for an insolvency proceedings. But there are certain defects and inconsistencies in present legislation and thereby the country is in stage to adopt the United Nations Commission on International Trade Law (hereafter referred to as “UNCITRAL”) Model Law on cross border insolvency by introducing a bill for it and adding it as a new chapter to IBC.
At present, India has to enter into bilateral agreements with other countries which is different for every nation but when adopting the UNCITRAL Model law it would be same for all the countries who has signed the treaty. Making proper legislation for cross border insolvency would lead to further increased investment of the foreign nations in Indian companies.
Insolvency means a state when an organization or an individual is not able to fulfil its financial burdens which are due against the lenders in term of debts. When a company is declared as an insolvent there are certain procedures which a company goes through i.e. there are informal meeting which are organized between the company and the creditors for making an alternative mode of paying the debts.
When the outcome of such meetings are not as per expected due to poor management of cash or the cash inflow is less than expected then the company can be declared as insolvent by performing certain insolvency proceedings where the liquidator would acquire all the assets of the company and evaluate them and liquidate those assets in order to pay off the debts.
The concept of cross border insolvency refers to treatment of financially burdened debtors where the assets of the debtors are in more than one country or the creditors are in more than one country.1
The cross border insolvency deals with three dimensions:
Firstly, protecting the rights of the foreign creditors who have certain rights on the assets of the debtor which are in the different jurisdiction wherein the proceedings of the insolvency are in place.
Secondly, when the assets of the debtors are in various jurisdictions and the creditor wants to involve those assets in different jurisdiction in the proceedings of insolvency.
Thirdly, the insolvency proceedings are going on or commenced on the same debtor in more than one jurisdiction.2
With increase in the globalization, the investment of different countries in India has also increased. With such increase in investment these foreign nations should be given a protection to their investment as to assure them that their investments are safe in India. Proper cross border insolvency laws is necessary to protect the rights of foreign investors. IBC has been formulated by the legislation in order to get speedy and smooth disposal of the cases in regards to the insolvency and bankruptcy.
At present, cross border insolvency is regulated by Section 234 and 235 of IBC. Section 234 of the code states that the Central Government can make any agreements with the foreign country to start with the insolvency proceedings. Central Government will do so with those countries with which there are reciprocal arrangements.
While further Section 235 of the said code states that the letter of request can be made to the authority of foreign nation with which such reciprocal arrangements have been made under Section 234. This application should be addressed to the relevant authority that is an adjudicating body in a particular country to provide for evidence in relation to assets of the debtor in country. This application can only be sent to the countries having reciprocal arrangements with India3. But entering in the reciprocal arrangements with different countries is itself a very cumbersome process as this method would intake a lot of time and the objective of the code i.e. timely recovery of debts would not achieve. Also, when the assets are located in different countries it would make the procedure of insolvency much more complicated through reciprocal agreements.
While further looking into the code, making reciprocal arrangements doesn’t state the procedure which has to be established in order to conduct the insolvency procedure. As there is no proper procedure for the insolvency procedure to be conducted then that makes the law incomplete. By only giving the right to make reciprocal arrangements with countries through the act doesn’t solve the problem of cross border insolvency.
There should be a proper procedure for the same. While on the principle of transparency and justice to all, the insolvency procedure conducted should be equivalent for all the countries entering into the reciprocal arrangements. But here there is no such procedure established by the Legislature of India.
When there is a situation that certain countries have entered into reciprocal arrangements and if for every nation there is a different process then it wouldn’t work out properly as there would be a point of conflict if in one insolvency proceedings there are creditors from different countries or assets of the company in different countries. As reciprocal agreements doesn’t have a feature of coordinating the procedure of insolvency which is in concerned with multiple jurisdiction.
So in order to have proper structure and justice to all the investors investing from different nations, there should be proper procedure of insolvency which would be governed with all the foreign nations. When we further look into the cross border insolvency it has three dimensions mentioned above in the article.
When we compare those three dimensions with the IBC out of which the code has adopted only the first dimension as the definition of persons in code also includes the “persons not resident in India”.4 Here in this definition, the new code permits the creditors of the foreign nation to be a part of the insolvency proceeding or to commence the procedure as the foreign creditors having the same rights which the Indian resident possess in relation to the distribution of assets when the company is liquidated by being insolvent. While the second and the third dimensions are not dealt by the code.
As the code lacks any mechanism for seeking proper procedure of insolvency with respect to having different jurisdiction where in Indian courts have to seek assistance of foreign courts in case of insolvency proceedings. Though there is implication of bilateral arrangements between nations under the code but it doesn’t show any proper implementation procedure for the insolvency.
While when the situation arises where India doesn’t have a bilateral agreement with that particular country and Indian debtor’s assets are in that country, then there will be no assistance on remedies given to insolvency professional in order to have evidence on such assets.5
The need of this model law aroused due to the issue that every nation has its own specific manner of managing the issues of Cross Border Insolvency and bankruptcy laws which were too varied. A few nations had made arrangements with each other but still there was no uniform way to deal with the Cross Border Insolvency issues. For dealing such issue, UNCITRAL received the content of Model Law on Cross Border Insolvency issues on 30 May 1997 and thereby was passed by United Nations (UN) General Assembly on 15 December 1997.
To provide greater flexibility, it was passed as a model law and not as a convention so that the nations can make necessary changes in their domestic laws regarding cross-border insolvency as per the model. Till now 44 states have adopted this model law. It focuses on authorizing, encouraging cooperation and coordination between jurisdictions, rather than attempting the unification of substantive insolvency law, and respects the differences among national procedural laws.6
In India the existing provisions for cross-border insolvency i.e. Section 234 & 235 of IBC are insufficient and time taking, for which the government is adopting this model law as this will strengthen the framework of insolvency resolution. In context of bankruptcy laws it was recommended in Justice Eradi Committee Report of 2000 for implementation of model law by amending Part VII of Companies Act, 1956, Recognition, co-ordination and participation of creditors in foreign proceedings. Also in 2001, the N.L. Mitra Committee Report also provided that the cross border insolvency laws of India is outdated and there was a need of Bankruptcy Code.
The basic object behind this model law is to ensure that the interest of banks and person involved including the creditor are protected in regard to cross border insolvency matters. By formulating these provisions there will be substantial growth in mergers and acquisitions which would thereby enhance the economy of the country.
In order to overcome the drawbacks of current law which are stated in the previous chapter, this Model Law was adopted which is applicable in situation when;
This Model Law will;
The Model Law lays down circumstances when the foreign proceedings are to be recognized and how they should be recognized. The recognition is granted based on where the debtor has its “centre of main interests” (hereafter referred to as “COMI”) which is in turn dependent on its place of establishment.8 If such a debtor has COMI in the country where such proceedings are going on or if not as foreign non-main proceedings then, such proceedings will be recognized as foreign main proceedings.
The relief that is provided after recognizing foreign-main proceedings is in form of granting stay on local proceedings by creditors against debtor undergoing insolvency. This suggests that moratorium would be imposed on assets of debtor and administration of debtor’s assets in that State is to be entrusted to foreign representative.9
“The application for the recognition of foreign proceedings in India will have to be made to the NCLT by the foreign representatives pursuant to the Model Law as the tribunal is not compelled to automatically recognize the concurrent proceedings.”
The Insolvency Law Committee Report on March 2018 recommended to have an all-included mechanism for cross border insolvency matters as the current provisions i.e. Section 234 & 235 of IBC do not provide a comprehensive framework so a separate chapter was required to be inserted in the Code which will be based on UNCITRAL Model Law on Cross Border insolvency.
For this, a public notice was issued by Ministry of Corporate Affairs (hereafter referred to as MoCA) on 20th June 201810. As per this notice Central Government after entering into agreement with other countries, may bring overseas asset of domestic corporate debtor into consideration of insolvency resolution in India. While initially cross border insolvency framework will apply only to corporate debtors, it can be extended to cases of personal insolvency resolution as well.11
The basic provisions provided in the public notice are:
Inclusion of cross-border insolvency framework will further enhance ease of doing business, provide a mechanism of cooperation between India and other countries in the area of insolvency resolution, and protect creditors in the global scenario.12
But still there are certain deficiencies in the public notice too;
As we look into the aspect of cross border insolvency, it requires a proper legal framework. This necessity has been recognized by the legislature as without proper legal provisions there would be a threat for the foreign investors to invest in India. While when we look at the current situation in India, India is inviting many foreign nations to invest in the country and to even set up their manufacturing units in the country. So in order to save their interest and motivate them to invest in the country the formulation of the law is of great importance.
The UNCITRAL has also given aspects of cross border insolvency and has given procedural framework in regards to insolvency for efficiency in the administration. As when we look into the aspect of insolvency it requires many complex issues in several areas of law in different jurisdictions.
So keeping in view the Model Law, MoCA has issued a public notice on cross border insolvency which would be added in the IBC itself. With the incorporation of this public notice in the Code, a uniform mechanism will be followed by various countries which also enhance cooperation among them. But there are various flaws in the public notice like the definitions of certain terms are not provided or is ambiguous, also there are flaws in certain provisions which should be taken into consideration before enacting such a public notice as a chapter in the Code. This public notice once incorporated into the IBC will resolve the problem of the cumbersome process provided in Section 234 and 235 of the IBC which has been followed till now and thereby will provide faster and proper remedy to the foreign creditors in cross border insolvency matters if the deficiencies provided are resolved too.