Public Policy Exception to Proposed Cross-Border Insolvency Law – Two Problems & Proposed Amendments
[Dharmendra is a Partner in the Dispute Resolution practice group at Poovayya & Co, and an incoming LLM candidate at University of Chicago Law School, Class of 2023.]
This article deals with two problematic aspects and proposes amendments to the public policy exception (PPEx) contained in §4 of the recently released draft of India’s cross border insolvency law – titled “Draft Part Z” (“DPZ”) – which, when enacted, will amend the Insolvency and Bankruptcy Code 2016. DPZ adopts the UNCITRAL Model Law on Cross-Border Insolvency 1997 (Model Law), and introduces multiple forward-looking principles relating to: (a) providing access to foreign insolvency professionals and creditors to domestic insolvency proceedings in India; (b) recognition and enforcement of foreign insolvency proceedings by Indian courts with standards for determining the concurrent foreign main or non-main proceedings; and (c) cooperation and coordination between Indian and foreign courts and insolvency professionals.
Contrary to the progressive intent behind enacting a certain and holistic cross-border insolvency law, the PPEx empowers the adjudicating authority (either the National Company Law Tribunal or the Debts Recovery Tribunal) to refuse to take ‘any’ action under DPZ if “in its opinion, the implementation of such action would be manifestly contrary to the public policy of India”. The opinion of the adjudicating authority is contingent on the Indian government’s submissions before any final determination. Additionally, the government has been granted suo motu powers to cause refusal of any action by the adjudicating authority, if the government opines that it is manifestly contrary to the public policy of India.
The contours of the doctrine of public policy have been left to be interpreted by courts through judicial precedents in India, as no law defines it (reference State of Rajasthan v. Basant Nahata [(2005) 12 SCC 77)]. These precedents, though, have been inconsistent – the Indian Supreme Court categorizes public policy as imprecise, changing from time to time with changing circumstances (reference DTC v. Majdoor Congress [1991 Supp (1) SCC 600]), and advised against its conceptual rigidity in the interest of societal stability (reference BCCI v. Cricket Assn. of Bihar [(2015) 3 SCC 251)]). As a result, the scope and application of the doctrine is one of the most contentious debates in Indian law[i].
In the DPZ, however, the invocation and application of the PPEx creates an intrinsic defect in the law where the exception swallows the rule(s). In one fell swoop, the purpose behind enactment of the Model Law in India can be rendered otiose. This is despite use of the qualifying term “manifestly contrary to” before “public policy”, which is advocated in the UNCITRAL Guide to Enactment and Interpretation of the Model Law, as a necessary countervailing force to militate against overbroad and expansive interpretation of the phrase “public policy”.
Despite use of the “manifestly contrary” qualification, the PPEx is an unworkable safety valve and needs to be altogether omitted or modified, as below:
Outsourcing of judicial function for determination of “manifestly contrary to public policy”: Unlike the US, India follows a broad separation of powers between the legislature, executive and judiciary. Despite established practice that the interpretation of law should be the judiciary’s sole prerogative, the PPEx introduces a third party, i.e., the government, into the interpretative exercise. The government ought not educate the adjudicating authority as to what “manifestly contrary to public policy” is or should be. In doing so, the DPZ outsources an essential judicial function – interpretation of law – to the government. Moreover, the authority may be reluctant to disregard the opinion of the government, as its final opinion is predicated on the government’s submissions. This disregards India’s federal legal system and creates an overbearing central government which will be empowered to opine on aspects that are neither within its legislative or executive domain.
Narrowing down: The UNCITRAL Guide’s prescription for narrowing and restricting the application of the public policy exception by introducing the “manifestly contrary to” qualifier has been followed by many countries, including the USA [ii]. American scholarship on the interpretation of the public policy exception has expounded that recourse to the exception should be the last resort in refusing any insolvency action, and that an effort should be made to rely on other grounds already available within the text of the law to refuse any action [iii]. DPZ already contains grounds on which relief can be refused to protect the interests of the creditors, the corporate debtor, or other interested persons (reference §19, DPZ). The uncertainty of the public policy exception in Indian arbitration law necessitating parliamentary intervention by narrowing it down [iv]. Unless narrowed, the PPEx will also lead to a multiplicity of litigation requiring judicially interpretation of its scope. The American caselaw and legislative experience is illuminative on how the framework of DPZ itself can be sufficient to protect the interests of subjects of the insolvency regime, without resorting to the public policy exception.
[i] For example, in Indian arbitration law, see Anirudh Hariani, Indian Arbitration and the Shifting Sands of Public Policy, 16(2) Asian Int’l Arb. J. 159 – 192 (2020). [ii] Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross-Border Insolvency (Jan. 2014), 36, 60-62. (UNCITRAL Guide). [iii] Michael A. Garza, When is Cross-Border Insolvency Recognition Manifestly Contrary to Public Policy, (2015) 38 Fordham Int'l L.J. 1587, 1624-25. [iv] Arbitration and Conciliation Act 1996 (§ 34(2)(b): Explanation 1).