[Ajay Sharma and Akhil Kumar are fourth-year students at National University of Advanced Legal Studies, Kochi.]
In this age of globalization, a corporate entity may have multiple offices, business, creditors and debtors in more than one country. This has given rise to many problems of which cross-border insolvency is one. The rapid growth of international trade, commerce, investment and industries setting the pace of globalization and opening-up of the economies of nations intensified the need for a proper framework for protecting Indian creditors in the larger scheme of things.[1]
The UNCITRAL Model Law on Cross border Insolvency (Model Law) has emerged as a largely accepted legal framework to deal with issues relating to cross border insolvency. The Model Law has been adopted by 44 countries in their respective insolvency legislation. India's Insolvency and Bankruptcy Code, 2016 (Code) consists of two provisions (sections 234 and 235) which deal with the issue of cross border insolvency. However, the existing provisions do not provide a comprehensive framework. There was an increase in cases relating to cross border insolvency in India which ultimately resulted in the issue of a draft chapter on this issue by the Central Government (Draft Chapter). The government has asked for suggestions from the different stakeholders as well as the public on the draft in order to come up with a comprehensive legal framework for insolvency cases involving overseas companies. The draft code resembles the Model Law and other codes which have been enacted on similar lines by different countries.
Salient Features of the Draft Chapter
I. Rights of Foreign Representatives and Creditors
Sections 7, 8, 9, 10 and 11 of the Draft Chapter deal with assistance to foreign representative and creditors. As per the said provisions, a foreign representative or a creditor will be treated as a domestic creditor in respect of initiation of and participation in a proceeding under the Code. A foreign creditor or representative would not require any kind of permission or recognition from any authority to approach the National Company Law Tribunal (NCLT) to initiate proceedings against the debtor if the application meets the requirements prescribed under sections 7, 9 or 10 of the Code. If, at any time during the proceedings, the NCLT passes any notification for the Indian creditors, similar notifications shall also be given to the foreign representatives and creditors who do not have a registered office in India.
II. Recognition of a Foreign Proceeding
A foreign representative may apply to the NCLT for recognition of the foreign proceeding in which the said representative has been appointed. The representative has to produce certain documents as prescribed under section 12 (2) of the Draft Chapter for filing an application. If the NCLT is satisfied that the application meets the criteria prescribed under section 15 (1), it shall recognize the proceedings within 14 days from the date of filing of the application either as a foreign main proceeding or a foreign non-main proceeding, such recognition depending upon the place of corporate debtor’s business.
Upon recognition of a foreign proceeding as a foreign main proceeding, the NCLT shall declare moratorium prohibiting institution of suits or continuation of pending suits, transferring or encumbering, alienating or disposing of any assets, or any action to relating to foreclosure, recovery or enforcement of any security interest of the company facing insolvency proceedings.[2]
If the insolvency proceeding is recognized as a foreign non-main proceeding, the NCLT may exercise its jurisdiction only to protect the assets of the company or the interests of the creditors. In such situations, the NCLT has the discretion to grant moratorium or any other relief.
III. Reciprocity
If, in the course of any insolvency resolution process or liquidation or bankruptcy proceeding, the insolvency professional is of the opinion that the assets of the debtor are situated outside India, the order of the adjudicating authority will only be applicable when India has signed a reciprocal arrangement with the other country. The proposed draft seeks to rectify this shortcoming.
As per the Draft Chapter, any order passed by an Indian court will be recognized in a foreign country which has adopted the UNCITRAL Model Law (including countries such as the United Kingdom and the United States). The Draft Chapter envisages recognition, assistance, cooperation and appropriate relief in relation to the insolvency proceedings which have commenced in India on the part of foreign countries.
IV. More Power to Insolvency Professional and Liquidator
As per section 22 of the Draft Chapter, the resolution professional or liquidator shall be in direct contact with foreign courts and can exercise its function, subject to the supervision of the NCLT. The draft also allows the Indian insolvency professional to participate and have access to the foreign proceedings.
V. Cooperation with Foreign Courts
The Model Law envisages that there shall be direct communication between courts across jurisdictions in cross border insolvency cases. However, as per section 21 of the Draft Chapter, the Central Government, with the consultation of the NCLT, shall notify rules as to how communication and co-operation shall take place between the NCLT and foreign courts. The NCLT may also conduct joint hearing with another foreign court in a concurrent proceeding and may communicate directly with, or request information or assistance directly from, foreign representatives. Resolution professionals appointed for the purpose of the insolvency proceedings shall be subject to the supervision of the NCLT.
VI. Concurrent Proceedings
As far as concurrent proceedings are concerned, the draft norms provide that the foreign proceedings and those under the Code in respect of the same corporate debtor can be commenced or carried out at same time. The conditions prescribed for concurrent proceedings are two-fold. Firstly, the foreign main proceedings have to be recognized by the NCLT. Secondly, the corporate debtor should have assets in India. Where a foreign proceeding and proceedings under the Code are taking place concurrently for the same corporate debtor, the NCLT shall seek cooperation and coordination of foreign courts or representative as per sections 21, 22 and 23 of the Draft Chapter.
Observations
Currently, the Code is not equipped with a proper framework to deal with cross border insolvency cases. The proposed draft is certainly a welcome step in this regard. Since the same is based on the UNCITRAL Model Law which has been adopted by 44 countries, India may be able to coordinate with other countries in cross-border cases.
However, there are certain areas that still need to be looked into. Under the Draft Chapter, there is no provision dealing with the proceedings against personal guarantors of corporate debtors whose assets are located in the foreign jurisdiction. Further, the norms need greater clarity as regards situations where one of the simultaneous proceedings against the same corporate debtor is concluded. Similarly, as far as the discretionary powers of the NCLT in relation to recognition of foreign proceedings are concerned, it is provided that the NCLT's action would depend on whether the same would be in tune with the public policy of India; however, the draft norms do not provide guidelines as regards the scope of "public policy of India." It is hoped that, with stakeholder participation in the process of creation of a cross-border insolvency framework, these issues would be addressed.
[1] NL Mitra, Report of the Advisory Group on Bankruptcy Laws, 9th May 2001.
[2] Draft Chapter, Section 17(1).