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This Guest Article is authored by Shreya Prakash (Senior Associate, Shardul Amarchand Mangaldas & Co.) and Kritika Poddar (Research Fellow, Shardul Amarchand Mangaldas & Co.) as part of the RFMLR-IBBI Blog Series Competition.
1. INTRODUCTION
The Ministry of Corporate Affairs (“MCA”) in November 2021, issued a notice inviting comments on its proposed modifications to include a cross-border insolvency framework in the Insolvency and Bankruptcy Code, 2016 (“Code”) (“Notice”). This Notice followed various news reports suggesting that a Bill to add a cross-border insolvency framework to the Code would be introduced in the Budget Session of Parliament in 2022. This blog post firstly traces the history of attempts to introduce a consolidated cross-border insolvency framework under the Code. Secondly, it summarises the features of the cross-border framework proposed to be enacted by the MCA in the Notice. Finally, it makes suggestions on how the proposed cross-border insolvency framework may be strengthened so it can efficiently deal with cross-border aspects of insolvency cases.
2. HISTORICAL EVOLUTION
The Code was enacted in 2016 to consolidate the erstwhile fragmented regime relating to corporates, partnerships, and limited liability partnerships.[1] The initial draft of the Insolvency and Bankruptcy Bill, 2015 recommended by the Banking Law Reforms Committee did not contain provisions dealing with cross-border matters. To offset this lacuna, the Joint Parliamentary Committee suggested the inclusion of sections 234 and 235 in the Code.[2]
Sections 234 and 235 require that bilateral arrangements entered into between India and other countries would provide the manner in which cross-border issues related to each country would be dealt with. This at best provides for the creation of multiple ad hoc frameworks that could result in heterogeneous and conflicting rules to resolve cross-border issues. This would result in uncertainty for creditors, debtors as well as courts. Worse still, this framework relied on the negotiation of multiple agreements which could take years.
Given this, in October 2018, the Insolvency Law Committee (“ILC”) proposed a Draft Part Z in the Code[3] largely based on the United Nations Commission on International Trade Law’s Model Law on Cross-Border Insolvency (1997) (“Model Law”), which is the most widely accepted framework to address issues arising in cross-border insolvency.
The ILC’s recommendations were supplemented by the Cross-Border Insolvency Rules/ Regulations Committee (“CBIRC”) which recommended rules and regulatory framework for the smooth implementation of the proposed Draft Part Z.[4]
These reform efforts and the advent of cross-border insolvency cases such as those of Jet Airways[5] and the Videocon Group emphasize the need for a robust legislative framework to deal with cross-border insolvency disputes. Draft Part Z along with CBIRC’s recommendations and the modifications proposed by MCA vide its Notice is collectively referred to as the ‘Proposed Framework’.
3. FEATURES OF THE PROPOSED FRAMEWORK
The Proposed Framework envisages the enactment of a procedural law that deals with cross-border insolvency proceedings of a debtor that has assets or creditors in multiple jurisdictions. Like the Model Law, this framework focuses on four elements as key to the conduct of cross-border insolvency cases: access, recognition, relief (assistance), and cooperation.[6] Under the Proposed Framework, a foreign representative has the right to apply to the Adjudicating Authority,[7] and upon recognition of a foreign proceeding, is entitled to participate in domestic insolvency proceedings under the Code.[8] A foreign proceeding may be recognized as the main proceeding if the proceeding is taking place in the country where the corporate debtor’s centre of main interests lies.[9] On the other hand, it may be recognized as a non-main proceeding if it takes place in a country where the corporate debtor has an establishment.[10] Recognition of a foreign proceeding as a main proceeding results in the grant of certain automatic reliefs, similar to the reliefs granted under Section 14 of the Code.[11] In addition to these automatic reliefs, the Adjudicating Authority may grant discretionary reliefs to protect the corporate debtor’s assets or the creditors’ interests. Such discretionary reliefs may also be granted upon the recognition of a non-main proceeding as well.[12] However, the recognition of a non-main proceeding would not result in the automatic grant of reliefs, unlike in the case of main proceedings. The Proposed Framework also empowers the Adjudicating Authority and insolvency professionals to cooperate and communicate directly with their foreign counterparts[13] and provides for coordination of two or more concurrent insolvency proceedings in different countries.[14]
While the Proposed Framework in its large part stems from the Model Law, its adoption has been suggested with certain deviations.[15]
4. RECOMMENDATIONS
In proposing the enactment of provisions pari materia with the Model Law, the Proposed Framework takes the right steps to ensure that India has a modern cross-border insolvency framework in place. However, in our view, these key issues ought to be addressed before the Proposed Framework is enacted:
(i) Applicability of the Proposed Framework
At present, the MCA has proposed that the Proposed Framework be made applicable restrictively in three ways. First, the MCA has suggested that the Proposed Framework would not be applicable where a corporate debtor is undergoing a pre-packaged insolvency resolution process,[16] where a corporate debtor is a financial service provider,[17] or where countries do not reciprocate[18] (or are exempted from reciprocity requirements). However, in our view, the MCA should consider recalibrating its approach in this regard. One of the main reasons for introducing the Proposed Framework is that it is a comprehensive and uniform framework, that would prevent ad hoc resolutions of cross-border issues. Given this, wherever such cross-border issues are likely to arise, it may be helpful to apply this Proposed Framework. In fact, there are already various safeguards to ensure that there is flexibility and adequate deference to domestic law within the Proposed Framework. Given this, any unstated concerns regarding the appropriateness of this framework should be re-evaluated, and this framework should be adopted unless there is evidence to indicate that cross-border issues are unlikely to arise in specific cases.
(ii) Application of Part II of the Code (Insolvency resolution and liquidation for corporate persons) to foreign companies
The Proposed Framework intends to apply the provisions of Part II of the Code to foreign companies with an establishment in India.[19] This will, in effect, allow for companies that are not incorporated in India but have an establishment in India, to be subject to Indian insolvency proceedings. Similar provisions for winding up unregistered companies exist in Sections 375-378 of the Companies Act, 2013, and the recommendation to move them to the Code would help streamline cross-border cooperation in such cases. However, before Part II of the Code is extended to foreign companies with an establishment in India, care should be taken to review whether all aspects of the corporate insolvency resolution process (“CIRP”) can apply to such companies. For example, given that the whole company would not be based in India, a resolution plan preserving the ‘whole company’, which is how the resolution is envisaged in the Code, may not be feasible. Moreover, mandatory steps like asking for an expression of interest, and requests for resolution plans may not be applicable where Indian proceedings are not ‘main proceedings’. In view of this, the MCA should consider introducing certain flexibilities and relaxations on mandatory steps of the CIRP for such companies or empower to Adjudicating Authority to grant such flexibility. Equally, the MCA should also consider allowing a direct entry into liquidation proceedings, if so envisaged as part of the foreign main proceedings.
(iii) Definition of foreign proceedings
Under the scheme of the Proposed Framework, it is only on recognition of a foreign proceeding, whether main or non-main, that the Adjudicating Authority can grant necessary reliefs for the protection of the corporate debtor’s assets or the interests of the creditors.[20] The explanation to the definition of ‘foreign proceedings’ in Clause 2(g) of Draft Part Z requires a proceeding to only be recognized as a reorganization proceeding when its objectives are the same as resolution under the Code. This may unduly limit the ability of the Adjudicating Authority to recognize proceedings and cooperate.
The meaning of resolution under the Code has been interpreted restrictively to envisage a “resolution of the company as a going concern”[21]. In many jurisdictions, however, the aim may be to save businesses and not the company itself, which could potentially be excluded by virtue of this explanation. Given this, the term ‘reorganization’ should be construed broadly enough to include only those foreign processes where the intent and spirit is to not wind down the business. In view of this, the explanation may be deleted.
(iv) Defining public policy
Clause 4 of Draft Part Z provides the Adjudicating Authority the right to refuse any action authorized by the Proposed Framework if such action is manifestly contrary to the public policy of India. Such a provision exists under the Arbitration and Conciliation Act, 1996[22] (“Act”) as well, but has been subject to various rounds of litigation and interpretation, that cause uncertainty, and risk expanding the scope of courts’ intervention under this clause to deal with ‘merits’ of disputes as well,[23] which is contrary to the purpose of the Act. In view of this, a new definition of ‘public policy’ was included in the Act in 2015. To avoid such litigation, and expansive interpretation in the context of cross-border insolvency, it would be helpful to adopt a similar definition of public policy in the Proposed Framework as well.
(v) Right of foreign representatives to commence proceedings
Under Article 11 of the Model Law, a foreign representative is entitled to commence proceedings under the laws of the enacting state if the pre-conditions for initiation of such proceedings are satisfied. However, the Proposed Framework only permits foreign creditors to commence proceedings under Sections 7 and 9 of the Code.[24] In many cases, foreign creditors may be passive and less willing to initiate insolvency proceedings in foreign jurisdictions that they are unfamiliar with and more so if they expect minimal payouts to themselves. Foreign representatives may be better placed to demonstrate that a default has occurred and other prerequisites for the commencement of insolvency proceedings have been met. Given this, the MCA should consider adding a new clause in line with Article 11 of the Model Law permitting foreign representatives to commence proceedings. Clause 1(2)(d) of Draft Part Z may also be amended to recognize the right of other ‘interested persons’ in line with Article 1 of the Model Law.
(vi) Framework for court-to-court communication
The Proposed Framework, just like the Model Law, relies significantly on court-to-court communication and cooperation, particularly for the coordination of concurrent proceedings. To enable smooth communication, the Proposed Framework suggests the adoption of the JIN Guidelines, 2016 [25].
In addition to this, the Modalities of Court-to-Court Communication (“Modalities”) may be adopted in consultation with the National Company Law Tribunal and National Company Law Appellate Tribunal, to provide more detailed mechanics for initiating, receiving, and engaging in such communication. For example, the Modalities provide for inter alia arrangements relating to the date, time, and language of communication between the judges, the method of engaging in such communication which can take place either directly or through a designated ‘facilitator’ via telephone, video conference or email and the prior consent of parties to the communication taking place.
5. CONCLUSION
Adoption of the Proposed Framework within the Code will eliminate many procedural challenges in the legal framework of cross-border insolvency. With the increase in foreign investments in India, a robust and comprehensive cross-border insolvency framework is the need of the hour. It is only fair that foreign investors and foreign nations are given adequate legal protection and the right to recover their monies promptly.
Endnotes:
[1] Banking Law Reforms Committee, The report of the Bankruptcy Law Reforms Committee Volume I: Rationale and Design (November 2015) < https://ibbi.gov.in/BLRCReportVol1_04112015.pdf> accessed 25 January 2022.
[2] Lok Sabha, Report of the Joint Committee on the Insolvency and Bankruptcy Code, 2015 (April 2016) < https://ibbi.gov.in/16_Joint_Committee_on_Insolvency_and_Bankruptcy_Code_2015_1.pdf > accessed 25 January 2022.
[3] Ministry of Corporate Affairs, Report Of Insolvency Law Committee On Cross Border Insolvency (October 2018 <https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf> accessed 25 January 2022.
[4] Ministry of Corporate Affairs, Cross Border Insolvency Rules/ Regulations Committee, Report on the rules and regulations for cross-border insolvency resolution (June 2020) < https://www.ibbi.gov.in/uploads/whatsnew/2021-11-23-215206-0clh9-6e353aefb83dd0138211640994127c27.pdf >accessed 25 January 2022.
[5] State Bank of India v. Jet Airways (India) Limited, 2019 SCC OnLine NCLT 7875.
[6] Ministry of Corporate Affairs, Report Of Insolvency Law Committee On Cross Border Insolvency (October 2018 <https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf> accessed 1 March 2022; https://uncitral.un.org/en/texts/insolvency/modellaw/cross-border_insolvency.
[7] Draft Part Z, Clause 7.
[8] Draft Part Z, Clause 9.
[9] Draft Part Z, Clause 15(2)(a); Clause 14 of Draft Part Z stipulates that the location of the corporate debtor’s registered office is presumed to be its centre of main interests. However, if such registered office has been moved to another country within three months prior to the commencement of insolvency proceedings, then the Adjudicating Authority shall conduct an assessment of where the corporate debtor’s central administration takes place, and which is readily ascertainable by third parties and its creditors. The CBRIC has further laid down certain determinative factors to assess the corporate debtor’s centre of main interests which includes inter alia the location of the corporate debtor’s assets, books of account, primary bank account.
[10] Draft Part Z, Clause 15(2)(b).
[11] Draft Part Z, Clause 17.
[12] Draft Part Z, Clause 18.
[13] Draft Part Z, Clauses 21 & 22.
[14] Draft Part Z, Clause 23(e).
[15] For example,:
(i) Clause 1(4) of Draft Part Z recommends the applicability of the Proposed Framework on the basis on ‘legislative reciprocity’ meaning thereby that India will recognise and enforce a foreign court’s judgements or orders only if the foreign country has adopted the Model Law or a legislation similar to the Model Law.
(ii) Article 2, sub-paragraph (f) of the Model Law defines ‘establishment’ as “any place of operations where the debtor carries out a non-transitory economic activity with human means and goods or services”. The Proposed Framework uses the word ‘assets’ instead of ‘goods’ to define establishment in an attempt to cover businesses that may not have goods but have immoveable as well as intangible property. This helps enlarge the scope of proceedings that can be recognised so that a comprehensive cross-border solution can be found for issues.
(iii)A regulatory framework for foreign representatives has been recommended wherein the Insolvency and Bankruptcy Board of India (“IBBI”) will emplace an online mechanism to allow foreign representatives seeking to act or participate in proceedings under Proposed Framework, to apply for authorisation. Additionally, certain provisions of the Code of Conduct specified in the first schedule of IBBI (Insolvency Professional) Regulations, 2016 shall also be made applicable to foreign representatives.
[16] Ministry of Corporate Affairs, Invitation of comments from Public on Cross-Border Insolvency under Insolvency and Bankruptcy Code, 2016 (November 2021)<https://www.mca.gov.in/bin/dms/getdocument?mds=0hVFo4x3MM7YCWEE9nXqAA%253D%253D&type=open> accessed at 25 January 2022.
[17] Ministry of Corporate Affairs, Invitation of comments from Public on Cross-Border Insolvency under Insolvency and Bankruptcy Code, 2016 (November 2021)<https://www.mca.gov.in/bin/dms/getdocument?mds=0hVFo4x3MM7YCWEE9nXqAA%253D%253D&type=open> accessed at 25 January 2022.
[18] Draft Part Z, Clause 1(4)(a).
[19] Ministry of Corporate Affairs, Cross Border Insolvency Rules/ Regulations Committee, Report on the rules and regulations for cross-border insolvency resolution (June 2020) < https://www.ibbi.gov.in/uploads/whatsnew/2021-11-23-215206-0clh9-6e353aefb83dd0138211640994127c27.pdf >accessed 25 January 2022.
[20] Draft Part Z, Clause 17 & 18.
[21] Binani Industries Limited v. Bank of Baroda & Anr., 2018 SCC OnLine NCLAT 457; In the matter of Roofit Industries, 2018 SCC OnLine NCLT 3808.
[22] Arbitration and Conciliation Act, 1996, Section 48.
[23] ONGC Ltd. v. Western GECO Ltd., (2015) AIR 363 (SC).
[24] Draft Part Z, Clause 1(2)(d).
[25] Ministry of Corporate Affairs, Cross Border Insolvency Rules/ Regulations Committee, Report on the rules and regulations for cross-border insolvency resolution (June 2020) < https://www.ibbi.gov.in/uploads/whatsnew/2021-11-23-215206-0clh9-6e353aefb83dd0138211640994127c27.pdf >accessed 25 January 2022.