How do international insolvency laws affect local practices?
Table of Contents
To have a better understanding of cross-border insolvency law, it is important to compare the insolvency laws of other countries with those of India and examine current legislation on cross-border insolvency. International insolvency laws affect local practices, especially for financially distressed companies with assets outside India’s jurisdiction, as the current IBC and relevant regulations provide limited provisions. This highlights the need for a legal system that allows such debtors to seek the most effective remedy through appropriate legal forums
Need for a Cross Border Insolvency Law in India
The development of technology in the insolvency process and the constant updates to insolvency and bankruptcy law with the growth in the economical structure of the market industry has increased multinational corporations interest in India. This introduces the need for modifications in the current legal system regarding jurisdiction, changes in procedures for international insolvents, and the manner in which the stakeholders are to be treated.
Under sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 (hereon forward known as “IBC”), under the ‘Miscellaneous’ part of IBC, are the provisions which specifically deal with cross border insolvency law in India.
There are certain limitations with the current legal regime, such as:
- Indian legislation is dependent on the bilateral agreements which includes lengthy negotiations, and a more time-consuming process.
- Since the pandemic, insolvency and bankruptcy cases have increased, including multinational corporations that possess assets abroad.
- The negotiating individual treaties for each country that is involved, introduces uncertainties for foreign investors and complexities in the legal and procedural requirements.
- Because of the absence of a cross border insolvency law, Indian creditors fail to obtain fair agreements and preventing foreign creditors from seizing assets
Comparison of Insolvency Process of India, UK, US, Australia, Germany and Singapore
| Details | India | UK | US | Australia | Germany | Singapore |
| Governing Law | Insolvency and Bankruptcy Code,2016 | UK Insolvency Act, 1986 | Chapter II, US Bankruptcy Code | Bankruptcy Act, 1966; Corporations Act, 2001; Australian Securities and Investments Commission Act, 2001 | Germany Insolvency Code | Chapter 50,Companies Act, 1967 |
| Period of Insolvency Process | 330 days | 12 months, with creditors consent or court approval, can be extended upto more than 6 months | 120 days, extendable upto 18 months | – | Majority in each group of creditors in addition to approving the plan exceeds half of sum of all claims of he voting creditors in that group | |
| Party who initiates proceedings | Creditors or corporate debtor | Creditors, debtors, holders of qualifying floating charges | Debtor company | Creditors, directors, debtor | Debtor company or creditors | Company, directors, creditors |
| Is there a moratorium period | Yes, as per section 14 | Yes, after court appoints administrator | Yes, after filing petition under Bankruptcy Code | Yes | Yes | Yes in judicial management, schemes and compulsory liquidation, in receivership there is not receivership |
| Management control | Board of directors are suspended with the appointment of insolvency practitioner | With insolvency practitioner, daily operations remains with the directors | Management continues with the debtor in possession | Receiver and administrator | Debtor in self administration | Judicial manager, the officer of the court, takes over the business operations |
| Resolution plan | Needs to approved by 66% of Committee of Creditors (CoC) and the Adjudicating Authority, and is based on the information memorandum | 8 weeks of administration appointment, or extended period as the court may allow. Approval requires a simple majority in value of the creditors present and voting | Debtor has 4 months, extension allowed upto 18 months, to propose and seek approval from impaired creditors and shareholders within 2 months. Creditors who have been impaired to vote in favor of majority & ⅔ in amount actually voting | – | – | – |
| Sale of assets | Resolution professional has the duty to do so after approval of CoC | Administation is the agent of the company, has the power to contract without personal liability, and can sell the assets without the court’s permission | Debtor can sell the assets as per its assets free of liens. Hence, assets are sold efficiently | – | – | – |
| Approval of resolution plan | By CoC by at least 66% of voting share | By simple majority in value of creditors | By majority and ⅔ in amount actually voting | From majority of the creditors is required | By majority of creditors | By majority of creditors |
| Insolvency proceedings costs is paid by | Whoever initiates the process | By Debtor | By debtor | Whoever initiates the process | By Debtor | Whoever initiates the process |
| End of insolvency process | If resolution is successful, debtor starts with a ‘clean slate’, however if failed, liquidation proceedings are initiated under section 33 | Administration ceases, 1 year and if application made by the administrator, for the process objective is achieved or that no purpose can be achieved, and then liquidation | Resolution plan confirmation discharges debtors pre-obligation other than what is proposed in the plan. If the plan is not confirmed,, conversion to bankruptcy | |||
| Cross border insolvency process | Section 234 and 235, IBC; UNICTRAL, recommended, but not yet adopted | EU Insolvency Regulation, UNICTRAL Model Law | UNICTRAL Model Law, substantially been adopted | UNICTRAL Model Law | UNICTRAL Model Law, not adopted, however own set of rules are complied | UNICTRAL Model Law |
Agreements with Foreign Countries
Section under 234 of IBC, the title of the action in “agreements with foreign’ countries. As per this section, the Central Government may sign a contract with a foreign government for enforcing the provisions under the IBC. The Central Government may also direct the application relating to assets or property of the corporate debtor, including the debtor’s personal guarantor, that are situated at any place ina country outside India with which reciprocal arrangements have been made.
Letter of request to a country outside India in certain cases
The letter of request to a country outside India in certain cases is explained under section 235 of IBC. The resolution professional, liquidator, or bankruptcy trustee, depending of the stage of the process under IBC, may application to the Adjudicating Authority, which under IBC, is the National Company Law Tribunal (NCLT), that evidence or action relating to the assets that is required for any process or proceedings. This application will be according to the assets or property in the reciprocal agreement under section 235. Upon receiving the application, the NCLT will then issue a letter of request or an authority of such a country competent to deal with the request, only iif the NCLT is satisfied that the evidence or action is required for the process or proceeding.
UNCITRAL Model Law on Cross Border Insolvency, 1977
The UNCITRAL Model Law on Cross Border Insolvency, 1977 (hereon forward known as “Model Law”) was adopted on 30th May, 1997.
International insolvency laws affect local practices: Purpose of the Model Law
The purpose of this Model Law is given in its Preamble. The main purpose of the Model Law is to provide States with more effective mechanisms for cross-border insolvency for corporate debtor facing financial distress or insolvency, focusing on:
- Cooperation between the courts and other competent authorities of this State and foreign States involved in cases of cross border insolvency
- Greater legal certainty for trade and investment
- Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor
- Protection and maximisation of the value of the debtor’s assets
- Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment
Scope and Applicability
The scope of Application is given under Article 1 of the Model Law, and is applicable in cases where:
- Assistance is sought in this State by a foreign court or a foreign representative in connection with a foreign proceeding
- Assistance is sought in a foreign State in connection with a proceeding under the insolvency laws of the enacting State
- A foreign proceeding and a proceeding under insolvency laws of the enacting State in respect of the same debtor are taking place concurrently
- Creditors or other interested persons in a foreign State have an interest in requesting the commencement of, or participating in, a proceeding under the insolvency laws of the enacting State
As per Article 1(2) of the Model Law, banks or insurance companies mentioned as examples of entities that the enacting State might decide to be excluded, as insolvency of such entities give rise to the particular need to protect vital interests of a large number of individuals.
Key Elements of Model Law
The main features is given under Part IV of the Guide to Enactment and Interpretation of the UNCITRAL Model Law on Cross Border Insolvency:
- Access to local courts for representatives of foreign insolvency proceedings and for creditors: The Model Law states that a foreign representative is entitled to apply directly to a court in the State enacting law. As per Article 10, a foreign representative has the right to apply to the courts of the enacting State does not subject the foreign representative to the foreign assets of the debtor to the jurisdiction of the enacting State for any purpose other than the application. Following this, under Article 11, this representative has the rights to apply to commence a local proceedings in the enacting State on the conditions applicable to that State and to apply for recognition of the foreign proceedings in which they have been appointed under Article 15. Upon recognition, a foreign representative is entitled to participate in insolvency-related proceedings conducted in the enacting State under the law of that State as stated under Article 12 and to initiate in the enacting State an action to avoid or otherwise render ineffective acts detrimental to creditors under Article 23, and as provided under Article 24, to intervene in any local proceedings in which the debtor is a party. As per Article 13, foreign creditors have the same right as local creditors to commence and participate in proceedings in the enacting State.
- Recognition of a Foreign Proceeding: Model Law has the main objective to simply the procedures for recognition of qualifying foreign proceedings that would avoid the lengthy procedures and provide certainty with respect to the decision to recognise. Article 6 permites that the recognition be refused where it would be contrary to public policy of the State in which recognition is sought. What comes under ‘public policy’ has not been mentioned, so it can be implied that it will include the public policy as per the State in question. Article 15 defines the procedural requirements for an application by a foreign representative for recognition. The documents required for this application does not need to be authenticated in any special way. The main proceedings are taking place where the debtor had its centre of main interest (COMI). COMI has no definition in the Model Law, but it can be presumed that it is the registered office or habitual residence of the debtor. Non-main proceedings are those which take place where the debtor has an establishment. As per Article 17, paragraph 2, the foreign proceedings can be the main proceedings or non-main proceedings. If the foreign proceedings are main proceedings, relief is automatic, this includes a moratorium on transfer of assets of the debtor.
- Relief to Assist Foreign Proceedings: Under the Model Law, there are two types of relief: interim relief and relief on recognition. International insolvency laws affect local practices by providing interim relief, which may be granted by the court until an application for recognition of foreign proceedings is decided upon, and relief on recognition, which is granted once the foreign proceedings are recognized. After an application for recognition is filed, the court has the discretionary power to grant urgent relief under Article 19. This interim relief is narrower than the relief provided post-recognition and terminates unless extended by the court when a decision on the recognition of foreign proceedings is made. Relief on recognition is further categorized into mandatory relief, which is automatically applied when the foreign main proceedings are recognized, and discretionary relief, which the court may grant for either foreign main or non-main proceedings.
- Cooperation Among the Courts of States Where the Debtor’s Assets are Located and Coordination of Concurrent Proceedings: The Model Law stipulates that courts are empowered to cooperate with jurisdictions governed by the Model Law and can communicate directly with their foreign counterparts. International insolvency laws affect local practices by authorizing cooperation between courts and foreign representatives, regardless of formal recognition. This cooperation can occur at any stage, even before an application for recognition, facilitating smoother cross-border insolvency proceedings and enhancing global collaboration in insolvency matters..
Cross Border Insolvency Proposed Draft Part
The report submitted by the Insolvency Law Committee (ILC) on October 16, 2018, includes the articles of the Model Law into the IBC, thereby adopting a globally acceptable practice. These recommendations may be instrumental in implementing much-needed cross-border insolvency laws into the current Code. International insolvency laws affect local practices, and the ILC has recommended the insertion of draft Part Z into the Code, which adopts the Model Law with certain modifications. These modifications aim to integrate global insolvency standards while addressing the specific needs of the Indian legal framework.
- Applicability to corporate debtors: At present, Part Z should be extended only to the corporate debtor, which under this draft, includes foreign companies. The Committee was of the opinion that this would allow foreign companies to approach the NCLT for cooperation or recognition of foreign proceedings to avail the required relief.
- Exclusion of certain entities: The Committee recommended that the Central Government must be empowered to notify the exclusion of certain entities from the application of draft Part Z.
- Reciprocity: The Committee recommends that the Model law be adopted gradually, first on a reciprocity basis and the same may be subsequently re-examined and included accordingly. It was also recommended that the domestic court will recognise and enforce a foreign court’s judgement or orders, if the country in which the foreign court is located had adopted the same or similar legislation to that governing of the domestic court.
- Access to Foreign Representatives: One of the main features of the Model law is accessibility to foreign insolvency practitioners and foreign creditors’ access to domestic court to seek remedies directly. Foreign creditors’ access has been included in the IBC, however access to foreign practitioners is not. Hence, it is recommended that the Central Government is empowered to devise a mechanism in which this is possible.
- Centre of Main Interests: The Committee recommended a list of factors comprising COMI that could be inserted through the rule-making powers, including the location of the debtors books and records, location of financing etc. As a preventative action, it was also recommended that the proactive enquiry by the NCLT and a look into the previous 3 months mus be adopted while enforcing COMI presumption.
- Cooperation: The cooperation between the domestic and foreign courts, and domestic insolvency practitioners and foreign insolvency practitioners. The IBC and its procedures are still evolving, hence, the cooperation between foreign courts and the NCLT is proposed to be subject to guidelines to be notified by the Central Government.
- Public policy exception: The Committee recommended that the NCLT may refuse to take any action under the IBC if it is against public policy. If there is any such action, the NCLT does not need to issue a notice, and the Central Government may be empowered to apply to it directly.
- Provisions in Companies Act, 2013: There are certain provisions that handle insolvency of foreign companies. On the enactment of Part Z, there will be a dual regime in handling the insolvency of foreign countries. To avoid this, the Committee recommended that the provisions in Companies Act, 2013 be reassessed and the pending matters be transferred for adjudication.
Conclusion
Globalization is a driving force in the market, significantly impacting insolvency practices. However, the current legal system in India lacks the framework to accommodate these changes. While Indian courts have historically cooperated with foreign courts on cross-border cases, there is a growing need to formally incorporate international insolvency laws affect local practices, especially for cross-border insolvency. The Insolvency Law Committee has provided detailed recommendations to help amend the IBC for this purpose. Implementing the UNCITRAL Model Law on Cross Border Insolvency (1977) and incorporating foreign laws into the Indian legal system will assist in aligning international insolvency laws with the IBC.
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