Abstract
In 1991, with the enforcement of economic reforms like globalization, privatization and liberalization, that focused at rapid industrialization, the government abolished the requirement of industrial licensing, and the foreign companies/investors were allowed entry in the Indian market.Consequently, it provided the “right to entry” to new companies. Later in 2002, the Competition Act,2002 was introduced, which aimed at creating a legal framework to manage and promote the competition in the market. This provided the companies with the “right to free and fair competition” withother companies in the market. However, until 2016 there was no sufficient law that provided the “right to exit” from the same. Therefore, the Insolvency and Bankruptcy Code, 2016 was enacted to provide a company the “right to exit” the market, to reduce the complexity of the winding-up process provided in the Companies Act, 2013, and to protect the interest of the investors of the company in case it becomes insolvent. Although, until now there is no sufficient law that aids in protecting the interest of the foreign investors and recognition of foreign insolvency proceedings when an Indian company becomes insolvent.Therefore, the legislature of India is considering to introduce a bill and adopt the UNCITRAL model law of cross border insolvency,1997, that aims at creating cooperation and coordination between two or nations such that it safeguards the interest of the foreign investors. This article explains the current provisions in India dealing with cross border insolvency, the reason why India should adopt the UNCITRAL model law and the functioning of this model law.
- INTRODUCTION
India has become anintriguing country internationally for the commencement of new businessesand investments. According to the world bank’s“ease of doing business”report[1], India ranked 130th in 2017 but withinthreeyears,it has grabbed the position of 63rd country out of 190 countries in the world since it provides easy access for an individual or company to commence or expand their business in India. Also, with the emerging “Make in India”movement, various companies are willing to invest in India.
To run a business, there are two important things that one needs. Firstly, an idea. An idea that is innovative and beneficial to society and people; and secondly an investor, a person who believes in the idea and invests money. As the equal possibility of flipping a coin, the business either can flourish and achieve heights or it fails and ultimately shuts down. In case a business fails, the owner faces huge losses and runs out of money. So basically, Insolvency is a situation wherein a person is not able to fulfill his financial burdens and can’t meet its requirements to fulfill his duties in the daily course of business. These duties refer to the repayment of money to the people or financial institutions that had invested in his business. Such a person who is not able to meet his debts is called an insolvent person. [2]
There are existing laws in India that make the entry of foreign companies easier in the market and provide access to invest in India. However, in case an Indian company becomes insolvent, there is no adequate law that protects the interest of foreign companies/creditors andrecognizesinsolvency proceeding running parallel in more than one county on the same debtor thereby creating cooperation and coordination between countries.Just getting cash through speculation doesn’t finish the obligation of the country. As a country, India needs to secure the ventures of foreign investors, but there are extremely few laws dealing with this issue.
- THE PRESENT LAW IN INDIA
The law in India, that deals with insolvency of the companies, is the “Insolvency and Bankruptcy Code,2016”.The code has 255 Sections and 11 Schedules. It was introduced to control the rising levels of the non-performing assets or bad loans (hereinafter referred as NPA). [3]India is one of the countries having anexceptionally high NPA. It was ranked 27th in 2018 by the World Bank [4]and 34th in 2019 by IMF. Consequently, the introduction of the IBC was a very important step by the government of India to make the Indian economy strong and independent. The code has significantly improved India’s insolvency regime and has proved to be the backbone of the Indian economy. Slowly but steadily, the ever-inflating NPA has started to decline. The insolvency code is a one-stop answer for settling bankruptcies which were a long procedure earlier and that didn’t offer a financially suitable game plan.
Moving forward, the code also intends to protect the interest of investors and makingan efficient way ofworking together.However,because myriad foreign companies are also willing to invest in India, the provision regarding the protection of interest of the foreign investors are immensely obsolete.Currently, under IBC some provisions permit the foreign companies/creditor to initiate and participate in the insolvency proceedings held in India against an Indian company but the main problem is the “recognition” of these Indian proceedings in the creditor’s home country. Until and unless the foreign proceedings are not recognized in the domestic country the order passed by the foreign country shall not have an effect. There is a need to enact reasonable provisions to secure the foreign financial investors, and in turn, ensure their privilegesat a point when an organization shuts down. This can be made possible with the help of ‘cross border insolvency’ law.
- WHAT IS CROSS BORDER INSOLVENCY?
The term cross border insolvency is also known as international insolvency. It refers to situations like; the debtor owns assets in more than one country; all the creditors of the debtors aren’t from the same country where the insolvency proceedings are taking place; where there are more than one insolvency proceedings taking place on the same debtor across the world. It mostly focuses on the insolvency of the companies rather than the insolvency of the individuals. The cross-border insolvency proceedings are based on different theories viz. the territorial approach, the universalist approach, and the hybrid approach.
The provisions dealing with the cross-border insolvency in India arefew. Section 234 and section 235[5]deals with the cross-border insolvency but they are not strong enough to address the issues that are faced by Indian courts. It provides a narrow framework to deal with the same. Section 234 deals with an agreement with foreign countries wherein it empowers the central government to enter into bilateral agreements with other nations for enforcing the provisions of the code and Section 235 deals with the issuance of letters of request by the Adjudicating Authorities to the foreign countries. However, these sections are inadequate to address the solution to the problems faced by creditors in this rat race world. There ought to be a legitimate method for the equivalent. While on the standard of transparency and equity to all, the insolvency proceedings ought to be comparable for all the nations going into the agreements. Be that as it may,there is no such system built up by the legislature of India.
Thereports of Justice Eradi Committee,2000 and the N.L. Mitra Committee have mentioned that the cross-border insolvency laws of India are behind the times and there is a need for a proper set of regulations dealing with the same[6]. The legislature of India has also understood the need for proper enactment of laws for cross border insolvency.Therefore, the nation is consideringembracing the United Nations Commission on International Trade Law (“UNCITRAL”) Model Law on cross border insolvency by introducing a bill for and making it a part of IBC.The Ministry of corporate affairs has issued a draft[7]acknowledging the advances of the model law majorly stating the ease of doing business abroad and making India more adaptable and flexible for foreign investments.[8] It also deals with the aspect of the protection of creditors and developing cooperation and coordination between nations.
- UNCITRALMODEL LAW ON CROSS BORDER INSOLVENCY
The Cross-Border Insolvency Model law by UNCITRAL was embraced in 1997. The purpose of this model law was not the unification of the insolvency laws worldwide but instead, there were 4 simple motives behind this, starting from granting access, getting recognition, relief, and cooperation. It will aid in consolidating the insolvency proceedings taking place across the world against the same debtor and maintainsynchronization between nations. It aims to acquire the maximum value of the assets of the company and assuring recovery of bad-debts to the creditors of the insolvent company irrespective of the jurisdiction of the insolvency proceeding. The reception of this model law is without a doubt a positive development. It has the capability of making cross-border bankruptcies increasingly predictable, complete, and proficient, amplifying estimation of advantages and advancing different objectives of universal insolvency laws.
The 4 principles of this model law primarily mean:
- Access: This deals with the fact that how a foreign representative or a foreign insolvency professional will approach or acquire access to the courtsto initiate or become the part of an insolvency proceeding.
- Recognition: This aims to acknowledge a foreign proceeding. There are 2 types of proceedings as mentioned in the model law i.e. main proceeding and non-main proceeding. The term foreign main proceeding is defined under art 2(b) of the model law which states that a proceeding shall be contemplated to be the main proceeding if it is conducted at a place thatthe debtor used to run and manage hisbusiness within all the countries. In other words, it means a place in the state where the debtor’s center of main interest lied (hereinafter referred as COMI)[9]. On the other hand, the non-main proceedings have been defined under Art 2 (c) which states that it is a proceeding held at any other place of operation where the debtor carries out non-transitory economic activities. Recognition is an important step because until and unless a foreign proceeding is not recognized by the domestic court or vice versa, justice would not be served fairly.
- Relief: The model law provides for certain reliefs that aid in fair and smooth conduct of cross border insolvency proceedings. The reliefs can be interim reliefs and automatic reliefs. [10]
- Cooperation and coordination: The ultimate goal of the model law is to create an understanding and cooperation between the domestic and foreign courts and between the insolvency professionals. It aids in keeping the best interests in mind while providing the orders during the proceeding and while pronouncing the judgment. Cooperation without coordination is of no use. This principle accommodates the coordination of at least two simultaneous bankruptcy procedures in various nations by empowering collaboration between courts.[11]
- How does the model law function?
The model law in principle makes the state which is COMI accountable for recovery of the loss of several creditors although the assets and creditors of debtor are at different states. It shall be subjected to the coordination procedures.
CENTER OF MAIN INTEREST (COMI)- Article 14
COMI is determined by the state during the proceedings based on certain factors:
- It is the presumption of the model law that COMI is the place where the business is registered.
- Although in numerous cases, the COMI is not where the business is registered, therefore the determination of COMI becomes the decision of creditors. The factors that usually aids them to determine it is:
- a place where the central administration of debt takes place.
- a place that is readily ascertainable by creditors.
- additional factors determined by the court.
The entire procedure of model law that is to be followed by the member countries can be best explained through an example. Let us take two countries to understand the concept i.e. India and UK.
NOTE: It is important to keep in mind that the main aim of the model law is to develop cooperation and coordination and not the unification of insolvency laws. Each country is allowed to lay down its national insolvency laws to deal with the insolvency of the companies.
Let’s assume a person named X, who resides in India is a creditor of the company named “ABC Ltd.” that is registered in India. ABC Ltd mainly operates from India but hasbranches in the UK. Further, Y is also the creditor of the company but he resides in the UK. Now, the company fails to pay its debts and becomes insolvent. Now, in this case, let’s suppose X files an application in the adjudicating authority in India to initiate the CIRP process under sec 7 of the IBC,2016.
This can be better explained with the aid of a flowchart given below.
*COMI will be India in the present case as the company was registered in India
After Y is informed about the insolvency proceedings initiated in India on ABC ltd.
After the foreign courts are notified by the foreign representative
The Indian courts can pass the order to sell all the assets in both the countries in cooperation with the foreign representative. The protection of interest of all the creditors of the company shall be given equal consideration without discrimination. Any order passed by the Indian court can be refused validity by the UK if it is against their public policy. The basic objective behind this model law is to ensure that the interest of creditor is protected concerning cross border insolvency matters.
The first Indian company that will undergo the cross-border insolvency proceedings under Insolvency and Bankruptcy Code,2016, and UNCITRAL model law is Jet Airways. Jet Airways owes 8,000 crores to its lenders and the total debt amount of approximately 25,000 crores that includes the dues of operational creditors as well.The company is subjected to parallel insolvency proceedings conducted in India i.e. main proceeding and also in Netherlands i.e. non-main proceeding. Both nations have agreed to cooperate and coordinate to protect the interests of the creditors. The National Company Law Appellate Tribunal, New Delhi, Indiahas allowed the Dutch court administrator to attend the meetings of Committee of Creditors (COC) during the CIRP process for the company. Also, The Dutch Court administrator has consented with the moratorium and confiscation of the assets of the company.[12]
- CASE LAWS ON APPLICATION OF THE MODEL LAW OF CROSS BORDER INSOLVENCY
In the cases of Destinator Technologies, Inc. and WellPoint Systems, Inc., both the companies headquartered in Canada and owned assets in the USA, these cases display the utilization of the Model Law to accomplish a streamlined and productive worldwide sale process. In both the cases, The Canadian court directing the main insolvency proceedings as per the model law affirmed the sale and the bidding procedure for the sale of the worldwide assets of the companies, and the US court administering the non-main proceeding under Chapter 15 along these lines perceived and recognized to those sale strategies (which were reliable with the prerequisites for a Section 363 deal in a US Chapter 11 continuing). The coordination and collaboration between the Canadian and US courts permitted the particular sale of assets to close in roughly two months on account of Destinator Technologies, and around a quarter of a year on account of WellPoint Systems, from the initiation of the bankruptcy procedures.
In re Elpida Memory, Inc[13], a Delaware Bankruptcy Court decided that even though the sale of a Japanese debtor’s assets ( including certain US patent rights) had been affirmed by the Japanese court directing the main insolvency proceeding, the US Bankruptcy Court was required to freely review and approve, under US Section 363 standards, that part of the sale including US assets. The Elpida case underscores that parties to adistressed cross-bordersale must consider whether the exchange will require the review and approval of more than one court, potentially under different standards.
- CONCLUSION
Establishment and Enactment of Insolvency and Bankruptcy Code, 2016 has remarkably strengthened the bankruptcy laws in India. India’s Non-Performing Assets Ratio decreased by nearly 2% and stood at 9.1 % in Mar 2019, compared to the ratio of 11.2 % in 2018. However, the provisions in regards to the cross-border insolvency are extremely outdated and inadequate to do justice to the creditors as well as debtors. Unless and until there are no provisions for cross border insolvency, it will create a barrier for the foreign companies to invest in India which will ultimately hamper the growth and development of the nation. Therefore,to protect, safeguard, and encourage the interests of the foreign speculators, the formulation of laws is necessary. The adoption of the UNCITRAL model law on insolvency is a positive step for India. It will significantly assist in dealing with the problems that are currently faced. It will provide an effective procedural framework in regards to insolvency for efficiency in the administration. The model law aims to establish cooperation and coordination between two or more courts and not the unification of insolvency laws. Further, the model laws permit to adjust the international insolvency law in accordance with the national insolvency laws of the country. The domestic court can refuse to abide by the orders of any foreign court if it is against the public policy. The aspect of insolvency requires addressingmultiple important and complex problems in various genres of law in different jurisdictions. Hence, the adoption of the UNCITRAL model law will not majorly change the insolvency laws of India that are enacted in IBC,2016, instead it will just make the laws for cross border insolvency stronger, independent and welcoming for the foreign investors to invest in India.
[1]World Bank, Ease of doing business report(2019), https://data.worldbank.org/indicator/ic.bus.ease.xq.
[2] Sarthak Jain& Anushka Sheth, Cross Border Insolvency: Why India Should Adopt the Uncitral Model Law, India Law Journal, https://www.indialawjournal.org/cross-border-insolvency.php.
[3] Care rating report, NPAs: a global view(Dec. 27,2017),http://www.careratings.com/upload/NewsFiles/SplAnalysis/NPAs%20Globally%20speaking.pdf.
[4]World Bank, Non-Performing loans report (2018),https://data.worldbank.org/indicator/fb.ast.nper.zs.
[5]The Insolvency and Bankruptcy Code (Amendment) Act, 2020, No.1, Acts of Parliament,2020(India).
[6]supra2.
[7]Indian Ministry of Corporate Affairs Government of India,Report of Insolvency Law Committee on Cross Border Insolvency(2018),https://www.mca.gov.in/Ministry/pdf/CrossBorderInsolvencyReport_22102018.pdf/.
[8] Shweta Bharti &Sukrit Kapoor, India at crossroads with cross-border insolvency, India Law Business Journal (Oct. 31, 2019),https://www.vantageasia.com/india-crossroads-cross-border-insolvency/.
[9] The UNCITRAL Model Law on Cross-Border Insolvency (1997).
[10]Jenny Clift, THE UNCITRAL MODEL LAW ON CROSS-BORDER INSOLVENCY: A brief introductions,https://www.ibanet.org/Document/Default.aspx?DocumentUid=13D29894-5EF4-4F32-A4D7-33CA47AA9FC1.
[11]supra 7.
[12]Jet Airways (India) Ltd v. State Bank of India &Anr (2019) SCC Online NCLAT 385.
[13]Elpida Memory Inc., Debtors, Case no. 12-10947-CSS (U.S.)(2012)
