Top
Columns

Suspension Of Insolvency Proceedings And Its Effect On Bilateral Investment Treaties

Tariq Khan & Animesh Upadhyay
10 Jan 2021 5:22 AM GMT
Suspension Of Insolvency Proceedings And Its Effect On Bilateral Investment Treaties
x

Recently, the Government extended suspension of insolvency proceedings till 31st March, 2021. On 24th September, 2020, Rajya Sabha passed The Insolvency and Bankruptcy Code (Second Amendment) Bill, 2020 by way of which it extended the suspension of Sections 7, 9 & 10 with a view to provide further relaxation period to companies adversely affected by COVID-19. The same was originally introduced by the government during March suspending the initiation of Corporate Insolvency Resolution Process for a period of 6 months with the objective of safeguarding Micro Small and Medium Enterprises. Now, the same has been further extended for another 3 months, and although the government's main aim is to provide a recovery period for the affected companies but this step taken by the Indian Government may have an adverse effect on foreign investors that are parties to the Bilateral Investment Treaties signed with India.

The authors in this article will analyze the amendments introduced by the government and its effect on Bilateral Investment Treaties (BITs).

Effect on BITs:

Foreign investment is the most important component for the economic growth of any country as it is a source of foreign currency income and it provides a boost to the local economy. India has developed on the economic front due to increase in foreign investment over the past years. Reasons as to why India is considered as an attractive destination for foreign investors includes low wage rates, robust banking and the diverse market. But the most important factor that is considered by foreign investors while investing in any country is the aspect of protection of rights in that country. Special protection is needed to be provided to the foreign investors for the growth of economy. To safeguard such rights of foreign investors and to protect them from the arbitrary unilateral decisions of the host country in which they are investing, exist Bilateral Investment Treaties.

Bilateral Investment Treaties are written understandings which comprises of the terms and conditions for private investment by nationals and companies of one nation in another nation. Essential clauses covered under BITs are as follows:

  1. Applicability
  2. Fair and Equitable Treatment and Full Protection & Security
  3. National Treatment and Most-favoured Nation Treatment
  4. Expropriation
  5. Dispute Settlement Mechanisms, both between States and between an Investor and a State.

India signed its first BIT with the United Kingdom in 1994 and subsequently went on to sign BITs with 86 countries. Much changed after the White Industries Australia Ltd v. The Republic of India dispute where the International Tribunal ordered India to pay 4.10 million Australian dollars to White Industries under the 1999 Indo-Australia BIT. This forced the Indian government to revisit its existing BITs. Simultaneously, India received notices under various BITs in relation to the retrospective tax amendments and cancellation of 2G licenses. Considering these incidents the Government in 2015 started drafting a new model BIT to replace the then existing model Bilateral Investment Promotion Agreement (2003). This Model was finalized in 2016. Now, as per the recent media reports India and Phillipines have begun negotiations for a new Bilateral Investment Treaty and have exchanged their model BITs. If this gets finalized then this will be India's fifth BIT that it has signed since the release of 2016 Model BIT.

Under BITs a foreign Investor is offered full protection and security and all the above mentioned clauses act as means to ensure effective assertion of right. Since the government has suspended the Insolvency proceedings under IBC it is likely that the rights of foreign investors will get substantially limited, leading to violation of promises that were made prior to investing in India. The amendments made to the Code may further lead the foreign investors to initiate action against India under the BITs for violation of FET clause, legitimate expectation and effective means rights.

Breach of Fair and Equitable treatment Clause:

At the time of enforcement of the Code, the government had promised to ensure great investment opportunities to foreign investors.Empathizing on the need to improve faith of foreign investors, the Supreme Court held in Macquarie bank v Shilpi Cable that it is of utmost importance that both foreign and domestic creditors are kept on equal footing. Recently, India has been entitled 63rd position in World Banks' Ease of Doing Business Index rising from the 142nd position in 2014 globally. On the basis of such promises made at that time the Foreign Investors can resort to allege a breach of FET clause ashighlighted by therecent cases of Cairn Energy Pvt. Ltd. and Vodafone Pvt. Ltd. where India lost the arbitration matters with both the companies unanimously because of the bilateral treaties India signed with United Kingdom (In case of Cairn Energy) and Netherlands (In case of Vodafone Pvt. Ltd.). In both these cases India lost owing to the fair and equitable treatment to be provided under the BITs it signed with Netherlands and United Kingdom. The disputes in both these cases arose owing to the retrospective change in tax laws in 2012 for making them effective from 1962. India demanded tax from Vodafone and Cairn Energy retrospectively. These Companies then approached Permanent Court of Arbitration to challenge these demands as a consequence of which the government lost both the cases.

In the matter of Tecmed v. Mexico in which the International Tribunal held that contracting state is duty bound to adhere to the expectations that were considered by the foreign investors during the time of making investment. FET clause as observed by the judges in the matter of MTD v. Chile states that FET clause has a magnitude importance for the foreign investors to be fully treated in a just and even-handed manner.

Amendments made to the Code can also be challenged on the grounds of limiting the investors to effectively assert their rights. In such a situation "White Industries" case becomes relevant wherein India paid 4.10 million dollars to White Industries as the tribunal held that "India had not provided effective means of asserting its claims and enforcing rights". In the present scenario the suspension for COVID-19 defaults is permanent due to which foreign investors have strong cause of action that effective means of asserting their rights has been disrupted.

In its defence India might contend that there is no permanent violation but only a mere postponement of effective means of asserting rights. However, various International Tribunals in such cases have held that foreign investors will still be entitled to raise a claim on the ground that although the measure taken by the destination country may be temporary but there is a chance that deprivation to their investment is not.

Concluding Remarks:

In the case of Swiss Ribbons Private Limited and Anr. vs. Union of India and Ors. The constitutional validity of the IBC, 2016 was challenged and the Apex Court while upholding the constitutional validity of the Code held:

"86…. These figures show that the experiment conducted in enacting the Code is proving to be largely successful. The defaulter's paradise is lost. In its place, the economy's rightful place has been regained."

This indicates the objective with which the Code was enacted i.e. to save the creditors from a time consuming process of recovering the debts from the wilful defaulters. Although the Indian judiciary from time and again has safeguarded the rights of investors as witnessed in the judgments rendered by the Delhi High Court and Supreme Court with respect to the Vodafone Industries; but when it comes to policy making, the Government of India lags behind despite starting several initiatives such as Make in India, Stand up India etc. An essential factor which comes in the mind of a foreign investor before making investment in any country is the municipal law of that country. The insolvency law of any country also plays a crucial role. The legislative intent behind the enforcement of IBC was to boost India's economy by providing speedy debt recovery process to the creditors and it is for this reason that FDI inflows increased in India over the past year. However, by unilaterally suspending the insolvency proceeding, the Government has neglected the interests of foreign investors. If the foreign creditors are not allowed to recover their debts from the wilful defaulters then this will derogate India's reputation of having a better credit market.

Before taking any measures that can have an impact on foreign investors, the government should consider its obligations under the BITs as ignorance of these obligations would lead to India's defeat in cases on an international level as was seen in the case of Vodafone Pvt. Ltd. and most recently in the case of Cairn Energy Pvt. Ltd. There is a need for establishment of coordination between the Ministry and all other ministries to discuss the obligations of India under the BITs before taking a step which may potentially affect foreign investors.

By unilaterally making the amendments in The Insolvency and Bankruptcy Code, 2016 the Government of India has violated the above-mentioned clauses of BITs and has contradicted its vision of making India a good economy. India is on the path of becoming the investment hub. The goal to become investor friendly can only be achieved when decisions are taken for safeguarding the rights of investors instead of taking those decisions that are detrimental to them.

Views are personal.

(Tariq Khan is a practicing Lawyer and Animesh Upadhyay is a Final Year Law Student at RMLNLU)

Next Story
Share it