Takeaways For The Indian Cross-Border Insolvency Regime In Light Of COVID-19
The COVID-19 pandemic is a crisis unlike any other. It has wreaked havoc on the economies of many countries around the world. As COVID-19 spreads, several companies have been negatively affected, and others have come to a halt. The vast number of major corporate downturns in the last two years have involved multiple jurisdictions, rendering foreign insolvencies common, rather...
The COVID-19 pandemic is a crisis unlike any other. It has wreaked havoc on the economies of many countries around the world. As COVID-19 spreads, several companies have been negatively affected, and others have come to a halt. The vast number of major corporate downturns in the last two years have involved multiple jurisdictions, rendering foreign insolvencies common, rather than something rare.
Cross-border insolvency refers to a scenario in which an insolvent debtor has assets in more than one country and some of the debtor's investors are not from the country in which the insolvency proceedings were initiated. Cross border insolvency code is associated with the company's insolvency process where the companies are operating in more than one country with a diversified asset portfolio in different parts of the globe.
In India, the Insolvency and Bankruptcy Code, 2016 currently governs cross-border insolvency, however it has not proved to be adequate to regulate this aspect of corporate insolvency. At the moment, India can enter into bilateral insolvency treaties with other countries. These treaties are unique to each country, but when the UNCITRAL Model Law is adopted, it will apply to all countries that have ratified the treaty. Making proper regulations for cross-border insolvency will encourage foreign countries to invest more in Indian enterprises.
This Article focuses on the impact of COVID-19 on the cross-border insolvency regime in India. It delves into the need for implementation of the UNCITRAL Model Law and provides an overview of the Singapore Guidelines and the Insolvency Regime in the United States.
Regulation Mechanism in India
Cross-border insolvency is currently governed by IBC Sections 234 and 235. Although Section 234 addresses bilateral insolvency agreements, Section 235 outlines the need for a letter of request to the foreign authority to enter into such an arrangement. Despite the fact that these provisions were added to make cross-border insolvency easier to resolve, it was discovered that no measures had been taken to efficiently enforce the bilateral agreements. An NCLT order in a cross-border insolvency case is not explicitly recognized or implemented in any foreign nation as of today. Even though these sections are notified, they do not properly resolve the complex problems that arise in cross-border insolvency lawsuits.
The Insolvency Law Committee (ILC), in 2016, was established to propose changes to the IBC. It has stated that these two sections do not make a robust system for cross-border insolvency. The existing regime is prone to delay causing confusion for investors, debt holders, and the judicial system. On October 16, 2018, the ILC submitted a document recommending that the Model Law be incorporated into the Code. The Draft Provisions include certain amendments and alterations to the Model Law that the Committee deems appropriate in the Indian context. It provides recommendations on matters relating to:
- Applicability,
- Recognition of Foreign Proceedings,
- Mandatory and Non-Mandatory Relief,
- Cooperation between countries,
- Concurrent Proceedings, and
- Public Policy.
These still remain recommendations and have not been incorporated into the legislation.
The recent Jet Airways trial puts forth an intriguing move by Indian judges to incorporate the model law system into the context of the insolvency code. The parties created a groundbreaking cross-border insolvency protocol. They established a mechanism for international collaboration and cooperation among all players involved in this case while maintaining jurisdictional sovereignty.
Issues with the Current Framework
When some countries enter into trade agreements because each country has its own mechanism, it may not work out well because there may be a point of contention if creditors from numerous jurisdictions or the company's properties are located in multiple jurisdictions in one insolvency proceeding. Since reciprocal arrangements lack the ability to coordinate insolvency procedures involving various jurisdictions, they tend to be ineffective.
The definition of persons includes those who do not reside in India. The code allows foreign investors to participate in insolvency proceedings or to initiate them as foreign investors with the same privileges as Indian residents in terms of asset allocation when a business is liquidated due to insolvency. When India does not have a bilateral arrangement with a nation and the assets of an Indian borrower are located in that jurisdiction, insolvency professionals would not be able to obtain evidence on those assets.
There is no way to determine what provisions are in place after insolvency proceedings have begun in India. Relief exists for a specific debtor with overseas assets, to confirm that those assets are not the target of a parallel prosecution in that foreign country. There is no provision to check whether the debtor and its properties are the subject of parallel insolvency lawsuits in other countries.
Since the current legislation lacks any framework for obtaining proper insolvency procedures with respect to having distinctive jurisdictions, Indian courts must request assistance from international courts in insolvency cases. While the code implies bilateral agreements between countries, it does not show a clear insolvency enforcement procedure. Numerous questions are left unanswered due to the lack of a mechanism for cross-border insolvency proceedings, with the recent Jet Airways and Videocon proceedings serving as prime examples.
UNCITRAL Model Law
The Model Law was enacted by UNCITRAL at its 13th session, on May 30, 1997. States may incorporate the Model Law into their national legislation to deal with cross-border insolvency issues using cooperation and mediation. Unlike a UN Convention, the Model Law does not mandate a State to inform the UN or other countries of its intention to enforce it.
States have adopted the Model Law into their domestic legal systems after making variations they determine as suitable to their jurisdictions. For example, the term "manifestly" in the national policy exception is missing from national legislation in Singapore, while it is used in the national laws of the USA and the UK.
In the light of bankruptcy laws, the Justice Eradi Commission Report in 2000 noted that the model law be implemented by amending Part VII of the Companies Act, 1956, which deals with recognition, coordination, and involvement of investors in international proceedings. In 2001, the N.L. Mitra Committee Report stated that India's cross-border insolvency laws were obsolete and that a new code was needed.
The main goal of this model law is to safeguard the interests of banks and all parties interested in cross-border insolvency proceedings, including creditors. By way of this law, there would be a significant increase in mergers and acquisitions, boosting the country's economy.
In Singapore, Insolvency Guidelines that have been formulated under the ambit of the Model Law complement all insolvency laws, regulations, and procedures in Singapore. These guidelines cover under their ambit, any case concerning cross-border insolvency or bankruptcy restructuring proceedings that have started in more than one country.
In the US, the Bankruptcy Code provides for cross-border related provisions. Its aim is to foster collaboration between US courts and relevant stakeholders as well as other international courts and regulatory agencies, in cross-border insolvency proceedings.
The Road Ahead for India
A certain level of standardization of insolvency laws through different jurisdictions may be one answer to these issues. Since there are many significant discrepancies between the legal frameworks of countries, the objective of standardization must be achieved.
To be able to transform into a statute under the Insolvency and Bankruptcy Code, as it stands today, the Draft Provisions will have to be incorporated into a Bill, which would have to be approved. There is currently no deadline for such changes, but reports say that the parliament is considering introducing a chapter on cross-border insolvency to the IBC soon. The structure proposed by them could go a long way toward ensuring cooperation and collaboration between countries in order to effectively resolve the disposition of cross-border insolvency proceedings.
The parliament recognized this need because, without an appropriate legal framework, international investors would be hesitant to invest in India, particularly in light of COVID-19, where foreign investment is needed to keep the economy running. An overview of the current scenario in India shows that the country is welcoming several foreign countries to invest and even set up industrial plants in the country. As a result, the composition of a law is critical in retaining their inclination and encouraging them to invest in the country.
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