The transfer of money from one country to another to acquire loan money or ownership shares is called 'cross-border investment'. International trade has existed considerably longer than cross-border investment, even though it has been a significant aspect of human activity for decades. An immediately recognizable feature of present-day cross-border investments is the deep historical basis of colonialism and imperialism of the nineteenth-century period.
The European powers chiefly invested in their colonies in the plantations, extraction of raw materials, and construction of the infrastructure to advance plantations, explore resources, and develop a structure at the beginning of the transatlantic expansion of capital return from the colonies of the colonial powers to their motherlands was the crucial trade flow. In the aftermath of WW2 when economies started to recover and globalization intensified, the investing that crossed country nations' boundaries gained more traction. International institutions such as the World Bank and the International Monetary Fund (IMF) made cross-border financial flow user-friendly. MNCs from rich countries needed to take advantage of cheaper wages, manpower, and resources that could be accessed by them only through setting up their business in underdeveloped nations.
The cross-border investment saw a sharp rise in the 1970s and 1980s that was associated with the creation of the Euromarkets, the laxity of capital markets restrictions, and the expansion of institutional investors such as mutual funds and pension funds. Developed countries became famous as they received enormous outbound investments from the United States, Japan, and Western Europe. In contrast, developing nations in Asia, Latin America, and Africa got large infusions of funds in the form of FDI. There was a major increase in cross-border investment during this time because of the integration of developing countries with the overall global economic system, along with financial globalization, communication, and transportation technical revolutions. Bilateral and multilateral trade agreements such as the EU and NAFTA enhanced the process of investment flow across borders. Globalization and the boom of cross-border investment are found to have their own sets of problems, for instance, eradicating insolvency and bankruptcy in multinational enterprises and other organizations whose investors are from different nations with their assets across the globe becomes a concern.
Considering its role as a key player in the global economy and the fact that it has benefited highly from Foreign Direct Investments (FDI), India has already seen the need for having a robust legal framework for dealing with insolvency actions.
Indian Juridical Frameworks About Financial Insolvency
India introduced the Insolvency and Bankruptcy Code (IBC) in 2016 to streamline company operations, protect creditor rights, and speed up the bankruptcy settlement process. It attempted to address the problem of the banking sector's increasing non-performing assets (NPAs) by providing a methodical procedure for handling debt defaults. By enforcing fines for noncompliance, the IBC aimed to encourage appropriate lending and borrowing practices. Ultimately, the objective was to modernize India's bankruptcy code, align it with global standards, and promote stability and economic advancement.
Sections 234 and 235 of the Insolvency and Bankruptcy Code (IBC) 2016 and the relevant provisions of the Code of Civil Procedure (CPC) play a major role in enhancing collaboration and assistance in international bankruptcy processes relating to Indian businesses or assets. According to Section 234 of the Insolvency and Bankruptcy Code, the Indian government may conclude mutual treaties with other countries to follow international bankruptcy procedures in India. This ensures the enforceability of the insolvency orders and decisions passed by the courts or tribunals of a foreign country in India. The arrangements may also allow for the enforcement of judgments handed down by foreign courts or insolvency experts under certain circumstances in India. This ensures that decisions made in international bankruptcy cases are enforced in India.
Section 235, works in conjunction with the CPC provisions such as Sections 77, 78, and 79. Section 235 says that Indian courts or any professional in insolvency can issue a Letter of Request to foreign courts or other relevant authorities. These letters of request may be sent for several reasons, including gathering proof, acting upon assets owned by a foreign entity, or locating debtors or creditors in a foreign jurisdiction.
Sections 77, 78, and 79 of the Code of Civil Procedure (CPC) are crucial for providing international support and cross-border assistance in matters of Indian business or assets. Section 77 of Indian courts entitles courts to issue letters of request to foreign authorities to obtain information or proof. Section 78 would enable other countries to seek the same from the Indian courts. Section 79 This section outlines how the letters of request are issued and executed for cross-border cooperation. Section 13 of the Code of Civil Procedure 1908 allows the recognition of foreign judgments and the enforcement of judgments delivered in a foreign insolvency proceeding in India. This is the provision that says that the decisions that have been made in the foreign courts have to be final unless there are special circumstances. The Indian courts recognize and adhere to such clauses to ensure timely adjudicating and distribution of international bankruptcy cases reasonably and promote international judicial assistance in bankruptcy cases.
An Analysis of UNCITRAL's Framework
A seminal legal milestone emerged with the United Nations Commission on International Trade Law (UNCITRAL) endorsing the Model Law on Cross-Border Insolvency on May 30, 1997. This momentous legislation subsequently garnered approval in the United Nations (UN) General Assembly on December 15 of the same year. Notable jurisdictions, including the United States, Japan, the United Kingdom, Australia, Canada, Mexico, and South Africa, have since integrated facets of this model law into their domestic legal frameworks, particularly concerning jurisdictional parameters, procedural guidelines, and enforcement mechanisms.
There are two particularly crucial factors to consider in the event of international insolvency: primary proceedings start in the country where the debtor has its main business place (COMI). and Non-main proceedings These actions can be initiated in any jurisdiction in which the debtor conducts business operations. any credit preference for local creditors over international creditors is now a thing of the past. It can also assist other countries' insolvency authorities. Adoption of this model law will ensure that India becomes an attractive locale for investing by creditors from around the world.
- Faster dissemination of vital information across national borders.
- Productive participation in the protection of the organization's assets and their reorganization.
- Establishment of a successful credit recovery process.
A nation may reject the legitimacy of international procedures if they conflict with its public policy. The UNCITRAL Model Law facilitates communication and collaboration between insolvency experts and courts in both local and international contexts.
Case Study
In 2019, Jet Airways found itself ensnared in a groundbreaking cross-border insolvency conundrum, compelled by the decree of the National Company Law Appellate Tribunal to adhere to the Joint Corporate Insolvency Resolution Process stipulated within the ambit of the Insolvency and Bankruptcy Code (IBC). This landmark judicial directive heralded a seminal shift in India's insolvency jurisprudence, as the venerable airline, domiciled in Mumbai, succumbed to the throes of bankruptcy. With liabilities soaring to over Rs 36,000 crores owed to an array of domestic and foreign creditors, including operational stakeholders, the pivotal debate rekindled pertains to the jurisdictional prerogatives of the Netherlands court in instituting bankruptcy proceedings and issuing directives for restructuring an Indian-incorporated and registered airline entity. A cadre of creditors, spearheaded by the esteemed State Bank of India, fervently petitioned the National Company Law Tribunal (NCLT) in early June 2019, beseeching the declaration of Jet's insolvency and the initiation of Corporate Insolvency Resolution Process (CIRP) proceedings to forestall asset dissipation under Section 14 of the IBC. Consequently, on June 20th, Jet was formally inducted into CIRP, albeit with retrospective acknowledgment of admission two months earlier. Concurrently, two European creditors within the conglomerate's ambit, aggrieved by unpaid claims approaching nearly Rs 280 crore, invoked the jurisdiction of the Noord-Holland District Court in the Netherlands, petitioning for the airline's bankruptcy declaration and the seizure of a Boeing 777 aircraft stationed at Schiphol Airport. In the wake of the filing, the Dutch Court expeditiously appointed a bankruptcy administrator, domiciled within the Netherlands, entrusted with the stewardship of Jet's Dutch assets. Leveraging this administrative fulcrum, the Dutch Court-appointed administrator diligently sought recognition of insolvency proceedings within the Netherlands, juxtaposed with a plea for the cessation of CIRP proceedings in India post-Jet's induction into CIRP. The ensuing imbroglio crystallized into a jurisdictional standoff as the fundamental question of authority confronted the crossroads of transnational legal precedent. The absence of statutory provisions delineating cross-border insolvency mechanisms under the aegis of the IBC underscored the ensuing legal impasse, compelling the NCLT to declaim a categorical refusal to suspend domestic proceedings. This denial was predicated upon the jurisdictional lacuna engendered by the government's inadvertence in notifying the statutory provisions pertinent to cross-border insolvency enshrined within Sections 234 and 235 of the IBC. Moreover, the contentious stance adopted by the Dutch Court-appointed administrator vis-à-vis the adjudicating authority, underscored by palpable discontent, further complicated the inter-jurisdictional labyrinth. In a seminal judicial intervention, the Appellate Tribunal, cognizant of the exigencies precipitated by the intransigence of jurisdictional demarcation, acceded to a nuanced resolution. This adjudicative respite permitted the continued collaboration between Indian counterparts and their Dutch counterparts, contingent upon the abstention of the Dutch administrator from offshore asset liquidation during the Committee of Creditors' deliberations. Furthermore, the Appellate Tribunal, in an act of judicial precedence, rescinded the erstwhile decision rendered by the NCLT, effectively reconciling the divergent strands of legal doctrine underpinning cross-border insolvency. This judicial saga, punctuated by the intricate interplay of legal tenets, exemplifies the exigency of integrating cross-border insolvency mechanisms within the contours of India's legal framework. The airline's entanglement in concurrent bankruptcy proceedings under Article 2(4) of the Dutch Bankruptcy Act precipitated a jurisprudential quandary, as the parallel adjudication of these cases in disparate jurisdictions posed deleterious ramifications for the restructuring process and the interests of creditors. Despite the confluence of legal mandates, the National Company Law Tribunal (NCLT) rebuffed the notion of halting domestic proceedings, attributing this decision to the government's oversight in failing to promulgate Sections 234 and 235 of the Insolvency and Bankruptcy Code (IBC) about cross-border insolvency. Consequently, the NCLT precluded the Dutch Court-appointed administrator from participating in IBC proceedings, eliciting discontent from the administrator over the adjudicating authority's decree. In a pivotal judicial intervention, the Appellate Tribunal granted leeway for the Dutch Administrator to collaborate with the Indian Insolvency Resolution Professional, subject to the caveat of refraining from offshore asset liquidation during Committee of Creditors meetings. Furthermore, the Appellate Tribunal overturned the NCLT's ruling, propelling the National Company Law Appellate Tribunal (NCLAT) to facilitate bilateral cooperation between Indian and Dutch counterparts to forge an optimal settlement plan for Jet Airways and associated stakeholders. This confluence of legal intricacies underscores the judiciary's endeavor to assimilate the Model Law framework into India's insolvency jurisprudence, culminating in the formulation of a 'cross-border insolvency protocol' ratified by the Dutch Court-appointed Administrator and the Resolution Professional in adherence to the Appellate Tribunal's directives.
This convention delineates proceedings in the Netherlands as 'non-main insolvency proceedings,' designating India as the 'center of main interest'. To avert potential jurisdictional conflicts, the Dutch Administrator was granted observer status without voting rights in the Committee of Creditors (CoC), with the onus of coordinating directives resting on the National Company Law Appellate Tribunal (NCLAT).
The case's complexity arises from divergent doctrinal approaches to cross-border insolvency adopted by India and the Netherlands. India espouses the 'universalist approach,' mandating a singular court to oversee insolvency proceedings where the debtor is domiciled, considering all assets irrespective of location. Conversely, the Netherlands adopts a 'territoriality approach,' confining jurisdiction to assets within its borders and disallowing administrators from managing extraterritorial assets. The NCLAT adeptly balanced relief for foreign representatives and stakeholders, aligning with the Model Law framework's objectives.
Jet Airways exemplifies the imperative of integrating cross-border insolvency procedures into extant legal frameworks, underscoring the evolving dynamics and exigencies inherent in international insolvency matters.
In the wake of the legislative void within the Insolvency and Bankruptcy Code (IBC) concerning cross-border resolutions, recent judicial pronouncements signal a notable shift towards a more favorable judicial disposition regarding India's potential to cultivate a business-friendly approach. However, these adjudicative instances serve as a clarion call for governmental action, compelling an expedited implementation of cross-border insolvency mechanisms. Notably, the draft regulations proposed by the Insolvency Law Committee (ILC), if ratified, hold promise for furnishing a structured framework capable of substantially enhancing interstate cooperation and communication for the efficacious resolution of cross-border insolvency conflicts. The enactment of legislation harmonized with the Model Law will serve as a robust bulwark fortifying the Code, thereby fostering a conducive environment for foreign direct investment (FDI) and facilitating seamless corporate operations within India, a pressing imperative in the contemporary landscape.
Authors: Daksh Sharma (student at IMS Unison University, Dehradun) and Ritwik Rudra (student at National law University, Odisha). Views are personal.