Cross-border insolvency regime – Need of the hour

The Bankruptcy Law Reforms Committee in 2015 developed a framework for insolvency and bankruptcy from a domestic perspective. However, the Joint Parliamentary Committee (“JPC”) felt that the Insolvency and Bankruptcy Code, 2016 (“Code”) would not be complete without provisions for cross border insolvency given that Indian firms have claims against defaulting global entities and global persons have claims against defaulting Indian entities. At the insistence of the JPC, sections 234[1] and 235[2] were incorporated in the Code to enable the Government of India to enter into bilateral treaties with foreign governments. However, sections 234 and 235 of the Code are susceptible to delay and uncertainty for creditors and debtors as well as for courts.

Globally, the UNCITRAL Model Law on Cross-Border Insolvency, 1997 (“Model Law”) is a recognised and accepted framework for cross border insolvencies. The Model Law has been implemented by 46 countries, including the United Kingdom and the United States of America[3]. Jumping on to the bandwagon, the ‘Report of Insolvency Law Committee on Cross Border Insolvency’ dated October 16, 2018 (“Report”) recommended adoption of the Model Law to the Code with certain modifications and the proposed draft on cross border insolvency framework is called ‘draft Part Z’ in the Report. Additionally, the Report also suggests certain amendments to the Code to streamline the inclusion of ‘draft Part Z’ in the Code which includes, inter alia,  (i) Section 60 of the Code be amended to allow transfer of domestic proceedings to the Adjudicating Authority notified under the ‘draft Part Z’ in relevant instances; (ii) the inspection and investigation powers of the Insolvency and Bankruptcy Board of India may be amended to include a suitable mechanism for investigation and adjudication of penalties against foreign representatives; (iii) Foreign representatives cannot apply for interim relief while adjudicating authority is considering application for recognition and also no enabling provision for them to intervene in other proceedings involving corporate debtor etc .

Further, the report of the ‘Working Group on Group Insolvency’ dated September 23, 2019 highlighted that there is a serious gap, when foreign investors are being invited to participate and purchase the corporate debtor. Accordingly, in the absence of special treaties with other countries, the proposed group insolvency framework is limited only to local Indian groups and local Indian entities of the group.

The initiation of insolvency proceedings against Jet Airways (India) Limited (“Jet Airways”) in Holland prompted the need to strengthen India’s cross-border insolvency norms. On July 12, 2019, in the matter of Jet Airways[4], the issue that arose for consideration before NCLAT was whether separate insolvency proceeding(s) against common ‘corporate debtor’ can proceed in two different countries, one having no territorial jurisdiction over the other. NCLAT set aside the impugned order dated June 20, 2019 passed by the NCLT, Mumbai Bench in so far it related to the observations that the ‘Dutch Court’ has no jurisdiction in the insolvency of Jet Airways. NCLAT in its order dated September 4, 2019 allowed the Resolution Professional (“RP”) of Jet Airways to take control and custody of Jet Airways’ assets situated outside India (in Holland) or other places and for giving it effect the RP was required to reach an agreement with the Administrator appointed pursuant to the proceeding initiated at Holland.[5] Further, on  November 4, 2019, the U.S. Bankruptcy Court for the District of Delaware (“US Court”) recognized the pending proceedings in the matter of SEL Manufacturing Company Limited[6] as a foreign main proceeding, within the meaning of section 1502(4) of the US Bankruptcy Code. This recognition was given owing to the petition made by the Foreign Representative, indicating India as the Centre of Main Interests of SEL Manufacturing Co. Ltd., i.e., the foreign debtor.  Further, the Foreign Representative and the Foreign Debtor were granted all the reliefs (like moratorium etc.) under section 1520 of the US Bankruptcy Code to protect the assets of the Foreign Debtor and the interests of its creditors. This is the first instance where the Code was recognized under Chapter 15 of the US Bankruptcy Code.

Recently, on March 4, 2020 the Standing Committee on Finance in its sixth report on the Insolvency and Bankruptcy (Second Amendment) Bill, 2019 proposed to introduce the draft bill on cross border insolvency as soon as possible in order to further strengthen the insolvency framework. Though the Code is a transformational piece of legislation and is still at its nascent stage, the work relating to cross border insolvency has begun in right earnest. As the process matures in the days to come, the insolvency regime is expected to impact not only ‘ease of doing business’ but also overall economic growth.

Author:
Dhirajkumar Totala, Partner
Harshita S Chaudhary, Associate

Footnotes:

[1] Ministry of Corporate Affairs by its notification dated March 30, 2017 appointed the April 1, 2017 as the date on which the provisions of Section 234 and 235 of the Code came into force.
[2] Section 234 of the code states that the Central Government can make any agreements with the foreign country to start with the insolvency proceedings. Central Government will do so with those countries with which there are reciprocal arrangements. While further Section 235 of the said code states that the letter of request can be made to the authority of foreign nation with which such reciprocal arrangements have been made under Section 234.
[3] The data is as per the Report of Insolvency Law Committee on Cross Border Insolvency presented to Honourable Union Minister of Finance and Corporate Affairs on  October 16, 2018.
[4] Jet Airways (India) Limited (Offshore Regional Hub) v. State Bank of India & Another, Company Appeal (AT) (Insolvency) No. 707 of 2019 before National Company Law Appellate Tribunal, New Delhi.
[5] On September 26, 2019, NCLAT approved the ‘Cross Border Insolvency Protocol’ entered between the Administrator of Jet Airways (India) Limited (Offshore Regional Hub) and the Resolution Professional of Jet Airways (India) Limited.
[6] SBI v. SEL Manufacturing Company Limited, CP (IB) No. 114/Chd/Pb/2017, National Company Law Tribunal, Chandigarh.

Date: May 1, 2020