Cross Border Insolvency in India: Limitation and Challenges Ahead

Chandradeep Kumar

Introduction

National economic has been integrated with the globalized world and trade between two
sovereign has increased exponentially. Globalization and cross border disinvestment by
multinational companies (MNCs) have given birth of multiple jurisdiction across the world.
Cross border disinvestment leads to more financial risks to foreign creditors as they invest more
into MNCs. In such a case, if a company become insolvent having assets and creditors in various
nations, creates conflict of jurisdiction and friction between various municipal insolvencies laws.
To protect the interest of domestic investors as well as foreign investor, cross border insolvency
law comes into play. Insolvency laws of India reflect its priorities. India’s new insolvency
regime starts with introduction of Insolvency and Bankruptcy Code in 2016. [1]

It is essentially not a complete out-of-court settlement between the parties involved, and the
interference of courts/tribunals would be required for final implementation of the pre-packs.
Therefore, it can be said that it will be a hybrid process involving out-of-court settlement along
with mutual settlement of the terms of restructuring between the debtors and the creditors. The
court’s oversight is also necessary to ensure that no prejudice is caused to any stakeholders due
to the terms of the restructuring arrived at and that everyone is treated fairly.[2]

The main objective of the code is to provide a robust mechanism to deal with insolvency process
in default of debt. Corporate creditor initiates corporate insolvency resolution process under IBC
if there is default in payment by the corporate debtor. [3] It also empowers adjudicating authority
to issue request letter to request to a Court or an authority competent to deal with request for
evidence or action in connection with proceedings under the Code in various countries.
However, IBC has its own limitation; under this code corporate creditor cannot initiate
insolvency process against MNCs. As IBC has limited jurisdiction. At this moment, cross border
insolvency comes into picture. But cross border insolvency process needs robust mechanism and
parallel agreement and arrangement between the institutions. Taking a forward step to
functionalize the cross border insolvency, Ministry of Corporate Affairs constituted a committee
to overlook the function of cross border insolvency Rules and Regulation in December 2020.[4]
United Nation Commission on International Trade Law has proposed the UNCITRAL Model
Law on Cross-Border Insolvency, 1997 to facilitate the uniform insolvency process across the
globe.

International Laws on Cross Border Insolvency

The UNCITRAL Model Law on Cross-Border Insolvency, 1997 has emerged as the most widely
accepted legal framework to deal with cross-border insolvency issues. The Model[5] Law
provides a legislative framework that can be adopted by countries with modifications to suit the
domestic context of the enacting jurisdiction. It has been adopted by 49 States to date.  The
Model Law is unlike other multilateral conventions merely offers legislative guidance for states.
The objective of the law, as stated, is ‘to assist states to equip their insolvency laws with a
modern, harmonized and fair framework to address more effectively instances of cross border
insolvency.’ It focusses on encouraging cooperation and coordination between countries, rather
than attempting unification, and respects the differences among national laws. The Model Law is
based on four main principles Access, Recognition, Cooperation and Coordination. [6] It allows
foreign professionals and creditors direct access to domestic courts and enables them to
participate in and commence domestic insolvency proceedings against a debtor. It allows
recognition of foreign proceedings and enables courts to determine relief accordingly. It provides
a framework for cooperation between insolvency professionals and courts of countries and for
coordination in the conduct of concurrent proceedings in different jurisdictions. It appears to be a
comprehensive instrument as it builds upon the prevailing bilateral frameworks and extends the
flexibility for deviations as per the requirement of any particular jurisdiction. Advocacy in favour
of adoption of the Model Law heavily rests on its flexibility and to accommodate our domestic
laws (Code) with the necessary modifications. Nevertheless, the major issue is that it is more a
procedural law than substantive, allowing for customization. Such flexibility seems to militate
against the objective of harmonization across jurisdictions. The exceptions adopted by countries
have been much wider than contemplated by the Model Law. The Model Law does not require
reciprocity, there is no requirement that a foreign representative wishing to access facilities under
it must have been appointed, or foreign proceedings commenced, under the law of a State which
has adopted it.

Benefits of adoption of Model Law in Insolvency Legislation

With the enactment of this model law, India will become an attractive destination for
foreign creditors for investment. The three main economic benefit achieved by Model
Law are reduction in time for exchanging necessary information between countries,
increase in credit recovery efficiency and cooperation and assistance helps in
preserving the company’s assets from dissipating, resulting in successful
reorganization. This law is much clearer than the IBC in terms of remedy and
procedure followed for foreign entities. This law is more flexible as a State can make
changes in the model law as per the conditions and the local insolvency laws. A
country could refuse validity of the foreign proceedings if such is against the public
policy of the country. Through this Model Law coordination between courts and
insolvency professionals will exist in domestic as well as foreign jurisdiction. The
Model Law lays down circumstances when the foreign proceedings are to be
recognized and how they should be recognized. The recognition is granted based on
where the debtor has its “centre of main interests”[7] (hereafter referred to as
“COMI”) which is in turn dependent on its place of establishment.  If such a debtor has
COMI in the country where such proceedings are going on or if not as foreign non-
main proceedings then, such proceedings will be recognized as foreign main
proceedings. The relief that is provided after recognizing foreign-main proceedings is
in form of granting stay on local proceedings by creditors against debtor undergoing
insolvency. This suggests that moratorium would be imposed on assets of debtor and
administration of debtor’s assets in that State is to be entrusted to foreign
representative.

Problem with the Model Law

Firstly, the role and powers granted to a foreign representative under the Model Law may not be
very pleasing to legislators as it gives wide powers without any regulatory check on them. It fails
to provide appropriate measures to curb the instances of misfeasance in cross border cases. .[8]
The only check provided is Article 21(2) which requires the court to be satisfied that the interests
of local creditors are ‘adequately protected’ before the foreign representative is entrusted with
the distribution of the debtor’s assets within the State Secondly, in its present form, it fails to
address the issue of conflict of laws in a cross-border insolvency proceeding and leaves the issue
at the mercy of application of private international law by the Courts in respective jurisdictions.
[9] It does not expressly deal with conflict of laws; however, it does allow for cross border
insolvency agreements which have been effectively used by parties to address the issue.
Jurisdictions with different stages of maturity cannot protect the advantages emanating from
Model Law uniformly. Differing interpretations offered to crucial provisions of the Model Law
by courts in the US and the UK despite both having adopted the Model Law early on has led to
the question of whether the objective of harmonization has failed. Case laws in the US and UK
has been informing the UNCITRAL legislative and practical guides heavily and such differences
in interpretation weaken the attractiveness of the Model Law. At the core of any economic
contagion are financial instruments and multinational enterprise groups with cross country value
chains managed through subsidiaries. The Model Law does not have any clear solution to offer
for these aspects.

Cross Border Insolvency in India

Central government formed a committee in 2000 which came to known as Justice Eradi
Committee. It was first ever stepped taken to look into cross border insolvency issues.  The
committee recommended the adoption of the UNCITRAL Model Law in the Companies Act,
1956 to deal with the cases of cross-border insolvency. It also suggested that adoption of Model
Law would help the courts for the quick disposal of cross-border insolvency cases and provide
efficacy and transparency to the law. Second committee was N L Mitra Committee which was
formed in 2002 to overlook the cross border insolvency issues. It suggested that there should be
introduction of legislation related to the cross border insolvency to solve the disputes, dealing
with the cases of cross border insolvency as well as adoption of Model Laws in the Indian
regime.

The Insolvency Law Committee in the year 2018 made a recommendation and submitted its
report to the Ministry of Corporate Affairs stating that Insolvency and Bankruptcy Code, 2016
should be amended and the provisions related to cross border insolvency should be incorporated
in it.[10] Under IBC, there is not any direct provision that enables cross border insolvency.
However, Union of India is empowered in the code to enforce the provisions of IBC for cross
border insolvency through bilateral agreements with other nations to administer the cross-border
ramifications and may also direct the application of the Code when assets or property of a
corporate debtor or its personal guarantor is situated at any place in the country with which
reciprocal arrangement has been expressly signed.

Sec 234 empowers the Union of India to enter into an agreement with the government of any
country outside India for enforcing the provisions of IBC. Whereas section 235 provides for
the application of the doctrine of reciprocity, when, in the course of the insolvency resolution
process, any evidence or action relating to the assets of a corporate debtor or its personal
guarantor is required, the resolution professional or the liquidator or the bankruptcy trustee make
an application to the National Company Law Tribunal (hereinafter referred to as “NCLT”) and
NCLT, if satisfied, may issue a letter of request to a court or an authority of the country with
which an agreement has been made to deal with such request. The primary objective of
abovementioned two provisions in the IBC to provide a suitable environment for cross border
insolvency process and create charges on the asset of corporate debtor. However, until now,
India has not entered into any agreement any other nation and also, no effective measures have
been taken to implement the inter-government agreements. The Insolvency Law Committee in its
October 2018 report on cross border insolvency recommended to the Government adoption of
the Model Law.

While further looking into the code, making reciprocal arrangements doesn’t state the procedure
which has to be established in order to conduct the insolvency procedure. As there is no proper
procedure for the insolvency procedure to be conducted then that makes the law incomplete. By
only giving the right to make reciprocal arrangements with countries through the act doesn’t
solve the problem of cross border insolvency. There should be a proper procedure for the same.
While on the principle of transparency and justice to all, the insolvency procedure conducted
should be equivalent for all the countries entering into the reciprocal arrangements. But here
there is no such procedure established by the Legislature of India. When there is a situation that
certain countries have entered into reciprocal arrangements and if for every nation there is a
different process then it wouldn’t work out properly as there would be a point of conflict if in
one insolvency proceedings there are creditors from different countries or assets of the company
in different countries. As reciprocal agreements doesn’t have a feature of coordinating the
procedure of insolvency which is in concerned with multiple jurisdiction. So in order to have
proper structure and justice to all the investors investing from different nations, there should be
proper procedure of insolvency which would be governed with all the foreign nations. When we
further look into the cross border insolvency it has three dimensions mentioned above in the
article. When we compare those three dimensions with the IBC out of which the code has
adopted only the first dimension as the definition of persons in code also includes the “persons
not resident in India”. Here in this definition, the new code permits the creditors of the foreign
nation to be a part of the insolvency proceeding or to commence the procedure as the foreign
creditors having the same rights which the Indian resident possess in relation to the distribution
of assets when the company is liquidated by being insolvent. While the second and the third
dimensions are not dealt by the code. As the code lacks any mechanism for seeking proper
procedure of insolvency with respect to having different jurisdiction where in Indian courts have
to seek assistance of foreign courts in case of insolvency proceedings. Though there is
implication of bilateral arrangements between nations under the code but it doesn’t show any
proper implementation procedure for the insolvency.

Judicial Development in Cross Border

India saw its first cross border insolvency in 1908, the Macfadyen & Co. case. The proceeding
was the liquidation of an Anglo-Indian partnership, after the death of one of the partners. The
London and Madras trustees came to an agreement, confirmed by Courts in both jurisdictions, on
admitted claims and promised that surplus sums would be remitted to the other proceeding for a
global distribution. When the agreement was challenged, the English Court stated that the
agreement was ‘clearly a proper and common-sense business arrangement’ and that it was
‘manifestly for the benefit of all parties interested.

JET AIRWAYS CASE [11]

In the year 2019, the National Company Law Appellate Tribunal ("NCLAT") gave a ruling,
consequent to which Jet Airways (India) Limited ("Jet Airways") became the first Indian
company to be subjected to cross-border insolvency. NCLAT's ruling set a leading precedent in
the evolving insolvency law in India as it directed the conduct of a "Joint Corporate Insolvency
Resolution Process" under IBC. It all began when State Bank of India filed a Section 7
application against Jet Airways, upon the admission of which the Corporate Insolvency
Resolution Process ("CIRP") of Jet Airways was commenced on June 20, 2019. Following this,
the adjudicating authority was aware of the fact that Dutch Court had already initiated insolvency
proceedings and a Bankruptcy Administrator was appointed in Netherlands to take charge of Jet
Airways' assets located therein. The same was done at the instance of a bankruptcy petition
which was filed by two European creditors against Jet Airways for claims of unpaid dues
amounting to nearly INR 280 crores. The European creditors were seeking the seizure of one of
the Jet Airways' Boeing 777 aircraft as the same was parked in the Schiphol Airport in
Amsterdam.
VIDEOCON CASE[12]

In August 2019, the Mumbai Bench of NCLT recognized the principle of “substantial
consolidation” and allowed to consolidate 13 of the 15 Videocon Group companies. It was for
the first time when consolidation of group companies for insolvency proceedings received green
signal under IBC given the rationale that it would help in maximizing the asset value of the
debtor, thereby, setting a benchmark for group insolvency.
The doctrine of “substantial consolidation” is, primarily, an enabling doctrine, by way of which,
adjudicating authority combines/merges the assets and liabilities of the individual corporate
entities and proceed with a common insolvency resolution and restructuring process in order to
achieve a fair value for the stressed assets of group companies while keeping in mind the
interests of the creditors.
In December 2017, SBI filed insolvency application against the Videocon Industries at NCLT,
Mumbai Bench, seeking to admit and initiate CIRP proceedings. Soon after the admission of
Videocon Industries to CIRP, SBI led consortium moved an application seeking “substantial
consolidation” of the 15 companies belonging to the corporate debtor, where the consortium was
the common creditor. Meanwhile, separate CIRP proceedings were instituted against all the
individual entities; however, it failed to obtain any attractive bid because of the lack of collateral
assets and their inability to survive individually. In the absence of any express provision in the
Code, the Tribunal analyzed bankruptcy jurisprudence in the US and the UK and subsequently
using its equity jurisdiction decided in favor of the consortium.
Interestingly, in February 2020, NCLT allowed the second round of group insolvency of
Videocon Industries with 4 foreign-based companies. The Tribunal ordered to club overseas oil
and gas businesses in the ongoing insolvency proceedings on a plea filed by the managing
director of the Videocon Group for extension of the moratorium, thereby questioning
extraterritorial applicability of IBC and procedure involved in collation of foreign subsidiaries
assets with the ones in India. This case, all over again, voiced the issues surrounding
coordination theory in cross-border insolvency and expressed the need for legislation governing
the same.

Conclusion

The UNCITRAL Model Law, in essence, provides a fairly independent framework which allows
the concerned jurisdiction to evaluate and thereby decide the operational nitty gritty best suited
to that countries legal landscape. As such, the UNCITRAL Model Law offers a wide scope of
benefits and clarity w.r.t. cross-border insolvency disputes. However, as highlighted above,
presently there exists not much of a legal framework for addressing cross-border insolvency
disputes in India. Even if the two provisions as provided in the Code are notified and
implemented, they suffer from various shortcomings and would not be able to provide a
comprehensive mechanism for cross-border insolvency proceedings. As such, eventually the
draft chapter recommended by the Committee would have to be adapted and included in the
Code, thereby resulting in the introduction of various amendments and rules to accommodate the
draft chapter. In January 2020, Ministry of Corporate Affairs had constituted a special committee
to further understand and recommend the necessary rules and regulatory framework for a smooth
implementation of proposed cross border insolvency provisions in the Code.5 However, there
does not seem to be many updates on the progress made by the said committee regarding their
work on the inclusion of cross-border insolvency provisions in the Code. It cannot be ignored
that a lot of procedural and legal challenges would have to be addressed for the effective
adaptation and implementation of the draft chapter. However, once the hard work is carried out
and the hurdles are met, the legal framework could ensure cooperation and communication
between different jurisdictions and successfully address the resolution of cross-border disputes
concerning India.

1. https://ibbi.gov.in//uploads/legalframwork/0150ec26cf05f06e66bd82b2ec4f6296.pdf
2. ibid
3. https://www.barandbench.com/columns/renewing-the-debate-on-prep-pack-insolvency-
in-india-a-case-for-atmanirbhar-financially-distressed-companies
4. https://indianexpress.com/article/opinion/columns/addressing-cross-border-insolvency-
7676664/
5. https://undocs.org/en/A/CN.9/WG.V/WP.48
6. https://www.scconline.com/blog/?p=247207
7. Ibid
8. https://www.mondaq.com/india/insolvencybankruptcy/1123982/cross-border-insolvency-
regime-in-india
9. https://www.mondaq.com/india/insolvencybankruptcy/1123982/cross-border-insolvency-
regime-in-india
10. https://prsindia.org/files/parliamentry-announcement/2021-12-15/Cross-Border
%20Insolvency%20under%20IBC.pdf
11. SBI v. Jet Airways (India) Ltd., CP 2205 (IB)/MB/2019
12. State Bank of India v. Videocon Industries Ltd., 2019 SCC OnLine NCLT 745