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Indian Journal of Law and Legal Research Volume II Issue II ISSN: 2582 8878

CROSS BORDER INSOLVENCY IN INDIA AND THE

ADOPTION OF UNCITRAL MODEL LAW: A
COMPREHENSIVE ANALYSIS

Dakshita Arora, UPES, Dehradun

ABSTRACT

In a world of globalisation and increasing cross-border trade, this paper seeks to

emphasise the need to incorporate the UNCIRAL Model Law in the Indian legal
framework on insolvency. Addressing the background of insolvency laws in India
and its inadequacy, the author has strived to walk the readers through the current
issues faced by the company with asset linkages spread across the world and the
plight of its domestic and foreign lenders, thereof. Further, the research goes on
to analyse the current provisions of insolvency and bankruptcy in India. It seeks
to bridge the gap between the inefficient provisions and an ideal legal framework
on cross-border insolvency in India through the latest judicial pronouncements.

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Indian Journal of Law and Legal Research Volume II Issue II ISSN: 2582 8878

Introduction

From an economic perspective, the insolvency and bankruptcy laws are a crucial aspect of the
legal framework of a developing country like India. These laws form the basis of dissolution
for every form of business. They effect various stakeholders across the society including banks,
employees, creditors, government, etc. As a result, bankruptcy laws are subject to political and
economic pressures. The experts believe that an effective insolvency law is a prerequisite if
India seeks to attract foreign companies to set up manufacturing units in India, provide remedy
to Indian creditors in other jurisdictions, developing a mechanism for cooperation and
consequently. to be amongst the top fifty countries in the Ease of Doing Business Index.

The erstwhile legislations that dealt with insolvency and bankruptcy in India were governed by
various different statutes including the Companies Act, 2013, SARFAESI, The Recovery of
Debt Due to Banks and Financial Institutions Act, 1993, etc. The lack of an efficient mechanism
resulted in inadequate and uncoordinated approaches to deal with unviable firms in India.
However, in 2016, a committee led by T.K. Viswanathan proposed the Insolvency and
Bankruptcy Code, 2016 (hereinafter referred to as the "Code"). The prime objective of this
code was to consolidate the existing laws and act as an effective mechanism for revival and
continuation of a corporate debtor. Also, it amended the laws relating to reorganization and
insolvency resolution of corporate persons, partnership firms, and individuals in a time-bound
manner for the maximization of value of assets of such persons, to promote entrepreneurship,
availability of credit, and balance the interests of all the stakeholders including alteration in the
priority of payment of government dues. 1 It is a beneficial legislation to revive the distressed
business and a recovery legislation for the creditors. Thus, the Code is not adversarial to the
corporate debtor but, in fact, protective of its interests. 2 Due to this code, the period it takes to

resolve a company has decreased from about 4.3 years to about 364 days. Gross nonperforming
assets (NPAs) fell to roughly 9.1% in the fiscal year ending in 2019, down from 11.2 percent
in 2018.3

The Code has not only protected the individual investors but has also contributed unprecedently
to the economic growth of India since its enactment. The enhanced inflow of FDI through cross-
border mergers & acquisitions has essentially been possible due to this Code and the legal

1Vishwanathan, N. S. (2018, April 18). It is not business as usualfor lenders and borrowers [Speech by Deputy
Governor, RBI]. NIBM.
2 Innoventive Industries Ltd. v. ICICI Bank and Anr. (2018). 1 SCC
407
3 Reserve Bank of India (RBI). (2021). RBI handbook of statistics on Indian economy 2018-19. Department of
Economic and Policy Research, RBI.

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Indian Journal of Law and Legal Research Volume II Issue II ISSN: 2582 8878

strength that it offers to the investors. While it may reasonably be catastrophic for the business
concerned, it is the key requirement for the business creditors that the capital has been recycled
timely and the value has been unlocked for distribution amongst the investors or other lending
or investing stakeholders.

The Code lays down the entire corporate insolvency resolution process, appointment of a
resolution professional and other major aspects that assist an insolvency scenario. However,
the drafters did not pay much heed to a situation where the business is spread across borders.
Globalisation has dramatically increased cross-border trade. Consequently, cross-border
insolvency has also been on a rise. It was quite essential that a streamlined and logical regime
is incorporate in Indian legal framework for such issues. The current legal framework with
respect to foreign investors, recognition of foreign courts, uniformity in relief provided, is at a
rather nascent stage in India.

Cross-Border Insolvency

Akin to insolvency, its cross border variant is when a portion or all of the assets or creditors of
the corporate debtor are dispersed across various jurisdictions and is known as cross-border
insolvency. Professor Ian Fletcher, a renowned scholar on aspects of commercial insolvency,
proposes that 'cross-border insolvency' should be considered as a situation'...in which an
insolvency occurs in circumstanceswhich in some way transcendthe confines of a single legal
system, so that a single set of domestic insolvency law provisions cannot be immediately and
exclusively applied without regardto the issues raisedby the foreign elements of the case.4 In
the common law courts, cross-border insolvency has a quite long history. In the case of
Solomons and Ross5 an English creditor initiated proceeding in an English court against a
Dutch trading firm when it was declared bankrupt. It was held that the English creditor has to
surrender its attachment and prove it before Dutch courts since the bankruptcy proceeding had
been initiated in Dutch courts and had vested all the assets of the firm in the Dutch assignees.

The situations of international insolvency can be distilled down to three pertinent questions: (a)
which law shall be applied? (b) who has the jurisdiction to carry out the entire insolvency
process? and (c) how to enforce the judgements that assert control over the assets without

4 Bogdan, M., 2000. Ian F. Fletcher, Insolvency in Private International Law: National and International
Approaches. Nordic Journal of International Law, 69(4), pp. 5 2 7 -5 2 8
.

5 (1764) 1 HY BI 131n: 126 ER 79

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Indian Journal of Law and Legal Research Volume II Issue II ISSN: 2582 8878

conflict? These questions act as major hindrance for courts across jurisdictions while solving
cross-border insolvency cases. This could be the major reason for the fact that most of such
cases are decided with a completely different approach as the court, which has jurisdiction to
try it, deems fit. Consequently, there are negligible number of set precedents to deal with such
cases in the future in current legal framework.

In India, cross-border insolvency concerns could occur in the following situations: (a) when the
assets of an Indian debtor are located overseas; (b) when the assets of a foreign debtor are based
in India; and (c) when the assets of a foreign debtor are based in foreign jurisdiction but the
creditors are Indians.

There are particularly three roads that the courts of law take while approaching cases involving
the said concerns. The theoretical approaches are territorial approach and universalist approach
whereas a more practical one is the hybrid approach. The territorial approach broadly provides
that each jurisdiction will apply its laws over assets located in its jurisdiction, to the exclusion
of others. 6 This might prove to be problematic to the creditors and other stakeholders due to
various reasons, inter alia, the assets of the corporate debtor might not be distributed
proportionately in all the jurisdictions. Secondly, the Universalist approach, provides for a
single administrator applying a single global regime over assets, across national boundaries. 7
Different jurisdictions practice different insolvency laws according to the needs of the state in
global market. This approach might disregard those laws and act as an arbitrary approach.
Thirdly, there is the hybrid or modified universalism approach, wherein different jurisdictions
try to harmonize and work out the most suitable place for the proceedings, by working out a
way of co-operation with other jurisdictions having distressed assets. This approach demands
co-operation from various jurisdictions however, is the most effective approach a court of law
can take in order to effectively deal with a cross-border insolvency issue in absence of a solid
regime in its legal framework.

The issues arising out of these situations are intricate and cross border insolvency, inevitably
creates panic amongst the creditors across jurisdictions over how their claims may be
compromised by the initiation of insolvency against the debtor in its centre of main interests.8

6 Ryan Halimi, An Analysis of the 3 major cross-border insolvency regimes, II PROGRAM PAPERS, 2,
(August 3, 2021)
7 Sarah Paterson, Rethinking corporate bankruptcy theory in the twenty-first century, OJLS, 1, 3, (2015)
8 Mukesh Chand, Cross border Insolvency "From territorialism to universalism to modified universalism,"

LIVELAW, (August 1, 2021), Cross Border Insolvency "From Teritorialism To Universalisn To Modified
Universalism" (livelaw.inj

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Indian Journal of Law and Legal Research Volume II Issue II ISSN: 2582 8878

Indian Legal Framework

Cross-border insolvency proceedings are remotely dealt by Sections 234 and 235 of the Code.
These provisions allow India to enter into reciprocal agreements with other states, such as
bilateral treaties, in order to initiate insolvency proceedings under the IBC. Both of these
provisions were not even present in the original bill that the drafters presented before the
committee since the prime focus was on the corporate insolvency resolution process,
liquidation process and so on. The drafters were confronted with the questions related to cross
border insolvency issues. Accordingly, an interim measure of bilateral treaties was suggested.
Another reason why bilateral treaties was considered an interim relief was because Section 13
and 44A of the Code of Civil Procedure, 1908 dealing with execution of decree passed by
reciprocating territories was already in place. Such execution has the same effect as if the local
District Court has passed the Execution decree in India. 9 However, there was no further
deliberation on these provisions. As a result, there have been innumerable instances where these
provisions have proved to be inadequate and have provided an incomprehensive framework to
deal with the complex dimensions of cross-border insolvency.

One of the major issues that arise in such scenarios is the absence of bilateral treaty with the
state in which a portion of assets is situated. The Code does not provide any procedure or relief
for the given situation. Secondly, entering into reciprocal arrangements with different countries
is a quite cumbersome process. This, in turn, would adversely affect one of the primary
objectives of the code, that is, a time-bound settlement of insolvency. Thirdly, if multiple
jurisdictions are involved then bilateral treaties with all the jurisdictions will have to be
invoked, creating legal and procedural complexities and administrative burden. Moreover, with
the growing international trade, cross-border insolvency is a quite wide area of law because of
the issues that might arise. Considering this, the Code does not provide adequate clarity and the
mentioned provisions are unequipped to deal with the issues unambiguously.

Eventually, due to growing discussions and deliberations on the subject, the government could
also clearly identify the lacunae with the Code. As a result, the Ministry of Corporate Affairs
constituted The Insolvency Law Committee in November, 2017 to identify the issues with the
corporate insolvency resolution and liquidation framework under the Code.1 0 In its March 2018
Report, the committee identified that the Report of the Bankruptcy Law Reforms Committee

9 Algemene Bank Nederland Nv vs Satish Dayalal Choksi, AIR 1990 Bom 170
10 Order of the Ministry of Corporate Affairs, November 16, 2017, available at United Nations Commission On
Jnternational Yade I , L last accessed on 6th August, 2021.

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Indian Journal of Law and Legal Research Volume II Issue II ISSN: 2582 8878

which laid down the foundation for the Code had initially recommended a detailed deliberation
upon the cross-border insolvency cases once the proposed legal regime for domestic insolvency
was in place," Since the insolvency laws in India, with respect to practitioners and judges,
stood on its feet quite smoothly, therefore, now there was a need to re-evaluate the current
cross-border insolvency framework as it was fragmented, complex and not at par with global
market. As a result, in the 2018 Report, the committee recommended the adoption of
UNCITRAL Model Law.

The UNCITRAL Model Law on Cross Border Insolvency

In order to create an adequate method for dealing with cross-border insolvency issues, the
United Nations Commission on International Trade Law proposed the UNCITRAL Model Law
on Cross Border Insolvency, 1997 (hereinafter referred to as "Model Law"). It was adopted in
the thirteenth session of the UNCITRAL held in Vienna. Unlike a United Nations Convention
the Model Law does not require a State to notify the United Nations or any other States of its
decision to implement it. 12 With the objective of creating a hassle-free solution to international
insolvency, the Model Law has been mostly adequate and therefore, is the most widely adopted
legal framework for the issues arising out of cross border insolvencies.

The Model Law is divided into five substantial chapters dealing comprehensively with the
facets of cross border insolvency including access of foreign representatives and creditors to
courts in a state; recognition of foreign proceedings and relief; cooperation with foreign courts
and foreign representatives; and lastly procedure to deal with concurrent proceedings. 13

It basically proposes the four crucial principles to assist an insolvency proceeding in a foreign
state. The first principle is the principle of access that allows foreign representatives to initiate
domestic insolvency proceedings directly in a state that has adopted the Model Law. This
provides the basic right to be heard to foreign creditors and subside barriers with respect to
jurisdictions. The second principle is the principle of recognition. It permits the recognition of
international proceedings as well as allows relief by a local court that flows from the principle
of recognition. In order to determine the degree of control of a jurisdiction over the insolvency

" Report of the Bankruptcy Law Reforms Committee, Volume I, November 2015, para. 2.
12 UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation.

13 https://www.nishithdesai.com/fileadmin/userupload/pdfs/ResearchPapers/Introduction-to-Cross-Border-
Insolvency.pdf

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Indian Journal of Law and Legal Research Volume II Issue II ISSN: 2582 8878

proceedings and the nature of relief it may grant, the Mode Law recognises two types of foreign
proceedings-

i. Foreign Main Proceedings: Proceedings in the State where the Corporate debtor has a
centre of its main interest(COMI); and
ii. Foreign Non-main Proceedings: Proceedings in the State where the Corporate debtor
has an establishment. 14

The third principle is the principle of relief. It basically provides that relief could be granted in
both foreign main and foreign non-main proceedings. So, considering the Indian scenario, if
the National Company Law Tribunal (hereinafter referred to as the "NCLT") determines that a
proceeding is a foreign main proceeding then the ongoing domestic proceedings will be put on
stay and the estate therein will be handled by the foreign representative so-appointed. Whereas,
if a proceeding is termed as foreign non-main proceeding, then such relief is at the discretion
of the domestic court.1 5 Lastly, the principle of cooperation and coordination suggests
maximum cooperation and coordination amongst the jurisdictions with respect to foreign
courts, domestic courts and insolvency professionals. The idea was to facilitate a framework
for concurrent insolvency proceedings, that is, initiating domestic proceeding when a foreign
proceeding has started to run its course. It also provides for coordination among two or more
concurrent insolvency proceedings taking place in different countries by facilitating
cooperation among them. 16 However, a State may refuse on such cooperation if admission or
recognition of a particular proceeding is against the public policy of that State. A significant
number of countries including developed nations like USA have incorporated the exemption of
public policy into their domestic legal framework.

The NCLAT paves a way

14 Principles for Effective Insolvency and Creditor/Debtor Regimes, World Bank (2015),
<http://pubdocs.worldbank.org/en/919511468425523509/ICR-Princiles-Insolvency-Creditor-Debtor-Regimes-
216xdf.>.
15 Orderly and Effective Insolvency Procedures, International Monetary Fund (1999).
16PRS Legislative Research, Report Summary Insolvency Law Committee on Cross-Border Insolvency, PRS
India(1-11
2018), https://wwwxrsindiaor /sitesdefaut/files/parlialnent or %20 °Io20%2OCross
%20Borderl20lnsolvencvmp df

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Indian Journal of Law and Legal Research Volume II Issue II ISSN: 2582 8878

In India, IBC was notified in a staggered manner because the committee was of the view that
the legal practitioners and judges shall be given time to stand their feet with respect to the new
legislation. This was primarily due to the timebound and complex nature of the Code laid down
to deal efficiently with the insolvency resolution process, liquidation process and winding up
process. Nevertheless, the Indian courts and tribunals were not only prepared to embrace the
code effectively but have also been filling the lacunae in the law through judicial
pronouncements since its enactment.

The first ever insolvency that Indian courts saw was in the case of P. MacFadyen & Co, wherein
the issue was liquidation of an Anglo-eastern company after a sudden demise of one of the
partners. As a result, the London and Madras Trustees reached to an arrangement, confirmed
by the respective courts, under which the surplus sum would be transferred to the other
proceeding for global distribution. The validity of this agreement was challenged in the English
courts and it was held that it was "clearly a proper and common sense business arrangement"
and that it was "manifestly for the benefit of all parties interested"", thereby upholding its
validity. Even after a centennial, there is no constructive law dealing categorically with cross-
border insolvency parlance and the judiciary is still coming up with encouraging precedents to
deal with such matters effectively.

Recently the curious case of Jet Airways has set a breakthrough for the constantly evolving
insolvency laws of India. In 2019, the defunct debt-ridden Indian-international airline, Jet
Airways was estimated to owe over Rs. 36,000 crores to its domestic and foreign creditors
including both financial and operational creditors. Consequently, the lenders even took over
the management from the erstwhile promoters of the company. In the meantime in Netherlands,
which was the European hub of the company, a winding up application was filed seeking the
seizure of one of Jet Airways' Boeing 777 aircraft stationed at Amsterdam's Schiphol Airport.
An estimate of Rs. 280 crores worth of unpaid dues was owed by the company to these lenders.
As a result, the district court of Netherlands made an ex parte order to wind up and appointed
a locally based bankruptcy administrator to take charge of the assets of the company located in
the Netherlands.

Later, a State Bank of India (hereinafter referred to as "SBI") led consortium of creditors
approached the NCLT seeking initiation of CIRP proceedings against the company and to
prevent the transfer of assets by applying moratorium under section 14 of IBC. Subsequently,

17 (1908) 1 KB 675

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Indian Journal of Law and Legal Research Volume II Issue II ISSN: 2582 8878

the application was admitted for CIRP following which it was discovered that, in fact, an
insolvency proceeding had already been initiated in the District court of Netherlands, two
months back. Thereafter, the administrator appointed by the Dutch court filed an intervention
in the NCLT seeking recognition of the order passed by the Dutch court and in the face of that
order, passing of some suitable order for cooperation. The reasoning was that the application
filed in the Dutch court was competent under Article 2(4) of the Dutch Bankruptcy Act.
Therefore, two simultaneous proceedings, which are taking place in different countries, would
sabotage the restructuring process and ultimately have an adverse effect on both domestic and
foreign lenders. The pertinent question of debate before the court was regarding the jurisdiction
of a foreign court to try and pass suitable orders on the bankruptcy matter of a company
incorporated and registered in India.

The NCLT, Mumbai Bench did not allow the cross border application and refused to recognise
the Dutch proceedings. The rationale behind the order was that the twin provisions, section 234
and section 235 had not been notified and therefore, there was no law to effect the remedies
sought by the administrator. Consequently, he was outrightly barred from participating in the
proceedings under IBC and the court categorically declared the foreign proceeding as null and
void.

Aggrieved by this order, the Dutch court appointed administrator filed an appeal before the
National Company Law Appellate Tribunal (hereinafter referred to as the "NCLAT"). The
NCLAT set aside the NCLT's order. As a result, the Dutch administrator was now allowed to
cooperate with the Indian Insolvency Resolution Professional. For this purpose, the creditors
of the company were asked to file an affidavit stating whether they are willing to cooperate
with the Dutch Administrator, pay his fees and accord foreign lenders the same status as the
Indian creditors, who otherwise are also eligible to file their claims before the resolution
professional coordinating the insolvency proceedings. 18 After no major dissent from the
creditors, the NCLAT further allowed cooperation between the Indian parties and their Dutch
counterpart to reach an amicable aim and conclude a resolution plan in the best interest of Jet
Airways and all the stakeholders involved. In consonance with the NCLAT order, there were
meetings held and a cross border insolvency protocol was decided upon. This protocol was
formulated completely under the shadow of the Model Law. It recognised India as the centre

" Jet Airways (India) Ltd v. State Bank of India, Company Appeal(AT)(Insolvency) No. 707 of 2019, Order
dated 12 August 2019; NCLAT seeks Jet lenders' response on Dutch insolvency administrator's plea, Business
Standard' available at httvs:/ww'.business-standard.c(r/com niestime=12579989

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Indian Journal of Law and Legal Research Volume II Issue II ISSN: 2582 8878

of main interest (COMI) and therefore, the proceedings in the Dutch court were the "non-main
proceedings". Further, the Dutch Administrator was not given voting rights in the Committee
of Creditors, however, was allowed to attend the meetings to prevent any potential overlapping
of powers.

In its decision, the NCLAT was successful in striking a "balance between the relief offered to
foreign representatives and the interests of affected by such relief," which was in line with the
Model Law. The Jet Airways case has exemplified the need to include a cross-border
insolvency regime into the existing insolvency framework of India.

Similarly, in the landmark case of State Bank of India v. Videocon Industries Ltd. 19 the NCLT
Mumbai Bench allowed to club the overseas oil and gas businesses in the ongoing group
insolvency proceedings of Videocon Industries. This case voiced the issue relating to the
coordination principle of cross border insolvency and the need for a legislation governing the
same. For now, the judicial pronouncements have been paving a way towards an efficient and
corporate-friendly approach by filling gaps in the current law.

Conclusion

The Insolvency Law Committee in its 2018 Report recommended the incorporation of Model
Law into the existing Code. The same was previously recommended by the Eradi Committee
in 2000 and the N.L. Mitra Committee in 2001. Considering the current situation of inadequate
cross-border insolvency laws in India, it is the need of the hour to adopt the Model Law
framework. Interestingly, it not only provides a uniform approach towards international
insolvencies but also recognises and respects the diverse laws of various jurisdictions by not
proposing substantive unification of insolvency laws. It allows States to construct their
domestic laws in accordance with the Model Law after making any changes they deem
appropriate. The current provisions under the Code are unequipped to deal with all the
dimensions of insolvency. Therefore, IBC without effective cross border insolvency scenario
is akin to a half-baked cake.

19 2019 SCC NCLT 745

10