The Ministry of Corporate Affairs, Government of India has invited suggestions on a draft chapter on Cross Border Insolvency (Proposed Amendment) proposed to be included within the framework of Insolvency & Bankruptcy Code, 2016 (IBC) by a public notice dated 20-6-2018 (Notice).
The Proposed Amendment is based on the UNCITRAL Model on Cross Border Insolvency, 1997 (Model Law) which is an internationally recognised legal framework to deal with cross-border insolvency issues. It is noteworthy to mention that UK, USA, Japan, Canada and Australia are some of the countries that have substantially implemented the Model Law.
Need for Cross Border Insolvency Regulations
At present, the legal framework governing corporate insolvency i.e. IBC is silent on the position of a foreign creditors’ right to approach National Company Law Tribunal (NCLT) to initiate corporate insolvency proceedings. However, the Hon’ble Supreme Court in Macquarie Bank Limited v. Shilpi Cable Technologies Lt [see End Note 1] set a precedent that foreign creditors shall have the same right as available to a domestic creditor to initiate and participate in corporate insolvency resolution process under IBC. The Hon’ble Supreme Court in the above case expanded the definition of ‘person’ to include persons residing outside India.
At present Sections 234 and 235 of IBC provide for cross border operation of directions and orders of NCLT. However, the above sections have not been notified, and therefore have no effect. Any orders passed in India as of now will not have effect outside, unless specifically taken up / followed up by the Indian government with the foreign state on a case on case basis. This remains untested till date.
Indian court’s recognition of foreign proceedings and, or orders passed by the foreign courts are all governed under Code of Civil Procedure, 1908 (CPC). Only the final orders / awards passed by foreign courts are recognized. Insolvency orders, orders arising out of reorganization processes, administrative orders and interim orders are NOT recognised for the purpose of execution in India.
The practical implications of lack of regulation in cross border insolvency are several and varied. At present, upon admission of a corporate insolvency petition by NCLT moratorium is imposed by default restricting institution/continuation of suits or arbitration against the company; the assets of the company are prohibited from being transferred or being encumbered etc.; and enforcing security interest against the company is prohibited. However, this moratorium only operates within India or governs only those assets of the Company situated within India. The Indian lenders do not have access to foreign assets of the Company.
Any foreign proceedings against the Company will continue to be contested in those jurisdiction, overseas assets of the Company and the security created over those assets will not be covered by the moratorium unless a mechanism is agreed upon by which the Indian proceedings are recognised in that jurisdiction.
In view of the above shortcomings a proper legal framework governing the operation of NCLTs’ orders and directions outside India, and recognition of Foreign Court’s orders and directions in a cross-border insolvency proceedings was required to be passed. This lacuna is sought to be remedied by the Government of India by including the present Chapter on Cross Border Insolvency.
Salient Features
The Proposed Amendment applies to all corporate debtors, unless specifically excluded by the Central Government, and will govern:
- Assistance sought in India by a foreign court in respect of foreign proceedings;
- Assistance sought by a foreign state in respect of proceedings under IBC;
- Foreign proceedings and proceedings under IBC in respect of the same corporate debtor concurrently; and
- Requests for commencement of, or participation in proceedings under IBC by a Foreign State through its representative.
The Proposed Amendment operates only in the jurisdictions where the States / countries have expressly adopted the Model Law with or without modification as to reciprocal recognition. However, there is an enabling provision contained in the Proposed Amendment whereby Government of India may expand the application of the chapter to jurisdictions where the Government of India may in the future enter into agreement with such countries.
Important Definitions
Certain new definitions have been included, set out below:
- “Centre of Main Interest” will normally lie in a place where the registered office of the company is situated. However, in a given case NCLT has been given the discretion to arrive at an independent assessment to ascertain the “centre of main interests” of a corporate debtor.
- “Foreign Proceedings” means insolvency proceedings initiated or pending in a foreign state in which the assets and the affairs of the company are subject to control and supervision by a foreign state;
- “Foreign Main Proceedings” means proceedings taking place in a country where the Company has the centre of main interests, outside India;
- “Foreign non-main Proceedings” means proceedings taking place in a country, outside India, where the Company has an establishment other than centre of main interests;
- “Foreign Representative” means a person or institution authorized in foreign proceedings to administer the assets or affairs of the Company; and, or to act as a representative of the foreign proceedings in India.
Assistance to Foreign Representative and Creditors
A Foreign Representative or a Creditor are treated on par with domestic creditors in respect of commencement of, and participation in insolvency resolution proceedings. A foreign creditor or a foreign representative can now without a need for a separate recognition can directly approach the NCLT to initiate proceedings against the company and exercise all the rights as a creditor.
The Proposed Amendment makes it mandatory that the NCLT and the Resolution Professional shall provide all notification that are required to be made available to the domestic creditors to the foreign creditors in such manner as will be separately notified.
Similarly, an authorized person or body duly authorized to represent the foreign proceedings in India shall also have the right to apply to NCLT and seek its assistance to carry out his / its functions as the Foreign Representative under the IBC. Essentially, the Proposed Amendment provides for recognition of Foreign Proceedings and paves way for a Foreign Representative secure the assets of the corporate debtor in foreign proceedings that are situated in India by simply moving the NCLT.
Recognition of Foreign Insolvency Proceedings
As provided in the definitions, Foreign proceedings are categorized into two broad heads viz. Foreign Main Proceedings and Foreign Non-Main Proceedings. Foreign Main Proceedings are those taking place in a State / Country where the corporate debtor has “centre of main interests” as opposed to Non-Main proceedings which take place in a country where the corporate debtor may just have an establishment or presence. The difference between the foreign proceedings shall influence the reliefs that may be granted by NCLT and the discretion that may be exercised by the NCLT while granting such reliefs.
NCLT may recognise the Foreign Proceedings on an application by a Foreign Representative on production of requisite documents as either a Foreign Main Proceedings or Foreign Non-Main Proceedings. Timelines for recognition of the proceedings are caped at a maximum 14 days from the date of filing the application.
Upon recognition of existence of a Foreign Main Proceedings, the NCLT shall be obliged to order and impose a moratorium prohibiting institution of suits or continuation of suits, transferring or encumbering any assets, any action to deal with or foreclose security interest etc. of the Company facing insolvency proceedings.
In the event the proceedings are recognised as Foreign Non-Main Proceedings, NCLT may exercise jurisdiction only to protect the assets of the company or the interests of the creditors in such foreign proceedings. To this end the NCLT may exercise its discretion to grant reliefs moratorium and such other reliefs to protect the assets of the corporate debtor, or the interests of the creditors.
The moratorium and, the prohibitions imposed by the NCLT under these provisions will be valid for the same duration and will terminate, as provided under Section 14 of IBC, either upon resolution of insolvency or upon liquidation.
Besides the above reliefs imposing moratorium, the NCLT in both the cases of Foreign Main Proceedings and Foreign Non-Main Proceedings has the discretion to pass orders entrusting the administration or realization of the assets situated in India to the Foreign Representatives. However, in the case of Foreign Non-Main Proceedings the above reliefs may be granted by NCLT only if its demonstrated that the reliefs relate to assets that are administered in the Foreign Non-Main Proceedings.
For example, if the NCLT recognises Foreign Non-Main proceedings against company X in country ABC, NCLT shall not grant reliefs to the Foreign Representative seeking administration of assets in India which are not administered (i.e. identified and controlled) in those foreign proceedings. In the same example above, if the Foreign Proceedings are recognised as Foreign Main Proceedings then NCLT will have no choice but to impose a moratorium and hand over the administration of ABC’s assets in India, whether administered or not under the said proceedings, to the Foreign Representative.
The Proposed Amendment also expressly provides that the NCLT before granting reliefs to the Foreign Representatives must first satisfy itself that the interests of all the creditors, interested persons including the corporate debtor are adequately protected. Clearly, the intention to afford a chance of representation to the concerned persons before passing an adverse order is explicit.
Cooperation with Foreign Courts and Concurrent Proceedings
Although the Model Law contemplates direct communication between the Courts across jurisdiction in cross border insolvency matter, the Proposed Amendment has modified the Model Law requiring the Central Government to frame rules as to how the communication between the NCLTs and the Foreign Court would happen.
The Proposed Amendment provides for cooperation between the NCLTs and any foreign court inter alia by enabling NCLT to conduct a joint hearing with the foreign court. Similarly, the Resolution Professional appointed under the IBC, subject to supervision by the appropriate NCLT, is empowered to communicate directly with foreign courts and foreign representatives in the discharge of his duties under the IBC.
As regards concurrent proceedings, it is provided that the commencement of insolvency proceedings against the same Corporate Debtor under IBC after recognition of a Foreign Main Proceedings against the same corporate debtor is permitted only if the corporate debtor has assets situated in India and the domestic proceedings concern only those assets.
The Proposed Amendment also provides powers to the NCLT to seek cooperation and coordination of foreign courts or Foreign Representatives in cross border insolvency proceedings. However, this will be further subject to such guidelines framed to oversee the channel of communication and the sort of cooperation that may be sought by the NCLT.
Conclusion
The Proposed Amendment is in the right direction as it recognises and tries to fill the gaps in IBC re operation of NCLT’s orders outside India, and India’s reciprocal obligation to Foreign Courts’ / Creditors, and access to foreign assets to Indian creditors.The Proposed Amendment is not free from doubts or limitations, especially regarding the discretion vested in the NCLT in recognition of the Foreign Proceedings. The entire jurisdiction of NCLT under the Proposed Amendment will depend on whether the action “would be manifestly contrary to the public policy of India” or not. The Proposed Amendment also makes provision for the Central Government to specify what will be manifestly contrary to public policy of India.
There is no clarity on what constitutes Public Policy of India. This has been under a lot of debate in the arbitration realm especially in the recognition and enforcement of Foreign Arbitral award and is now likely to spill over to IBC. Secondly, the Proposed Amendment provides that the central government may notify classes of corporate debtor or entities to whom this amendment will not apply. There is no indication whether in the discussion part or otherwise, as to who will be excluded and reasons for providing such exclusions. Lastly, there is no clarity as to the parameters that will decide where the “centre of main interests” of a company lie. It is stipulated that Registered Office will be an indicative centre of main interest, but discretion is vested with the NCLT to draw its own conclusion. Often companies are registered in jurisdictions depending on tax relaxation etc. but the actual business is centered in some other jurisdiction.
Therefore, it is crucial to define the parameters to arrive at centre of main interests to avoid conflicting views and tests adopted by different NCLT which may also lead to long drawn litigation. Another crucial aspect is the reciprocity obligation under the Model Law. The success of the Proposed Amendment will entirely depend upon the acceptance and recognition of foreign proceedings by India, which will in turn determine the validity of NCLT decisions, orders outside India. This will be clear only once the Proposed Amendment is notified and the reciprocal arrangement between the countries are agreed separately and notified by the Central Government.
We believe that the concerns will be answered by the Government in its final discussions and hope that the Proposed Amendment in its’ final form, hopefully, without watering down the provisions, is brought into effect at the earliest.
[The author is Joint Partner, in Commercial Dispute Resolution practice, Lakshmikumaran & Sridharan, New Delhi]
End Note:-
1.Civil Appeal No.15135 OF 2017