Cross Border Insolvency and Its Challenges

– By Rani Jha, pursuing second year B.L.S LL.B from Government Law College, Mumbai

INTRODUCTION

International trade is reaching unprecedented heights, causing a shift in the commercial landscape. The corporations are involved in numerous jurisdictions throughout the world and are part of a global economic system. When one of these companies’ file for bankruptcy, it results in cross-border insolvency. The Insolvency and Bankruptcy Code, 2016[1] (referred to as ‘IBC’) intends to establish a systemic approach for individuals and corporations seeking a time-limited judicial remedy. When it comes to cross-border insolvency, however, relying on the laws of just one jurisdiction may be inefficient and can arise conflicts

The issues resulting from such instances are complex, and cross-border insolvency eventually causes concern among creditors in various jurisdictions regarding their individual claims, that may be put at risk by the onset of insolvency (or restructuring) proceedings against debtor in its center of main interests (referred as ‘COMI’). The United Nations Commission on International Trade Law (referred as ‘UNCITRAL’ or ‘the Model Law’), sets guidelines to identify the appropriate jurisdiction for commencing insolvency proceeding, setting out the principle of center of main interests where the main proceedings should commence. The initiation of proceedings against an Indian corporate entity, where the COMI is located in India deems such actions “foreign main proceedings”[2] (under the Model Law) for a foreign creditor in India.

THE GIBBS RULE

Many issues arise when dealing with cross-border insolvency and trying to implement the laws that regulate insolvency in different countries around the world. The Gibbs Rule is one of the rules that has posed a challenge to uniformity in cross-border insolvency procedures and is a point of discussion. In the case of Antony Gibbs and Sons[3], a contract for purchase of copper was made by the defendant from the plaintiff. The defendants were company under the jurisdiction of the French law which have gone into liquidation under French court. The plaintiff went before the English court stating that the contract was an English contract and that they were hence not bound by the law of France. The court affirmed the claim by stating that the contract was indeed an English contract on the basis that the contract was made in England and they were to be performed in England. The judgment set a precedent stating that a debt that is administered by the English law cannot be dismissed by a foreign insolvency proceeding unless the creditor consents to such a proceeding.

Recently, the Gibbs rule was put to test in the case of Bakshiyeva v. Sberbank of Russia & Ors.[4] where the court considered an application to the English court on behalf of the International Bank of Azerbaijan (Debtor), by a foreign representative, requesting a stay to be implemented permanently under the English law contracts on creditors’ enforcement of claims in England. The Foreign insolvency proceedings against the debtor was initiated in Azerbaijan and nearly all of the creditors were in consensus to a restructuring plan that had been approved by the Azeri Court. However, the subject of whether the plan should be accepted in England was brought up before the English court. The judgment cited that the Gibbs rule has been considered as “anachronism” by various English law insolvency experts, some of them even going as far as to state that the doctrine of Gibbs belong to Anglocentric reasoning and should be consigned to history[5]. Several other courts have repeatedly emphasized the necessity to overturn the Gibbs rule[6]. If a foreign creditor participates in the insolvency procedures, he is assumed to have surrendered himself in personam (by submitting proof of claim or otherwise) to the insolvency court’s jurisdiction and thus cannot pursue his claim independently.

The English court stated that Article 21 and Article 25 of the Model law contains no reference regarding the enforcement of foreign judgements and that it could not be construed as a foundation for a court to approve the enforcement of a foreign judgement, rejecting the strategy adopted by the Privy Council in Cambridge Gas[7]. The ‘Dicey Rule,’ as it is known, was approved by the court and it states that, in the following instances, a court of law outside the United Kingdom has authority to issue a judgement in personam that can be enforced or recognized against whom it was issued:

1. If the individual against whom the judgement was issued was present in the foreign country at the time the proceedings were started.
2. If the person against whom the judgement was entered was a claimant or counterclaimant in the foreign court proceedings.
3. If the individual against whom the judgement was issued voluntarily appeared in court and surrendered to the court’s jurisdiction.
4. If the person against whom the decision was issued agreed, prior to the commencement of the proceedings, submitted to the said court’s jurisdiction or the courts of that nation in respect of the subject matter of the proceedings.

In India, when an Indian corporation with English law agreements and foreign liabilities is required to be restructured in the procedure of insolvency resolution, the Gibbs rule come into play. While all the creditors are bound to the resolution plan approved by NCLT, relief can be sought from an English court by the creditors under English contracts for their claim amount in full. This may be a critical issue to consider while implementing a restructuring strategy, depending on the company’s debt profile[8].

India and Cross Border Insolvency

 The first cross border insolvency witnessed by India was in 1908, in the case of P. MacFadyen & Co., in re, which involved the liquidation proceedings of an Anglo-Indian partnership following the death of one of the members. As a result, the London and Madras Trustees mutually established an arrangement, which later received the confirmation of the courts, in which the excess amount was pledged to be repaid towards the other proceeding for global distribution[9]. When the question was raised on the validity of the aforesaid agreement, it was stated by the English court that the agreement was “clearly a commonsense and proper business arrangement” and it was “manifestly for the benefit of all parties interested”[10].

The National Company Law Appellate Tribunal (“NCLAT”) issued a judgment in the case of Jet Airways (India) Limited which created a precedent in India’s emerging insolvency proceedings by directing the conduct of a “Joint Corporate Insolvency Resolution Process” under the Insolvency and Bankruptcy Code 2016. Due to a shortage of funds and financial issues, the firm was forced to halt flight operations on April 17th, 2019. An insolvency case was filed before the Mumbai bench of the National Company Law Tribunal (referred as NCLT), which resulted in the NCLT initiating the insolvency resolution process on June 20, 2019[11].

A month prior to the initiation of IBC proceedings, Jet Airways had been pushed into bankruptcy in the Netherlands on 21 May 2019. The bankruptcy trustee appointed in the Netherlands approached NCLT about the potential complications surrounding two parallel processes against the company after hearing about the filing for insolvency in India. On June 2019, NCLT issued an order declaring Dutch proceedings null and void in law, citing the lack of legislation governing cross-border insolvency and disregarding the presence of past bankruptcy proceedings against the corporation.

Aggrieved by the same, an appeal was filed before the National Company Law Appellate Tribunal (NCLAT) which led to a unique direction. The NCLAT sought to negotiate an agreement between the Dutch trustee and the Indian resolution professional in order to maximize the value of the insolvent company by assuring coordination and cooperation while the proceedings ran parallel. They eventually came to an agreement on a cross-border insolvency protocol based on the Model Law, with India as the Centre of main interest, which was authorized by the NCLAT in a ruling dated September 26, 2019.

Conclusion

With International trade and globalization of companies reaching new heights, it becomes more important to have a legal framework to deal with cross-border disputes under IBC. The observations of the courts have established a positive judicial trend with regard to create a corporate- friendly approach in India. However, it should serve as a clarion call to incorporate cross-border insolvency provisions

The Gibbs rule can be overcome by applying international comity principles, resulting in a new cross-border insolvency regime being suggested in India. Victory over this archaic territorial rule would be a huge step forward to demonstrate India’s dedication to establishing a universal insolvency resolution system, which would help India climb the Ease of Doing Business Index rankings. The cross-border insolvency mechanism would lure large international investors into the Indian economy since it would finally give them a platform to resolve their disputes based on global standards.

Reference

[1]The Insolvency and Bankruptcy Code 2016, India.

[2]Article 2(b) UNCITRAL Model Insolvency Law, 1997

[3][1890] 2 QBD 399

[4][2018] EWHC 59 (Ch)

[5]Ibid. Professor Ian Fletcher, quoted in paragraph 49 of the judgment

[6]Pacific Andes Resources Development Ltd., In re, 2016 SGHC 210.

[7]Rubin v Euro finance SA [2013] 1 AC 236, 276–8 [128, 132]

[8]Dhananjay Kumar, Indian Insolvency Regime without Cross-border Recognition – A Task Half Done?

[9]India’s tryst with cross-border insolvency law: How series of judicial pronouncements pave the way?

[10](1908) 1 KB 675.

[11]Order dated 26.10.2019