Harmonizing Cross-Border Insolvency Regime under IBC: The quest for unified framework
Satyanshu Kumari
3rd Year, B.A. LL.B(Hons.), Chanakya National Law University, Patna
In the case of State Bank of India v. Jet Airways (India) Limited, established the needs for the adoption and implementation of the provisions of the UNCITRAL Model Law on the Cross-Border Insolvency, 1997 by amending the Sections 234 and 235.
Jet Airways Case: The conundrum of Parallel Insolvency Proceedings
State Bank of India v. Jet Airways (India) Limited[1], is considered to be a landmark case in terms of cross-border insolvency. Jet Airways (India) Limited (“Jet Airways”) is the first Indian company to declare bankruptcy. The decision of the National Company Law Tribunal (hereafter “NCLT”) establishes a precedent in the evolution of Indian bankruptcy law by directing the conduct of a “Joint Corporate Insolvency Resolution Process” under IBC.
The State Bank of India filed an application under Section 7 of the IBC against Jet Airways, and the admission of the Jet Airways Corporate Insolvency Resolution Process (CIRP) began on June 20th, 2019. The adjudicating authorities were aware that a Dutch Court had already commenced the bankruptcy case and that a Bankruptcy Administrator had been appointed in the Netherlands to take custody of Jet Airway’s assets. This was done after the two European creditors filed a bankruptcy petition, claiming unpaid dues totalling approximately INR 280 crores.
Bankruptcy Administrators petitioned the NCLT, Mumbai Bench, for an insolvency procedure in the Netherlands. The Bankruptcy Administrator further requested that the CIRP be delayed since an active bankruptcy proceeding against Jet Airways is continuing in the competent court under Article 2(4) of the Dutch Bankruptcy Act. It was suggested that holding two concurrent actions in different jurisdictions could be detrimental to both the restructuring process and the creditors.
The crucial question is whether the Dutch courts have jurisdiction to adjudicate the issue and to pass appropriate orders in the case of Jet Airways, which is registered and incorporated in India. The NCLT, on the other hand, refused to stop the bankruptcy procedure in India under Sections 234 and 235 of the Code, which deals with cross-border insolvency, but these provisions have yet to be implemented. In the absence of such laws, the Bankruptcy Administrator was prevented from participating in the Indian insolvency action and the ongoing proceeding in the Netherlands was ruled null and void.
In the further appeal for the same to NCLAT, over the decision of NCLT, NCLAT allowed the appeal in the following manner:
- NCLAT, upon assurance from the Bankruptcy Administrator that they would not alienate any of the offshore assets of Jet Airways, NCLT order aside.
- Bankruptcy Administrators were allowed to cooperate with the Resolution Professional as appointed under the Code and also to participate in the meeting of the Committee of Creditors, to observe and prevent any overlapping of the powers.
- Cooperation between the Indian parties and the Dutch counterparts to finalise the resolution plan that would be best interest of Jet Airways and all its stakeholders.
The Resolution Professional and the Bankruptcy Administrator, both appointed by the Dutch Court, reached an agreement on a “cross-border insolvency protocol” based on the UNCITAL Model Law. As a result, India was designated as the ” centre of main interest,” and the Netherlands was designated as a “non-major insolvency proceeding” because the procedure was held in the Netherlands. As a result, this case is relevant to the legal position relative to cross-border bankruptcy proceedings in India since it illustrates an endeavour by the Indian judiciary to be a front-runner in evolving the principles.
Centre for Main Interest (COMI)
The phrase “Centre of Main Interest” was developed by the UNCITRAL Model Law on Cross-Border Insolvency (COMI). It is significant because it decides where the court procedure for the Corporate Debtor’s insolvency resolution will take place and, in the case of a concurrent action, which proceeding will take precedence.
A firm’s or cooperating debtor’s COMI is the location where the company resides or performs the majority of its functions. COMI should refer to the site where the debtor routinely manages its interest and is thus ascertainable by third parties. In the absence of proof to the contrary, the location of a company’s registered office is assumed to be its COMI.
When it comes to the COMI, the two most common insolvency models are universality and territoriality. According to Universality, the debtor’s assets should be consolidated into a single unified estate and governed by the laws of the jurisdiction in which the debtor resides. The latter, territoriality, states that the insolvency procedure should be limited to the territorial region of the jurisdiction where it was initiated. COMI is a middle ground between these two options for avoiding court confrontation.
COMI and Its Application in India
The notion of COMI under Indian law is incorporated in Clause 14 of the Draft Chapter Z of the IBC. In India, the Insolvency Law Committee draws inspiration from the EU’s interpretation of COMI, as seen by clauses 14(2) and 14(3). (3). Clause 14(2) specifies that the assumption of COMI jurisdiction is based on the location of the debtor’s registered office. Clause 14(3) imposes on the adjudicating authority in India the burden of determining a debtor’s COMI based on factors established by the Central Government. The first successful case, where the principle of the COMI is applied was in the case of Jet Airways (India) Ltd v. State Bank of India.
The NCLAT’s ruling in the Jet Airways case demonstrates the Indian court’s willingness to collaborate with international authorities to ensure a smooth and harmonious insolvency proceeding, even before the Model Law is implemented. With the implementation of Draft Z shortly and considering the role of the courts in the application of the COMI principle, India can considerably benefit from the European interpretation of the concept and adopt a more liberal approach to recognising foreign proceedings.
Need for Cross-Border Insolvency and Its Mechanism under the Code
With the rise of globalisation has come an increase in cross-border activity. In such a case, the question of insolvency can have far-reaching consequences. It has been suggested in favour of creating a framework for coordinating and cooperating with the courts or insolvency authorities of different nations, such as administrators or liquidators. This is done to avoid a conflict of laws and to protect and maximise the debtor’s assets.
One of the fundamental purposes of any legislative regime designed to settle cross-border insolvency is to facilitate foreign insolvency proceedings. Currently, Indian law recognises international judgements and decrees from some of the reciprocal countries, like the United Kingdom and Singapore (Section 13 and 44A of the Code of Civil Procedure, 1908). However, foreign activities, including insolvency processes, have not been recognised.
The Insolvency and Bankruptcy Code, of 2016, is the primary legislation controlling insolvency and bankruptcy in India, although even the Code does not allow for an adequate method to regulate cross-border insolvency proceedings. The Code has two measures, Sections 234 and 235, to aid in cross-border insolvency proceedings. Both of these articles give the Central Government the authority to enter into bilateral agreements with foreign countries to enforce the Code. However, the current legal system governing cross-border insolvency in India falls far short of addressing the real issues associated with the process and has numerous flaws, such as the fact that Sections 234 and 235 have yet to be notified and no steps have been taken to implement them, and the Code of Civil Procedure, 1908, provides for a mechanism for enforcing foreign judgments, but it is not broad enough to include all foreign judgments.
Way Forward
The Code is an ambitious unification of India’s insolvency and bankruptcy rules, while ripe for challenges, that have occurred in recent years in India. India has already begun negotiations with nations such as the United States about entering into reciprocal agreements, and choosing reciprocal agreements rather than adopting the Model Law is a controversial decision. In reality, even if India adopts the Model Law, it allows for a system in which agreements with a country might trump the provisions of the Model Law.
The Bankruptcy Law Reforms Committee, established in 2014 by the Department of Economic Affairs, suggested that the Model law be considered only after assessing the efficacy of the regime presented by the Code. According to the Joint Committee’s report, the Central Government will develop a framework for cross-border bankruptcy at the right time, and the added issue of global implications will be addressed later. The difficulties concerning multinational corporations with branches in many jurisdictions.
The Code as a whole does seem to move in the right direction but the reciprocal agreements mechanism may not serve as the wholesome solution to address the cross-border insolvency and is likely to bring about an improvement in global perception concerning doing business in India.
Conclusion
Finally, the Insolvency and Bankruptcy Code, 2016, is a forward-thinking piece of law designed to increase the efficiency of insolvency and bankruptcy processes in India. Furthermore, while the present sections of the Code have been notified and implemented, they have several flaws and would not be able to provide a full structure for cross-border insolvency procedures. The draught chapter as recommended would have to be adopted and included in the Code, resulting in different adjustments and rules being introduced to fit the draught chapter.
The Ministry of Corporate Affairs formed a special committee to recommend a smooth implementation of the Code’s proposed cross-border insolvency provisions. However, there appears to be no update on the committee’s progress on the inclusion of cross-border insolvency provisions in the Code.
However, if all of the hard work has been completed and all of the obstacles have been overcome, the legal framework could ensure cooperation and communication across different jurisdictions while successfully addressing the resolution of cross-border conflicts involving India.
References:
[1] State Bank of India v. Jet Airways (India) Limited, (2019) ibclaw.in 20 NCLT
2. Ramesh Kumar, “Understanding Cross Border Insolvency: An Indian Overview,” 1.3 JCLJ (2021) 110
3. Ran Chakrabarti, “India’s Proposed Cross-Border Insolvency Regime: Will it Trump the Gibbs Rule?”, (24th July 2018), https://www.mondaq.com/india/insolvencybankruptcy/721994/indias-proposed-cross-border-insolvency-regime-will-it-trump-the-gibbs-rule
4. Apoorv Sarvaria and Sanyam Mehdiratta, “Cross-Border Insolvency: Understanding Centre of Main Interest (COMI), (30th May 2022) https://www.mondaq.com/india/insolvencybankruptcy/1197432/cross-border-insolvency-understanding-centre-of-main-interest-comi
5. Zulfiquar Memon, Abhishek Gupta and Aakansha Luchach, “Cross-Border Insolvency Regime In India”, (31st October 2021) https://www.mondaq.com/india/insolvencybankruptcy/1123982/cross-border-insolvency-regime-in-india
6. Bankruptcy Law Reforms: https://ifrogs.org/POLICY/blrc.html#:~:text=On%2022nd%20August%202014%2C%20the,and%20Secretary%20General%20Lok%20Sabha.
7. The Insolvency Law Committee:https://www.mca.gov.in/Ministry/pdf/constitutionOrder_30012020.pdf
