Crossing Borders in Bankruptcy: India's leap into Global Insolvency Law

Author:  Poorva Sharma

Third-year law student at Dharmashastra National Law University, Jabalpur, Madhya Pradesh

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I. Introduction

The globalization effect on businesses has made sure that developmental goals are met, but in the process they lead to very pertinent legal conundrums that remain unsolved when it comes to insolvency laws. Think of a case where a company, headquartered in India, with branches in Europe and the U.S., goes forward and files for bankruptcy. How do you think the assets be divided among the creditors which are of different countries? Who will get paid first, and according to which country’s laws? These issues can be answered by a clearly delineated cross-border insolvency law to avoid potential conflicts of law and jurisdictional clashes.

Recently, remarks by the former Chairperson of the National Company Law Appellate Tribunal (“NCLAT”), Justice S J Mukhopadhaya, pointed to the lacuna in the Insolvency and Bankruptcy Code, 2016 (“IBC”) to tackle this issue. This comes after a year of a total antithetical approach that was  favored by the government when it paused its plans to adopt cross-border insolvency rules to prioritize domestic insolvency reforms, (such as extending informal debt resolution schemes to cover large corporations in addition to small ones, introducing specific regulations for the insolvency of corporate groups as a whole, and carving out provisions tailored for the real estate sector) over international integration with the United Nations' Model for Cross-border Insolvency stating issues with the varied degrees of stringency and the different interpretations of these laws as the primary reasons.

II.  Cross-border Insolvency under the IBC

The insolvency of a multinational corporations can have varied ramifications, which can be streamlined into 3 categories – (i) Foreign creditors having claims over assets of the debtor located in different jurisdictions and the insolvency proceedings have been initiated there, (ii) the corporate debtor operates in multiple branches or possesses assets in different jurisdictions apart from where the insolvency proceedings are underway and, (iii) the corporate debtor is being subjected to concurrent insolvency proceedings in various other jurisdictions.

To counter these, Cross-border Insolvency provisions are embodied under IBC; in Section 234 and 235.

Section 234 provides for a mechanism by which the Indian government can enter into bilateral agreements (called reciprocal agreements) with other countries to enforce the provisions of IBC across the borders. The problems attached with this provision are the impracticality of negotiating a number of bilateral agreements, the looming inconsistencies that might arise and the associated risk of multiple litigations from foreign jurisdictions. Also, even though the IBC prohibits actions taken against debtors during the insolvency period, international actions can still be started. Due to these reasons, no bilateral agreements have yet been implemented in accordance with the IBC's Section 234.

Section 235 allows the Insolvency Professional to seek assistance regarding the debtor’s overseas assets from foreign courts. This provision of ‘facilitating and gathering of evidence’ or ‘the management of assets’ that are located abroad through formal requests is known as 'letters of request.' It is somewhat like the UNCITRAL Model Law in spirit, but lacks specific provisions to address coordination issues.

The loopholes in both provisions do not allow the IBC to tackle the aforementioned issues, a fact accepted by the 2018 report of the Law Commission.

It becomes imperative to follow primary legal principles that guide these proceedings, which stem from three distinct philosophies - Territorialism, which gives primacy to the territorial sovereignty and allows countries to deal with debtor’s assets independently; Universalism, which proposes a single, global proceeding for administering and disposing all worldwide assets; and Modified Universalism, which supports a primary proceeding in one country along with ancillary proceedings in other countries where debtor has assets, fostering cooperation.

The UNCITRAL Model Law has a unique blend of universalism and modified universalism, now incorporated by countries like the US, UK, and Japan. The main objectives of it are centered on the elements legal certainty, access, recognition, procedural ease, and cooperation. For countries like India, adopting the Model Law could significantly clarify and improve the handling of cross-border insolvencies.

Analysis of case laws

The Gibbs rule, established in Gibbs & Sons v. La Societe Industrielle et Commerciale des Metaux, says that an English court may not recognize a foreign court's discharge of a debtor’s liability if the contract was made and performed in England, regardless of the foreign proceedings. This rule has, however, faced criticism and calls for its abolishment but it still continues to be reluctantly followed in English courts. This principle suggests that foreign creditors’ participation in insolvency proceedings is considered to have submitted to the jurisdiction of the insolvency court and that they should not pursue their claims independently elsewhere. But it can lead to heavy burden on the debtor, regarding the costs of discharging liabilities across multiple jurisdictions.

Given the absence of specific laws addressing the issue, the judiciary was compelled to establish a positive precedent to guide future cases.

The Jet Airways case, in which the protocol acknowledged India as the "center of main interest," thus, classifying the proceedings in the Netherlands as "non-main insolvency proceedings", marked a milestone in Indian insolvency law.  However, it also highlighted issues arising from differing doctrinal approaches to cross-border insolvency between India (Universalist) and the Netherlands (Territoriality).

The Code of Civil Procedure 1908 (“CPC”) also outlines mechanisms for recognizing and enforcing foreign judgments, which are generally seen as definitive, except in cases outlined in Section 13, which lists specific exceptions. Section 44A of the CPC also stipulates that judgments from superior courts in 'reciprocating territories' can be executed within India, holding the same authority as judgments from local District Courts. Beyond CPC, Indian courts have also recognized and enforced foreign court judgments and orders based on the principle of comity among courts.

III. Approaches from other Countries

(a) European Union: A Prescriptive Approach

The European Insolvency Regulation (“EIR”) governs cross-border insolvency within the EU (excluding Denmark) and presumes that a debtor's registered office coincides with its center of main interests (“COMI”) which facilitates an automatic recognition across member states. This can be rebutted if evidence suggests that the COMI is located elsewhere.

The European Court of Justice (“ECJ”) upholds stringent adherence to ‘public policy exceptions’ to this rule, requiring a high threshold of discrepancy from the national legal order to invoke such an exception, thus preventing subjective interpretations that could hinder the free movement insolvency proceedings across borders.

(b) United States: Flexibility and Discretion

The U.S. approach, in Chapter 15 of the Bankruptcy Code, adopts the UNCITRAL Model Law. U.S. courts focus on the location of the debtor’s primary business operations and assets, treating the COMI presumption as a starting point, again subject to challenge. This flexibility allows courts to consider a broader set of factors, thus adapting to the specifics of each case. Public policy exceptions in the U.S. are similarly narrowly construed, ensuring that only genuine discrepancies with fundamental principles of law justify refusal of cooperation.

(c) India’s Emerging Framework

In India, Cross Border Insolvency Rules/ Regulations Committee (“CBIRC”) proposed changes suggesting adopting a presumption that a debtor's registered office is its COMI but also recommend providing an indicative list of factors to ascertain COMI more accurately, addressing the potential for disputes and forum shopping. Public policy remains an important exception under the IBC as well, drawing from arbitration laws to define what constitutes a breach of public policy, including fraud, corruption, and violation of fundamental legal principles.

One of the other major challenges in such cross-border insolvency is the handling of corporate groups with entities in multiple jurisdictions. Both the U.S. and the EU allow for coordinated insolvency proceedings, yet a universally accepted legal framework for enterprise group insolvencies still remains elusive. While the U.S. and U.K. handle recognition on a case-by-case basis without demanding reciprocity, India's proposed amendments advocate for reciprocal arrangements, potentially streamlining cooperation but limiting flexibility.

IV. Way Forward: A Balanced Approach to Cross-Border Insolvency

Keeping in mind Government’s contention, India might consider a phased approach, where it first aligns domestic insolvency processes with international standards to prepare for a smoother integration of cross-border rules. It may try Pilot Programs of cross-border insolvency protocols with specific countries that have strong economic ties with India.

An alternative approach could also be a standard model bilateral insolvency agreement, similar to the model bilateral investment treaty, which could address unique national needs while maintaining overarching consistency.

As Mr. Sudhaker Shukla of the Insolvency and Bankruptcy Board of India (“IBBI”) rightly noted, the interpretation and implementation of the UNCITRAL Model Law vary significantly between countries and absence of such a harmonized approach leads to unpredictability in handling international insolvency cases.

V. Conclusion

The recent court rulings show a promising shift towards creating a more business-friendly environment for handling cross-border insolvency under India's IBC, even though there isn't a specific legal framework in place yet. These cases highlight the pressing need for the government to speed up the process of adding cross-border insolvency rules. If implemented, the draft provisions proposed by the CBIRC could provide a strong foundation that would greatly improve coordination and communication between states when resolving cross-border insolvency issues. This would not only make the IBC stronger but also attract more foreign investment and improve the business climate in India.

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