Resolving cross-border Insolvencies

Resolving cross-border Insolvencies

Resolving cross-border Insolvencies

Benjamin Disraeli presciently said that debt is a prolific mother of folly, and of crime. When a company runs into debt, it is the creditor who inarguably suffers more than the debtor. Insolvency laws aim to assist both the debtor and the creditor in the management and disposition of the debtor’s assets. Recent months have witnessed insolvency petitions against numerous companies being admitted. A few of these companies may also have assets in other jurisdictions, and one of the crucial questions that arises is the treatment of such assets. This, as such, is the province of cross-border insolvency laws.

In a situation where an insolvency petition is admitted against a company and the committee of creditors (CoC) fails to arrive at a resolution plan, the company is ordered to be liquidated under the Insolvency and Bankruptcy Code, 2016. In this situation, it is pertinent to understand the regime governing the disposition of the foreign assets of a company. It is in this area that the code is woefully inadequate, and there is an urgent need for a framework on cross-border insolvency.

Globally, cross-border insolvency laws are based on one country providing assistance to the other in taking control of the assets and eventual disposition of such assets of the debtor company. Such aims are achieved by the mutual recognition of each country’s insolvency regime. For instance, the UK recognizes the insolvency provisions of certain Commonwealth jurisdictions and courts in the UK are bound to assist courts in such Commonwealth jurisdictions. India is not one of the jurisdictions that qualifies for the benefit under this route.

The European Union has one of the most effective cross-border regimes where, under Insolvency Regulation 1346/2000, the country where proceedings are initiated against the debtor and the Centre of Main Interests is located in such country, the laws of that country automatically take priority and have the same effect in all other member states and govern all issues except those specifically excluded. Some countries have adopted the UN Commission on International Trade Law (Uncitral) model law on cross-border insolvency, adopted in 1997.

The model law is designed to provide a harmonized approach to the treatment of cross-border insolvency proceedings, facilitate cooperation between the courts and office holders involved in the insolvency in different jurisdictions, and provide for the mutual recognition of judgements and direct access of foreign representatives to the courts of the enacting state. India has not adopted the model law.

As regards cross-border insolvency laws in India, under the Companies Act, 1956, a court could order the winding up of an unregistered company, which included a foreign company. However, if an Indian company with assets abroad was sought to be wound up, there was no specific statutory process for the proceedings. It was based on the mutual recognition of foreign decrees as in the Code of Civil Procedure, 1908, in India. Foreign creditors could also independently proceed against the assets of the company located in the foreign jurisdiction.

In the absence of such recognition, it is difficult for a liquidator to gather information on the assets and enforce the disposition of foreign assets in a liquidation. This problem was recognized by the Justice V. Balakrishna Eradi committee in 2000 which called for the urgent adoption of the model law, in whole or in part, for India to have an effective cross-border insolvency regime.

Thereafter, the N.L. Mitra committee report set out in detail the then prevailing cross-border insolvency regime and once again reiterated the recommendation for the adoption of the model law. The banking law reforms committee report, on the basis of which the current code was formulated, side-stepped the question on cross-border insolvency and stated that the committee would take up the subject in its “next stage of deliberations". In its current form, the code contains only two provisions that may possibly enable and assist the liquidator with respect to a company having assets in a foreign jurisdiction.

Section 234 of the code allows the Union government to enter into reciprocal agreements with other countries to enforce the provisions of the code. Section 235 envisages a “Letter of Request" by the liquidator for action on the assets of the company situated in another country. However, there must exist a reciprocal arrangement with such country. It is important to appreciate that the code does not envisage the adoption of the model law or any cross-border insolvency regime. Despite deliberations since 2000, no serious efforts have been made by the government with respect to cross-border insolvency.

There are, however, rumours of discussions with the US for a reciprocal agreement. The insolvency law committee report, which was published recently, observed that Sections 234 and 235 of the code did not provide a comprehensive framework on cross-border insolvency matters and stated that it would attempt to formulate a framework based on the model law in a separate report. If the code is to be effective in the management and disposition of foreign assets of debtor companies, it is the need of the hour that India put in place a framework for cross-border insolvency. Till such time, liquidation of foreign assets will be a long-drawn process.

Source: livemint


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