Cross-Border Insolvency Law Framework: A Critical Analysis

Shashwat Shekhar*

Introduction

In May 2016, India enacted the Insolvency and Bankruptcy Code 2016, which completely revamped its insolvency and bankruptcy law. The Code mimics the insolvency laws of the UK and is tailored to Indian law. Even though a few issues have been addressed since its inception, it is still lacking in a few areas.

It is the primary purpose of the Code to enable the creditors of an entity to initiate a procedure of corporate insolvency resolution (hereinafter referred to as “CIRP”) when the corporate debtor falls behind in remitting their debts. Nevertheless, relying solely on national laws when dealing with multinational companies might not be effective. To deal efficiently with such cross-border disputes, a robust institutional arrangement is necessary. The foreign-based corporate debtor was restructured using intra-jurisdictional focused insolvency laws as opposed to international insolvency treaties. As a result, the “UNCITRAL Model Law on Cross-Border Insolvency, 1997” (hereinafter referred to as “the Model Law”) was drafted with the ultimate aim of facilitating a uniform approach.

This Model Law offers States merely legislative guidance, unlike other multilateral conventions, to develop a modern, harmonized, and fair insolvency framework to facilitate the efficient and swift resolution of cross-border insolvency disputes, this body’s primary objective is to assist States in the preparation of their insolvency laws.

The pre-COVID-19 projections of January 2020 projected global growth at -4.9% in 2020 and 6 1/2% in 2021. According to the World Bank, and another 5-10 percent in 2021, with a slow rebound in 2022. There is a projected decrease in global trade flows of 12.9% (optimistic scenario) and 31.9% (pessimistic scenario) in 2020, followed by a recovery in 2021. A new wave of pessimism has swept through the globalization movement due to looming uncertainty and bleak outlooks. The business will be left with long-term scars as a result of the pandemic. Globally as well as in emerging markets, default probabilities are rising as the pandemic spreads. Bankruptcy will become more common. Large multinational companies are capable of damage to the entire global market chain if they fail; in the industry of which they are an integral part; in the countries where they operate heavily; and in countries in which they are multinational companies.

Concerning insolvency laws dealing with cross-border insolvencies, the ongoing pandemic raises several challenging questions that require a comprehensive response. Several factors influence which framework a country should choose, including the level of integration with the global economy and the maturity of the insolvency system already in place. To address cross-border insolvency, the Insolvency and Bankruptcy Code, 2016 (Code) gave the central government the power to reach an arrangement with other countries to enforce provisions of the Code. The Adjudicating Authority has also been empowered to issue letters of request to a court or an authority in these countries in connection with proceedings under the Code to obtain evidence or take action.

The significance of Model Law and the 2nd Insolvency Law Committee Report

To create an efficient and hassle-free procedure for the resolution of international insolvencies, the UNCITRAL Secretariat issued the UNCITRAL Model Law on Cross-Border Insolvency, on 30-5-1997 (the “Model Law”).

According to the “Insolvency Law Committee (hereinafter referred to as ‘ILC’)”, the Model Law should be incorporated into the existing Indian Insolvency Code, with some modifications (the report dated 16-10-2018). It has been recommended in the past that India adopt the Model Law by the “Eradi Committee” and the “N. L. Mitra Committee” in the years 2000 and 2001 respectively. By adopting the Model Law, India would benefit in a variety of ways, including improving its ranking in ease of doing business, which will result in strong foreign direct investment, prioritizing domestic issues and stakeholders (where foreign involvement in the case is contrary to domestic law), providing relief to Indian creditors in other jurisdictions, etc.

Drawbacks with the Model Law

A cross-border insolvency proceeding in its present form does not address the question of conflict of laws, leaving the issue at the mercy of the courts in the respective jurisdictions to apply private international law. Conflict of laws is not expressly addressed, but it does allow cross-border insolvency agreements, which have been used effectively to address the problem. Model Law benefits cannot be protected uniformly across jurisdictions with different levels of maturity. It has been argued that, despite both having adopted the Model Law early on, the US and UK courts have not applied the same interpretations to crucial provisions of the Model Law, thereby failing to achieve the goal of harmonization. US and UK case laws heavily influence UNCITRAL’s legislative and practical guides, and these diverging interpretations undermine the Model Law’s appeal. Global financial instruments and multinational corporations forming cross-country value chains are at the core of any economic contagion. These aspects are not outlined clearly in the Model Law.

India’s judiciary plays a critical role in solving Cross-Border insolvency laws

Insolvency laws in jurisdictions all over the world are very complex when it comes to their implementation. The case of “Gibbs & Sons v. La Societe Industrielle et Commerciale des Metaux” is a case with a long history of debate by nations with common law, determining that a foreign court may not be readily acceptable in English law when it comes to full discharge of certain debtor’s obligations towards certain creditors.

Insolvency laws of other jurisdictions also pose challenges to cross-border insolvencies. Due to the Indian situation, several high-valued companies have been admitted to the insolvency process within the last two years, which have assets and creditors located outside India, raising concerns about the process to be followed in such a situation.

Therefore, in the absence of a law categorically dealing with cross-border insolvency matters, the judiciary was left with no choice but to establish a precedent to encourage future decision-making on the same issue.

A Case of Group Insolvency in India: Videocon Industries

NCLT Mumbai bench affirmed “substantial consolidation” in August 2019 and approved the consolidation of 13 of the 15 Videocon Group companies. The first time the consolidation of group companies under IBC was approved for insolvency proceedings was because it was rationalized to maximize the asset value of the debtor and, therefore, set a benchmark for insolvency of groups.

Videocon Industries was admitted to CIRP shortly after the SBI led consortium moved for a “substantial consolidation” of five of its subsidiaries as a group creditor. The CIRP proceedings had been instituted separately against each entity; however, because there were no collateral assets and none of the entities could survive individually, it failed to secure an attractive bid. The Tribunal then analyzed bankruptcy jurisprudence in the US and UK and utilized its equity jurisdiction to rule in the consortium’s favor in the absence of an express provision in the Code.

The NCLT allowed in February 2020 Videocon Industries to file for bankruptcy with 4 foreign-based subsidiaries. On a plea filed by Videocon Group managing director seeking extension of the moratorium, the tribunal ordered to rule on the extraterritorial application of IBC and the process involved in collating overseas subsidiaries’ assets with those in India. Once again, this case highlights the need for legislation governing cross-border insolvency and issues surrounding coordination theory.

Suggestions for enhancing the code

The government of India may introduce “debtor-friendly” measures in the future to give relief to businesses and give them a better chance at survival. The UK has enacted permanent remedies in addition to temporary ones, such as the freestanding moratorium. This allows some companies to escape creditor action for 20 days (that may be extended).

It is suggested that Directories remain in charge during the moratorium, but a monitor oversees them. Financially distressed companies should be given some extra time to formulate a plan, thereby increasing their chances of surviving as a going concern rather than being forced to file for bankruptcy. A similar business rescue strategy is also needed in India to avoid a flood of insolvencies after temporary relief measures under Covid-19 cease.

In the UK, there is also the Restructuring Plan, which can be implemented without the consent of dissenting creditors as long as such a plan does not treat them unfairly. The IBC contains similar provisions.

Cross-border insolvency has advanced rapidly in other countries, and India needs to catch up. Companies today operate across borders. Thus, India must introduce a proper cross-border regime in its legal framework as soon as possible.

*The author is a second-year student at National Law University, Odisha.