Is UNCITRAL a Way Out to Cross Border Issues?

Sakshi Tulsyan and Tanvi Tanu*

The rise of international trade has led companies to expand their businesses across diverse jurisdictions. This has caused an exacerbation of complexities in insolvency resolutions related to financially distressed corporate entities. The article analyses whether adopting the United Nations Commission on International Trade Law [“UNCITRAL”] model in India’s cross-border insolvency regime would help resolve such complexities.

India enacted the Insolvency and Bankruptcy Code [“the Code”] in 2016, which laid down the foundation of the insolvency regime in the country. Although the code consolidates and amends laws relating to insolvency and has solved various problems, it has proved to be ineffectual in matters of cross-border insolvency. The Code accommodates the said concept in Sections 234 and 235 but they are yet to be implemented. Moreover, even if these provisions are notified, they will fail to tackle the complex settlements as they call upon entering into separate bilateral agreements with countries for adjudicating relief.

UNCITRAL: A Way Forward

The UNCITRAL Model law on Cross Border Insolvency [“the Model Law”] has become a requisite for every nation due to varied laws governing cross-border liquidations. It offers a uniform framework for countries while deciding the operational aspect and facilitates an efficient and cost-effective method for tending to transnational insolvency cases. It is a magnificent piece of document which at present has been adopted by 49 States in a total of 53 jurisdictions.

India’s inadequate cross-border insolvency regime depicts a need for the adoption of UNCITRAL Model Law. The Insolvency Law Committee constituted in 2018, for recommending amendments in the Code, had suggested an initial adoption of the Model Law on a reciprocity basis. It observed that the present provisions dealing with cross-border insolvency don’t provide a comprehensive framework and are susceptible to delay and uncertainty. Therefore, there is a need for the insertion of a separate chapter based on UNCITRAL Model Law.

Need to Create a Creditor’s Friendly Law

In times of financial distress, the absence of a notified code on cross-border insolvency puts foreign creditors in a disadvantageous position. Centre of Main Interest [“COMI”]is the seat of a corporate entity’s major stakes, whether in terms of control, location of its assets or its significant operations; the principle of COMI is often a deciding factor for ascertaining the jurisdiction of the main proceedings. One of the extreme challenges faced by the creditors transpires when the COMI of an Indian debtor lies in a foreign jurisdiction. In such a situation, the Code ceases to operate as it does not effectuate extraterritorially. Hence, the Foreign Main Proceeding will lie in that jurisdiction. This implies that the Indian creditors can only secure relief if the foreign law is consistent with IBC. Thus, they hesitate to invest, which institutes a problem for better running of a company. Therefore, in the case of Macquarie Bank v. Shilpi Cable Technologies, the court held that the foreign creditor and debtors must be kept on equal footing to strengthen the faith in foreign investments in companies.

Public policy exemption is when, by virtue of Article 36(1)(b)(ii) of the Model Law, a state refuses to enforce an award because it is contrary to its public policy. It is an immense challenge for foreign creditors as it may be invoked by rebuffing the recognition of foreign proceedings. When domestic insolvency resolution laws predominately govern the resolution process, it creates a financial distress in insolvency regimes present in such countries. For instance, Thailand has not yet adopted the Model Law and the absence of a universal cross border regulation has been challenging for foreign creditors in some major international insolvencies like the case of Thailand Airways. The country has indicated its inclination towards a more universalist approach to cross-border insolvencies.

Judicial Trends Pointing Towards UNCITRAL

The cursory provisions related to cross-border insolvency have made courts use different references while rationalising the decision. In recent times, the Indian Judiciary has witnessed references of the Model Law for cases associated with the issue. The case that set a benchmark in group insolvency is Videocon Industries– India’s first “Group Insolvency” case. In this case, the National Company Law Tribunal [“NCLT”], Mumbai acknowledged the “substantial consolidation” principle of the UNCITRAL and allowed 13 of the 15 Videocon group companies to consolidate based on the rationale that it will assist in maximizing the asset value debtor. The tribunal used its equity jurisdiction and gave the decision in favour of the consortium.

Another prominent case related to bankruptcy law is the Jet Airways case where a defunct debt-ridden Indian-International airline owed a liability above Rs. 36,000 crores to its domestic and foreign lenders. In the case, an eminent question arose with respect to Netherlands jurisdiction- whether to inspect bankruptcy of the airline which was registered and incorporated in India. Further, it was apprised that a bankruptcy petition has already been filed in a district court of Netherland. The Dutch court administrator requested to withhold the Corporate Insolvency Resolution Proceedings [“CIRP”] but was refused by NCLT on the ground that cross-border insolvency provisions had not been notified thus abstaining the administrator from participating in the proceeding. Ultimately, the National Company Law Appellate Tribunal [“NCLAT”] allowed his participation on the assurance that the offshore assets of the airline will not be alienated. It further went on to allow the parties to conclude the resolution plan expedient to Jet Airways and all its stakeholders. In this way, the Indian Judiciary attempted to incorporate a model law framework into Indian insolvency laws by striking out a balance between relief granted to the creditors and debtors.

Efficacy of UNCITRAL in Other Jurisdictions

Countries across the globe are adopting the Model Law in their domestic legislation as it can be endorsed according to a country’s needs. There is no need to adopt it in toto, it can be altered to suit the legal framework of the country.  In Singapore, there has been a shift in the nature of the insolvency proceedings; its legal framework now accommodates foreign insolvency proceedings and professionals. Similarly, amendments were also brought about in Brazil’s Bankruptcy laws to plug the existing loopholes in the law. The reform is expected to eliminate the unnecessary uncertainty in international restructurings concerning Brazilian debtors. The Model Law is acting as an evident example for speedy recognition and relief which is manifested through 2015 order of Seoul Central District Court on 6th March in Seoul to commence the rehabilitation proceedings; the order was instantly recognized by Japan on 9th March 2015 and by UK and  USA on 16th and 19th March 2015 respectively and followed by Australia on 8th May 2015.

Australia’s Cross Border Insolvency Act features the adoption of UNCITRAL; this has eased judicial access to foreign insolvency professionals. The country’s judiciary is empowered to deal with cross-border disputes efficiently. The United States references the UNCITRAL in Chapter 15 of the country’s Bankruptcy Code. Furthermore, the adoption of the Model Law by Greece has aided in the foreign insolvency proceedings in the enacting state, recognising foreign insolvency proceedings, foreign representatives’ access to the enacting state’s courts, transnational cooperation, and coordination of concurrent proceedings.

Conclusion

The recommendation of adopting the Model Law pour in time and again yet India has not adopted the UNCITRAL in its insolvency law. This stance may be in line with the common reasoning among other countries that have also refrained from adopting the Model Law. The primary concern could be the need to safeguard the country’s sovereignty- to make laws concerning assets within its territorial limits. States experience the impelling need to protect local parties and national economic interests. Identical commercial interests may not always exist in certain matters of insolvency especially those susceptible to media attention and public scrutiny. Thus, even though countries wish to incorporate a universalist approach, they may hold back from doing so.

The flexibility in the adoption of the Model Law can be exploited. At times the states tend to waver from the UNCITRAL provisions. If India wants to progress in line with Model law, it needs to be proactive like South Korea; after adopting the UNCITRAL the country’s judiciary has been instrumental in recognizing foreign insolvency proceedings and providing assistance to foreign representatives in deposing assets of foreign creditors. Likewise, accommodating UNCITRAL in India’s legal framework should occur without eroding the key features of the international law and to ensure the same the country needs to act in furtherance of the three guiding principles-cooperation, flexibility, and equilibrium.

*The authors are third-year law student at University of Petroleum and Energy Studies, Dehradun