THE SAGA OF CROSS-BORDER INSOLVENCY FRAMEWORK AND FOREIGN INVESTMENT IN INDIA

Prakriti Singh*

INTRODUCTION

The Insolvency and Bankruptcy Code, 2016 (the Code), the first consolidated and comprehensive legal framework enacted in India to regulate insolvency and bankruptcy proceedings had brought rules which were hitherto alien to the realm of Indian Insolvency. The flexibility of the Code, the emphasis on business reforms and the expeditious resolution mechanisms did present avenues for foreign investors. However, in the absence of a standardized cross border insolvency framework, there is a skepticism among the foreign investors regarding the safeguarding of their rights, assets and investments in India.

As highlighted in Budget 2022 and Economic Survey, 2022, Draft Chapter Z, based on UNCITRAL Model Law on Cross-Border Insolvency (Model Law) will be soon incorporated into the Code. The provisions of the Model Law reflect a strong commitment towards equitably safeguarding the rights of all the parties in cross-border insolvency matters. Thus, aligning the provisions of the Code with the Model Law would significantly abate the skepticism of foreign investors and provide a relief to the pandemic-stricken Indian economy.

There are certain gaps within the IBC framework which can act as a roadblock in the execution of this Draft Chapter Framework. There is a room for improvement within this Draft Chapter to ensure that the cross-border insolvency rules and regulations within the Code resonate well with the objectives of the UNCITRAL Model Law. This article will analyse how the Draft Chapter in the Code falls short on the principles of coordination, cooperation, predictability and certainty in cross-border insolvency resolution process. It will suggest some rules and regulations to be incorporated within the Code so that the lofty objectives of the first cross-border insolvency law in India can be fulfilled.

SEAMLESS COORDINATION & COOPERATION- THE NON-NEGOTIABLES OF CROSS- BORDER INSOLVENCY

Article 25 and Article 26 of the Model Law mandate cooperation and coordination between the competent State authorities and the foreign stakeholders. It is essential that the Code provides for coordinated administration to holistically address the concerns in cross-border insolvency matters. A significant feature of the Model Law is that it provides significant freedom to the nations to incorporate cross-border insolvency regulations while being mindful of the domestic laws and circumstances. The Central Government has been given the authority to frame appropriate rules to ensure coordination in cross-border insolvency proceedings. Given that the cross-border insolvency proceedings entail an additional layer of complexities, it is essential that the legislature utilizes this freedom in the best possible manner.

The primary purpose of an insolvency law is to deal with business failures in competitive markets.[i] There is a high possibility that in addition to non-payment of dues, such business failure involves tax evasion and fraud. In the event of such business failures, there is a high possibility of a clash between the insolvency proceedings and the regulatory authorities such as the Enforcement Directorate (ED) and the Central Bureau of Investigation (CBI). An insolvency framework enhances the probability of recovery of dues and rescue of viable businesses. These regulatory bodies could create severe interventions and risks in the insolvency proceedings. Hence, in order to promote availability of credit in the economy, the insolvency framework must provide safeguards and guidance mechanisms to prevent the intervention of these regulatory bodies.

The Code has taken account of these circumstances. Section 31(1) and Section 238 of the Code lay down explicit safeguards to prevent regulatory authorities from throwing a spanner in the works of IBC. According to Article 31(1), the resolution plan approved by the Adjudicating Authority is binding upon the Central Government, any State Government or local authority. Article 238 of has provided the Code an overriding nature and made the regulatory authorities bound under IBC. These provisions have been seldom abided by the regulatory authorities. The Code has been dynamic and has undergone notable amendments to lay down better rules to prevent this intervention. However, there is a vacuum in the law in terms of providing rules to ensure cooperation and coordination between the authorities and resolution proceedings. This vacuum has been reflected in several instances.

Essar Steel insolvency case has witnessed one of the largest recoveries under the Code. The promoters had to take a call on restructuring options and additional financing. During the proceedings of this case, the CBI had conducted rigorous raids and arrests into the IDBI Bank. This bank was associated with the business failure in Kingfisher Airlines. Even though this was an entirely separate proceeding and the Code had an overriding nature, the consequences permeated to the Essar Insolvency Proceedings. The lack of proper cooperation and coordination mechanisms in the Code contributed to the skepticism of bankers and the abysmal delays.

The Jaypee Infratech Insolvency proceedings have been one of the most prolonged in the history of the Code. At that juncture, Section 29A had been newly incorporated into the Code to rectify a loophole in the Code. The objective of this Section is to preclude those who had contributed to the downfall of the company from the Corporate Insolvency Resolution Process (CIRP). The proceedings witnessed several twists and turns due to challenges to Section 29A of the Code. However, another challenge was posed by the Uttar Pradesh Government and its regulatory authorities. Section 233 of the Code provides safeguard to action undertaken in good faith under the Code from any suit, prosecution or legal proceeding. It is an essential provision to protect the insolvency professionals and liquidators from the proceedings of regulatory authorities. Due to a lack of coordination mechanisms in the Code, the Section 233 was blatantly violated by the regulatory authorities by arresting the IRP leading to litigation and delays.

This vacuum in the Code created severe issues in the domestic insolvency proceedings. Cross-border insolvency matters involve foreign representatives and foreign creditors. The rules of the cross-border insolvency framework must be equipped to protect the investments and assets in cross-border insolvencies. Hence, appropriate rules must be framed in the Draft Chapter to ensure this coordination and cooperation.

CERTAINTY & PREDICTABILITY- THE FOREIGN INVESTORS’ PERSPECTIVE

The provisions in the Draft Chapter and the Code must be consistent with the objective of legal certainty and predictability prescribed under the Model Law. The cross-border insolvency framework must provide a reasonable magnitude of certainty and predictability to the foreign investors. Even the procedural aspects of cross-border insolvency need to be certain.

The addition to the Code in the form of incorporation of the Draft Chapter is a positive step towards providing certainty and predictability. However, it is high time that the Preamble of the Code recognized efficient resolution of cross-border insolvency matters as one of its objectives. The Bankruptcy Law Reforms Committee (BLRC) had recognized the creation of a cross-border insolvency framework as one of the objectives of the first consolidated insolvency law. Bringing in such recognition within the Preamble of the Code would reflect India’s robust resolve towards handling of cross-border insolvency matters.

The Code lays down multiple objectives. It is essential to consider these objectives as harmonious to each other. The Code has failed to lay down provisions in this regard which have led to legal and procedural uncertainty in the resolution process. In the DHFL Case, the over-emphasis on value maximization resulted in the acceptance of post hoc-bid. In the insolvency of cases of Ricoh India, Bindals Sponge & Asian Colour Coated Ispat, the Appellate Authority condemned the fact that the over emphasis on one objective is being used as a justification to bypass the procedure and the certainty enshrined under the Code.

This regulatory vacuum could become impediments to capital flow. The adoption of inharmonious legal approaches in the cross-border insolvency framework in India would create disincentives to cross-border investment in India. The foreign investors must be ensured that the Code is certain in its stance towards cross-border insolvencies and there is predictability in the proceedings. Chapter VII of the Code lays down several offences and punishments. Provisions must be laid down within this Chapter to establish legal certainty in the cross-border insolvency framework. Any procedural bypass which is in contravention of the principle of certainty must be penalized.

CONCLUSION

The nascence of the Code and institutional inexperience were the primary factors which hindered the adoption of standardized cross-border insolvency framework in India. As the Draft Chapter is expected to be soon incorporated into the Code, the road towards the framing of an unambiguous cross-border insolvency framework has become clear. The legislature must take into consideration the troublesome experiences of the domestic insolvency regime and how harshly they can impact the cross-border investment.

In order to fulfil the non-negotiables of coordination and cooperation, the Draft Chapter must be amended to include a set of rules and regulations which will serve as the guiding mechanism to ensure coordination between the domestic regulatory authorities and the cross-border insolvency proceedings. While drafting these regulations, the legislature must take its lessons from the hindrances posed by the regulatory authorities in the Essar Case and the Jaypee Infratech Case. Given the additional intricacies involved in cross-border insolvency proceedings, not filling this regulatory vacuum in a timely manner can handicap the first consolidated cross-border insolvency framework of India. In order to maximize foreign investment in a strained economy, the foreign investors must be provided predictability and certainty. The Code must be brought into consonance with the recommendations of BLRC. It is time to bring the mention of cross border insolvency in the Preamble of the Code. The Draft Chapter must be amended to lay down explicit provisions for certainty and predictability in the cross-border insolvency regime. Also, taking the right lessons from the hindrances faced in the domestic insolvency proceedings, a reasonable magnitude of harshness against any procedural bypass is necessary. Chapter VII of the Code must incorporate penalties against the acts done in contravention of the Code.

*The author is a second year student at Hidayatullah National Law University, Raipur.

[i] Chakrabarti, R. (2018). KEY ISSUES IN CROSS-BORDER INSOLVENCY. National Law School of India Review, 30(2), 119–135. https://www.jstor.org/stable/26743940