Author: Nandini Dwivedi
Indian economy was opened in the year 1990. Since then, we have never looked back and today we are the 6th largest economy in the world poised to become a $5 trillion economy in 2025 by overtaking Germany from the 5th position. We are also the 2nd fasted growing economy in the world. Our companies are engaging in increased cross-border trade in the era of 21st century and that’s why it becomes very important that our government provide them with all possible help and also make it easy for the foreign companies to do business in India. In this context, it becomes very important to address the issue of cross-border insolvency laws in our country. Indian laws by not adopting the UNCITRAL Model Law has left much to be desired. This paper seeks to address these similar issues and suggest changes by analysing it with benchmark set by the modern cross-border insolvency laws such as Recast EIR adopted by the European Union.
Insolvency is a situation that arises when a company is unable to repay its financial debt. Majority of the insolvency laws around the world were drafted during the time of closed economies. There was no exports-imports between the countries and the businesses operated within the borders of a particular country. But this does not hold ground in today’s world.
In this age of globalisation, there is an increased presence of companies in international market and this in turn has led to an increase in cross-border transactions. But this interaction also brings with it the greater risk of cross-border insolvency because multinational companies have shareholders who are the citizens of different countries, their assets are located in different parts of the world and their offices or branches comes under the legal jurisdiction of different countries. Due to the internationalisation of insolvency laws, there is a lot of complexities involved in the legal proceedings of an insolvent company which has an interest in a property but the creditors are located in different jurisdictions. That’s why it becomes important to analyse our insolvency laws with a focus on cross-border insolvency. This paper is going to address the basic features of cross-border insolvency and present a comparative view of Indian and European context with what might happen when an insolvent company has substantial assets in different countries[i].
What is The UNICTRAL Model Law?
It is only a template provided by the UN commission for dealing in International Trade Law because although it suggests that states incorporate this Model Law into their national insolvency law, it is actually left at the discretion of the nation whether it will incorporate this or not. It just simplifies the insolvency proceeding, it does not provide a universalistic way for dealing with cross-border insolvency. It provides a way to contact the appointed professional for the proceedings in the court of a particular jurisdiction, thus creating a path for commencing and participating in the proceedings. It also provides a set of rules that helps to identify the jurisdiction, where the proceedings must commence. From these rules, one can imply that the jurisdiction should be the place where the company has major stakes.
Indian context (Developing nation)
The Government of India recently took a very positive decision of including a chapter on cross-border insolvency in the Insolvency and Bankruptcy Code of India, 2016. On the same line, the Ministry of Corporate Affairs, on 20th June,2018 issued a notice seeking to invite comment and suggestions on the draft chapter of cross-border insolvency. Notably, it is based on the United Nations Commission on International Trade Law model on Cross Border Insolvency ‘the UNCITRAL model law.’
Keeping in mind the Indian context, insolvency arises when:
- The credit holders of an Indian company who are of Indian and domestic origin, have their assets located in India as well as foreign countries.
- The foreign subsidiaries of an Indian company have been promised security over their financial debt and probably also granted security over its shares to foreign creditors.
- The credit holders of a foreign company, have their assets located in foreign countries as well as India.
All the situations discussed above are complex, but a particularly concerning situation arises when a company guarantees the debt of its foreign subsidiary, because if that subsidiary is unable to discharge its liability, then it becomes contingent on the parent company to do the same.
Now, it is easy for the parent company to do the same if the issue is concerning one subsidiary but it becomes much more difficult or even next to impossible, if the same thing happens with a number of overseas subsidiaries.
And in such a situation if one of the creditors calls for default on one loan agreement, then it is more than likely that all the other creditors will also cross-default other loan agreements. Also, if one of the creditors files for insolvency and it is accepted by the Code, then it will mandatorily create a moratorium on all the claims for debt against the insolvent company.
Here’s the main question arises? If such a situation arises, then will the foreign courts help us in the proceedings against the insolvent company according to our code? And even if they agree to help us, will it be of more value over the contract already in place between the Indian company and the foreign creditors that is governed by foreign law?
Now, before we move on to answer this question, we must remember that India has not yet adopted the UNCITRAL Model Law. S.234 of the Code simply allows the Indian government to enter into treaties with foreign countries to allow the application of the Code with regards to foreign assets.
The Legal Framework in India
S.234 and S.235 of the Code allows the adjudicating authority to issue a letter of request to the court of the country, we have entered into a treaty, to deal with the foreign assets of an insolvent company. Now, the irony is that we should have given the similar rights to a foreign adjudicating representative, to issue a letter of request to an Indian court to deal with the Indian assets of a foreign company in consistency with the laws of foreign jurisdiction, but we haven’t.
For the proceedings of foreign courts to be applicable in India, the only way is through the Civil Procedure Code,1908, along with the English Common Laws, but the point to be noted here is that it is not vast enough to deal with something like insolvency proceedings. Most of the industrialized countries have adopted the UNCITRAL Model Law, and they are required to provide all types of procedural assistance to India in the case of an Insolvency proceeding but they cannot expect the same in return.
Till now more than 44 countries have adopted the UNICTRAL Model Law and we must remember that most developed countries have made some modifications to the law and may require reciprocity from countries like India[ii].
European Context (Developed Nations)
On 25th June 2015, the recast European Insolvency Regulation (Recast EIR) came into force in accordance with its own article i.e., Ar.92 and Ar.84 of the same law states that it only applies to insolvency proceedings that have commenced after 25th June, 2017. It is inarguably one of the most modern insolvency regulations within the realm of the international insolvency law.
The Legal Framework
The Recast EIR applies to all the member nations of the European Union with the exception of Denmark. But what it entails is that, these member nations follow the rules of this Recast EIR while dealing with each other but the same nations apply their personal international insolvency law while dealing with the nations outside the European Union.
The most interesting case is of UK in this regard which has 4 regulations simultaneously for dealing with cross-border insolvency. It follows the Recast EIR while dealing with other EU states; when it comes to the commonwealth nations, it follows S.426 of the Insolvency Act 1986; with regards to all the remaining states, it applies the provisions of the Cross-Border Insolvency Regulation 2006. Above all these, it also abides by the duty of cooperation that has been mentioned in the English Common Law.
Some of the other developed nations in the western world adopts the UNCITRAL Model Law but not in its entirety because of its non-binding nature. For example, USA has adopted the Model Law by Chapter 15 of its Bankruptcy Code, but it has not accepted the template provided by the same law on specific details. These modifications threaten the harmonisation of the Model Law even among those countries which have incorporated it into their national laws in entirety.
Now coming back to the Recast EIR, this law is based on the same foundation as the UNCITRAL Model Law because the European nations also believes that there should be a single set of insolvency proceedings for an insolvent company that has worldwide effect. Both of them are based on trust on foreign insolvency proceedings, and from this we may assume that they are not dependent on reciprocity by foreign nations. Both of them also follows the principle of cooperation and communication.
Although there is one difference between the both of them. Recast EIR is of binding nature but the UNCITRAL is not as already mentioned.
In the first version of EIR, that came into force in 2000, the EIR in its Ar.3(1) was already linking international jurisdiction for the opening of insolvency proceedings to the focal point of the debtor’s core activity, using the term ‘Centre of Main Interests’(COMI). Now, in the Recast EIR Ar.3 of the regulation provides an overview of the COMI in cross-border insolvency. It first states that COMI for an insolvent company is the country in which the registered office is located. Although it can be rebutted. When it is the questions of independent business owners, COMI is the place where the head office is located. At last, for an independent person COMI is his/her place of residence.
Recast EIR also talks about main and secondary proceedings. It is the main insolvency proceedings if the debtor has its COMI in the state in which the proceedings have commenced and it is the secondary insolvency proceedings if the state of COMI is not the same[iii].
From the above arguments, it can be concluded that although the Recast EIR is similar to Model law on many aspects, it is the one with greater significant contribution in the unification of cross-border insolvency proceedings law because its binding in nature and more comprehensive in the scope of its rule. The UNCITRAL Model Law has made significant contribution in the harmonisation of insolvency laws but it is in need of modernisation.
Now coming to developing countries like India, we must adopt the idea of COMI, it will in turn help us in identifying the main and secondary proceedings. Although the Code, allows the government to implement the UNCITRAL Model Law while negotiating the bilateral treaties, it is just not practical when we take numerous treaties into account and it would be very difficult and tiresome for our courts to take into account the nuances of each of these treaties while hearing the insolvency proceedings. Thus, the only plausible solution for us is to sign and ratify the UNCITRAL Model Law and incorporate it into the Code.
[i] Aniruddha Rajput, ‘Cross-Border Insolvency and Public International Law’ (2018) 19 Romanian J Int’l L 
[ii] Ran Chakrabarti, ‘Key Issues in Cross-Border Insolvency’ (2018) 30 Nat’l L Sch India Rev 119
[iii] Reinhard Bork, ‘The European Insolvency Regulation and the UNCITRAL Model Law on Cross-Border Insolvency’ (2017) 26 Int’l Insolvency Rev 246