CROSS BORDER INSOLVENCY: LEGAL IMPLICATIONS ON INDIAN CORPORATES

CROSS BORDER INSOLVENCY: LEGAL IMPLICATIONS ON INDIAN CORPORATES

Cross border insolvency refers to a situation where the insolvent debtor has assets in more than one State or where some of the creditors of the debtor are not from the State where insolvency proceedings have taken place.

The Insolvency and Bankruptcy Code was enacted in 2016 but it could not cater for cross border insolvency effectively. The Ministry of Corporate Affairs, Government of India, released a draft on cross border insolvency in October 2018 which is to be inserted as a separate chapter under the present Insolvency and Bankruptcy Code 2016.

It was introduced with the objective of providing ease for Creditors both domestic and Foreign to enable them to enforce their rights over assets of Corporate Debtor situated overseas or in case of Foreign  Proceedings, to recognize such insolvency Proceedings over assets in India.

These draft guidelines are based on the UNCITRAL Model Law. This move will indeed be a sigh of relief for the creditors as otherwise, it was difficult to reach out to the overseas assets of Corporate Debtor.

Although, Section 234 of the Insolvency and Bankruptcy Code, 2016 provides that Central Government is empowered to enter into bilateral agreement with countries to resolve matters pertaining to cross border insolvency and Section 235of the Insolvency and Bankruptcy Code, 2016 empowers the Hon'ble Adjudicating Authority to issue letter to the Hon'ble Court of such country with whom bilateral agreement is signed, but, the provisions are not effective considering that a bilateral agreement can be enforced under this code only with  the countries which are signatory of the same.

Thus, having a separate bilateral treaty with Foreign countries under the present Code becomes a cumbersome task.

Therefore, upon implementation of cross border insolvency provisions it will have benefits such as reduction in time for exchanging information between countries, increase in credit recovery efficiency, cooperation between countries will help in preserving the Corporate Debtors assets, Insolvency Professionals will have access to Foreign jurisdiction assets, etc.

Some of the features of the proposed draft are that it applies to all Corporate Debtors (foreign and domestic both), unless specifically excluded by the Government.

The draft provides for assistance sought in India by Foreign Court in respect of Foreign Proceedings and assistance sought by a Foreign country in respect of Insolvency and Bankruptcy Code, 2016, to initiate Proceedings under the Insolvency and Bankruptcy Code by a Foreign state through its representative against the Corporate Debtor.

Therefore, upon implementation of the draft, the Foreign Representative can directly approach the National Company Law Tribunal to initiate proceedings against the debtor and exercise all the rights as a creditor. The draft also strives for giving recognition to Foreign Proceedings.

The Foreign Proceedings under the proposal are categorized as Foreign Main Proceedings and Foreign Non-Main Proceedings.

The Foreign Main Proceedings are those taking place in a State where the Corporate Debtor has a center of main interest as opposed to Non-Main Proceedings which takes place in a State where the Corporate Debtor may just have an establishment.

This difference between the Foreign Proceedings will play a big factor in influencing the relief to be granted by the National Company Law Tribunal.

The draft also expressly provides that the National Company Law tribunal must first satisfy itself that the interests of all the creditors, interested persons including Corporate Debtor are adequately protected before granting reliefs to Foreign Representative.

The draft empowers the National Company Law tribunal to seek cooperation and coordination of Foreign Courts or Foreign Representative in cross border insolvency Proceedings.

The proposed draft by the Ministry of Corporate Affairs are in the right direction which will have positive implication over the Indian Corporate as these amendments strive to fill in the gaps of Insolvency and Bankruptcy Code's Sections 234 and 235 which are meant for operation of the order of National Company Law tribunal outside India and India's reciprocal obligation to the Foreign Courts.