Tuesday, May 17, 2016

Filling in the Gaps in the Insolvency and Bankruptcy Code - Cross Border Insolvency

[The following post is contributed by Aparna Ravi, who is a Bangalore-based lawyer and was a member of the Bankruptcy Law Reforms Committee. The views expressed here are personal.]

One issue that is conspicuous by its absence in the Insolvency and Bankruptcy Code, 2016 (IBC), that recently got past both houses of Parliament and is now awaiting presidential assent, is cross border insolvency.  The Report of the Joint Parliamentary Committee on the IBC notes this absence, but its proposal -- that the government address cross border issues by entering into bilateral agreements with other countries -- is very limited.  This blog post considers how India could go about incorporating cross-border insolvency issues into its domestic legal framework, including the advantages of adopting the UNCITRAL Model Law on Cross-Border Insolvency and the issues to be considered if India were to adopt a version of the Model Law.

Cross-Border Insolvency in the IBC

Cross border insolvency issues arise when a company in financial distress has assets, business operations or creditors in more than one country.  Such cases typically involve one or a combination of three situations. First, the insolvent company may have a number of foreign creditors who want to ensure that their rights are protected even though they may not be based in the country where the insolvency resolution is taking place.  Second, an insolvent company may have assets located in another jurisdiction, which its creditors may want to access as part of the insolvency proceedings. Finally, insolvency proceedings with respect to the same debtor may be commenced and ongoing in more than one country.  The last situation is particularly common when corporate groups face financial difficulties and proceedings against different legal entities within the group are commenced in different jurisdictions.

The IBC deals with the first situation discussed above by implication, as it does not discriminate between domestic and foreign creditors.  By including “persons not resident in India” in the definition of persons and, as a consequence, in the definition of creditors, the new legislation permits foreign creditors to commence and participate in the proceedings under the IBC. Foreign creditors also have the same rights as similarly situated domestic creditors regarding distribution of assets on the liquidation of an insolvent company.

The second and third situations are not dealt with in the IBC, which currently lacks any mechanism for cooperation between jurisdictions or for an Indian court or tribunal to seek the assistance of a foreign court or insolvency authority when an insolvency proceeding may have implications across national borders. The Joint Parliamentary Committee’s Report introduced two new clauses (Sections 234 and 235) to address these situations. Section 234 states that the Central Government may enter into bilateral agreements with other countries for purposes of enforcing the IBC. Section 235 allows the relevant court or tribunal in India to issue a letter of request to a foreign court or tribunal seeking its assistance in situations where a debtor’s assets may be located abroad. While these two clauses are an acknowledgment of the existence of cross border concerns in insolvency, they, in essence, postpone consideration of substantive provisions on cross border insolvency to bilateral agreements with other countries.

Are Bilateral Agreements the Way Forward? 

Bilateral agreements can and have in the past been used to deal with cross border insolvency concerns. In fact, even before procedural frameworks for cooperation were embedded in domestic laws or treaties, courts in different jurisdictions developed protocols to cooperate with each other in specific cross border insolvency cases. Such a protocol was first developed between the English and American courts in 1991 during the insolvency proceedings of Maxwell Communications Corporation, a U.K.-based media corporation with significant assets in the U.S.[1] This case involved simultaneous Chapter 11 proceeding in the U.S. and an administration proceeding in the U.K.  The courts developed a cooperation protocol on the basis that information flow and cooperation between the two proceedings was essential for an efficient resolution of the insolvency and the preservation of the debtor’s estate. 

However, bilateral agreements take time to negotiate and need to be negotiated individually with different countries, an extremely laborious process. Cross border insolvency treaties are also difficult to negotiate as different countries have wide variations in their substantive insolvency law regimes. Further, there could well be situations where a country’s bilateral agreement with one country varies substantially from its agreement with another country, which could lead to uncertainties in implementation.

The UNCITRAL Model Law

The UNCITRAL Model Law does not seek to harmonize substantive insolvency laws across jurisdictions, but instead sets out a procedural framework for information exchange, cooperation and coordination in cross border insolvencies. As it is a model legislation rather than a treaty or convention, countries may adopt it into their domestic laws with any changes that they see fit. It has intentionally been drafted with flexibility so that it can be adopted by countries with vastly different substantive laws on insolvency. Since its endorsement by the U.N. General Assembly in 1997, 41 countries, including the U.S, the U.K., Canada, Australia and Japan, have adopted the Model Law. 

The proceedings that fall within the scope of the Model Law are collective proceedings under the insolvency law of any state which have the purpose of reorganization or liquidation of the debtor. With respect to such collective insolvency proceedings, the Model Law contains four types of provisions:

(1)       Provisions regarding access of foreign creditors and foreign insolvency representatives to domestic insolvency proceedings.

(2)       Provisions regarding the recognition of foreign insolvency proceedings and the granting of certain reliefs:  A foreign proceeding may be recognized either as a “foreign main proceeding” (a proceeding taking place where the debtor has its “centre of main interest) or as a “foreign non-main proceeding” (a proceeding other than a foreign main proceeding taking place in a state where the debtor has an “establishment”). The types of relief that are then granted depend on whether a proceedings has been recognized as a main or non-main proceeding.

(3)       Provisions regarding cooperation and direct communication between courts and insolvency representatives in one state with their counterparts in a foreign state.

(4)       Provisions dealing with the conduct of concurrent insolvency proceedings of the same debtor in more than jurisdiction.

Adopting the Model Law would hold several advantages for India as opposed to relying on bilateral agreements alone. First, it is a widely accepted standard that has already been adopted by other countries and one with which foreign creditors are familiar. Adopting the Model Law would, therefore, bring much needed certainty for foreign creditors on the rules of access and recognition of foreign insolvency proceedings. Second, it would be much quicker to adopt and would save the cumbersome process of negotiating bilateral agreements, at least with those countries that have already adopted the Model Law. Further, India would be permitted to make any changes to suit its particular needs when enacting legislation based on the Model Law. The Model Law itself foresees such changes, including the exclusion of certain kinds of institutions and exceptions based on public policy. It is perhaps for these reasons that two prior committees that looked into insolvency law reform in India – the Eradi Committee in 2005 and the N.L. Mitra Committee in 2001 - also recommended that India adopt the Model Law with suitable modifications, though this was never carried out.

At the same time, there are some issues that will need to be looked into carefully if India were to consider adopting the Model Law into its domestic legislation. Below is a non-exhaustive list of such considerations:

(1)       COMI: As many of the recognition, coordination and cooperation provisions in the Model Law hinge on whether an insolvency proceeding is a foreign main or non-main proceeding, the determination of a debtor’s “centre of main interests” or “COMI” assumes special significance. However, COMI may not always be easy to determine, particularly when it comes to multinational corporations that may have assets and business operations in a number of jurisdictions. The Model Law does not define COMI, but states that there is a rebuttable presumption that COMI is the location of the debtor’s registered office.[2] As the Model Law does not provide guidance on the factors that could rebut this presumption, courts have provided a wide range of interpretations on what constitutes COMI.[3]

In this context, it would be useful if the Indian legislation that adopts the Model Law spells out some of the factors that could help determine COMI. In particular, while COMI could be presumed to be the place of incorporation of the debtor, this presumption should be rebuttable based on factors such as the principal place of the debtor’s economic activities and operations and the location of its assets. Such provisions could help minimize the confusion over the determination of COMI and also provide guidance to Indian courts and tribunals making this determination.

(2)       Reciprocity: A key feature of the Model Law is that it is not based upon a principle of reciprocity between States. There is no condition or requirement that a foreign representative wishing to access facilities under the Model Law must be from a state which has itself enacted the Model Law. Thus, if India were to incorporate the Model Law in its original form into its domestic legislation, a foreign representative from a state that has not enacted the Model Law could gain access to Indian insolvency proceedings. However, an Indian representative would not similarly gain access to foreign insolvency proceedings in that state under the Model Law, though there may be other provisions in the laws of that state enabling access.  While a few countries have included a reciprocity requirement in adopting the Model Law, many others have adopted it in its original form with the hope that more countries would adopt the Model Law in coming years.

(3)       Interaction with Other Laws and Capital Control Requirements: An important and rather India-specific issue is how adopting the Model Law would affect domestic capital control laws, such as the Foreign Exchange Management Act and RBI capital control requirements. For example, while it is all very well to say that foreign creditors would be entitled to the same distribution rights as domestic creditors, their ability to receive cash or assets located in India would depend on a host of other laws or regulations. This is most likely an issue that would have to be considered afresh as most developed countries that have already adopted the Model Law do not have similar capital control requirements.        

The issues noted above and probably many others must be carefully reviewed in determining how to adopt the Model Law to suit India’s specific needs.  However, these are not reasons against adopting the Model Law, but rather areas where the Model Law may need to be tweaked to ensure its implementation is effective. The Model Law provides a good starting point as India considers adopting cross-border issues into its domestic legislation by, at the least, providing a robust procedural framework for addressing the complexities that arise in cross border insolvencies.   

- Aparna Ravi

[1] In re Maxwell Communications Corporation plc, 170 BR 802, 802 (Bankr SDNY 1994).
[2] Model Law, Article 16(3).
[3] See, for example, the European Court of Justice ruling in Eurofood IFSC Ltd., EU: Case C-341/04, 2006 WL 1142304, ¶ 17 (May 2, 2006) in contrast to the U.S. Bankruptcy Court’s judgment in Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325 (SDNY 2008). 

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