The banking and finance sector was struggling due to the lack of a clear framework in India with regards to cross-border insolvency despite the recent Insolvency and Bankruptcy Code, 2016. In order to address the concerns of the sector the Ministry of Corporate Affairs constituted the Insolvency Law Committee. The committee’s report, submitted on 16 October 2018, recommended a comprehensive framework based on the UNCITRAL Model Law on Cross-border Insolvency, 1997, be added as a part of the code to align with the best practices adopted globally.
This report is a significant step as it paves the way for India’s accession to the Model Law rather than the alternative of entering into bilateral arrangements with other jurisdictions and will help in increasing foreign investment, maintaining flexibility relating to the differences among national insolvency laws, protection of domestic interests, priority to domestic insolvency proceedings and providing a mechanism for cooperation between courts, foreign bodies and insolvency professionals.
The major concern of the banking and finance sector was regarding the enforcement of a creditor’s right over the assets of the debtor. These assets can either be of an Indian debtor located overseas, of a foreign debtor located in India or of a foreign debtor located in a foreign jurisdiction. One of the key recommendations of the committee was to authorize domestic insolvency representatives in the enacting country to access foreign courts or act in a foreign country in relation to insolvency proceedings against the debtor, subject to the regulations framed by the Insolvency and Bankruptcy Board of India.
The committee also provided that the adjudicating authority, dealing with the insolvency proceedings, would cooperate with foreign courts and issue notices to foreign creditors and impose a penalty, which would be three times the unlawful gain enjoyed by it or the loss caused due to such activity, if found to be in contravention of the code. The committee has also expanded the definition of corporate debtors to include foreign debtors.
While dealing with the issue of unenforceability of foreign judgments due to the limited scope of the Civil Procedure Code, 1908, the committee recommended that the adjudicating authority would recognize foreign proceedings upon proof of existence of such a proceeding and would determine one to be the main proceeding if the center of main interest (COMI) is found to be there and such recognition would lead to a declaration of moratorium by the adjudicating authority.
It also recommended providing a procedure for determining the COMI, where it does not coincide with the registered office or date of commencement of foreign proceedings, to be where the central administration of the debtor takes place; and which is readily ascertainable by the creditors.
Further, the rigidity of the present legal framework and the lack of legislative uniformity was impeding the right to institute insolvency proceedings in foreign jurisdictions. The committee has suggested that in order to deal with such issues it shall provide an exclusive right to the creditors to commence and participate in insolvency proceedings and that the existing provisions under section 234 of the code, which empowers the central government to enter into bilateral agreements with countries, and section 235 of the code, which empower the adjudicating authority to issue letters to such countries, requesting claim over such assets, should be amended to only apply to individuals and partnership firms.
The lack of provisions for automatic attachment of assets situated overseas and concurrent proceedings against the corporate debtor in more than one jurisdiction has also been a cause of concern for the financial sector. To deal with this issue, the committee has aimed at providing a mandatory relief and subsequent automatic moratorium upon recognition of a foreign main proceeding or a discretionary relief on foreign main and non-main proceedings and this moratorium doesn’t affect the right to preserve claims against the corporate debtor by commencing proceedings against it.
Considering the report withheld certain issues for further discussions and is subject to formulation and implementation of subordinate legislation on certain matters, it would be critical to observe how the code evolves with the passage of time regarding the application of the framework being extended to individuals and partnership firms.
Soumyajit Mitra is a principal associate at SNG & Partners.