Cross-border insolvency requires a new framework

By Abhishek Dutta and the Knowledge Management Team, Aureus Law Partners

While a corporate entity may have creditors, debtors and assets in various countries, the Insolvency and Bankruptcy Code, 2016 (IBC), in its current avatar has no comprehensive legal framework on cross-border insolvency (CBI). The Ministry of Corporate Affairs on 20 June 2018 issued a public notice inviting comments on a draft chapter on cross-border insolvency, which is primarily based on the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency, 1997.

Currently, sections 234 and 235 of the IBC empower: (i) the government to make bilateral agreements with other countries for enforcing the IBC; and (ii) the National Company Law Tribunal (NCLT) to issue a letter of request to a foreign court for action on a debtor’s assets. Once a bilateral treaty is executed, and these provisions are notified, a foreign proceeding will be recognized in India, as per the Civil Procedure Code, 1908, while an Indian proceeding will be recognized in the foreign country based on its procedural rules.

Dealing with the issue of cross-border insolvency in Macquarie Bank Limited v Shilpi Cable Technologies Ltd, the Supreme Court recently gave foreign creditors the same right as a domestic creditor to initiate and participate in the corporate insolvency resolution process (CIRP). In this context of lack of a comprehensive framework on cross-border insolvency issues, the draft chapter would apply when: (a) assistance is sought in India by a foreign court or a foreign representative regarding a foreign proceeding; (b) assistance is sought in a foreign country regarding an IBC proceeding; (c) foreign and Indian proceedings for a corporate debtor are taking place concurrently; or (d) creditors in a foreign state have an interest in requesting initiation of or participation in the CIRP.

In a major departure from the Model Law, the draft chapter adopts the principle of reciprocity in that it will apply to countries which have adopted the Model Law. Further, access to the CIRP and information on notifications issued to a domestic creditor would be provided to foreign representatives and creditors.

A foreign proceeding could be recognized as a foreign main or non-main proceeding. This is paramount in determining the right to relief that may be granted by the NCLT. In the Model Law, the principle of centre of main interests (COMI) is used to determine the location of the main proceeding. COMI under the draft chapter is presumed as the place of debtor’s registered office.

A foreign main proceeding takes place in the country of the debtor’s COMI, while a non-main proceeding is at the debtor’s place of establishment. During a foreign main proceeding, the NCLT will ensure a moratorium on: (a) all proceedings against the debtor (including execution of judgments); (b) transferring, encumbering or disposing of any assets, rights or interests of the debtor; (c) enforcing any security interest on property of the debtor; and (d) the recovery of any property in the debtor’s possession by its owner or lessor. For non-main foreign proceedings, any relief is at the discretion of the NCLT. Before granting relief in a foreign proceeding, the NCLT is to ensure that the interests of creditors and stakeholders including the corporate debtor are protected. A foreign representative is also entitled to apply to the NCLT to avoid acts harmful to creditors.

The draft chapter provides for cooperation between the NCLT and the foreign court. The NCLT has the power to: (a) conduct a joint hearing with a foreign court; and (b) communicate with, request information or seek cooperation from foreign representatives. Resolution professionals (subject to NCLT supervision) are also empowered to communicate with foreign courts and representatives. Coordination between concurrent insolvency proceedings (for the same debtors) will ensure that the relief granted in a foreign non-main proceeding is consistent with the relief granted in a foreign main proceeding.

The NCLT also has the power not to give effect to the cross-border insolvency provisions if there is a violation of public policy.

The draft chapter is a step in the right direction. Among issues that need redressal, it does not govern cross-border insolvency proceedings of individuals. The term “foreign proceeding” is limited to an insolvency process and does not cover other forms of arrangement. Where the COMI falls outside India, the relief will depend on laws and courts of the foreign country. The draft chapter is silent on the rights and duties of an insolvency professional in a foreign proceeding. As public policy is not defined under the draft, parameters to ring-fence judicial discretion may be adopted, considering the inconsistent judicial approach towards the public policy doctrine.

Thus, once the draft chapter is enacted the question of whether it is better than negotiating bilateral treaties will be determined on the anvil of practical application.

Case Update: Supply of foods/beverages on-board a train to be treated as pure supply of goods

Taxpayer is involved in the business of supplying food to passengers travelling via Rajdhani Trains and other mails/express trains on basis of the menu approved by Indian Railway. Primarily, the Taxpayer was supplying food via three different modes. Firstly, supply of food through the food plaza / food stalls on the railway platforms; Secondly, supply of food on board the trains, including mandatory supply of newspapers; Thirdly, supply of food on board the mail/express trains. The Taxpayer preferred the application for advance ruling under Section 97 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) before the Authority for Advance Ruling (“Authority”). On basis of the materials and records placed before the Authority, an advance ruling was sought in relation to the rate of GST applicable on the said supply of foods/beverages, and the mandatory supply of newspapers on board the trains by the Taxpayer.

Taxpayer was of the view that the supply of foods/beverages from food stalls / food plazas at the platforms and on board the trains would be taxable at the rate of 5% integrated tax (“IGST”) in terms of the Entry No. 7 of Notification No. 11/2017 – Central Tax (Rate) dated June 28, 2017 (“Rate Notification”). Further, the supply of newspaper would be exempt from GST as per the Entry No. 120 of Notification No. 2/2017 – Central Tax (Rate) dated June 28, 2017 (“Exemption Notification”). The jurisdictional Commissioner (CGST) agreed to the views of the Taxpayer except with respect to supply of foods/beverages on board the trains, which would be taxable at the rate of 18% IGST, being the supply of ‘outdoor catering’ services.Basis the perusal of contracts / agreements, the Authority observed that for supply of food on the trains, there are three transactions, one between the passengers and the Indian Railways, second between Indian Railways and Indian Railway Catering and Tourism Corporation (“IRCTC”) and third between IRCTC and the Taxpayer. The present application pertains to the third transaction vis-à-vis between IRCTC and the Taxpayer.

The Authority observed that the train is a mode of transport and hence cannot be treated as a restaurant, eating joint, canteen, etc. Accordingly, the catering services provided on-board a train are not covered under S. No. 7(i) of the Rate Notification, as claimed by the Taxpayer. Further, with respect to the treatment of said supply of food/beverages on-board a train as composite supply of services, the Authority ruled that since no element of service is involved, the same shall be treated as pure supply of goods. In similar terms, the supply of foods/beverages from the food stalls on the platform shall be treated as pure supply of goods. Further, the supply of newspapers, which is separately invoiced, shall be exempted from GST in terms of the S. No. 120 of the Exemption Notification. Accordingly, the application for Advance Ruling was disposed off by the Authority.

(In Re: Deepak and Company; Advance Ruling No. 02/DAAR/2018; Authority for Advance Ruling, New Delhi)

In case of any queries or clarifications on this subject, please feel free to reach out to Manish Parmar, Senior Associate, Aureus Law Partners at manish.parmar@aureuslaw.com.  Views are personal.

Liquidated Damages – Implications under the Goods & Services Tax Laws

Liquidated damages (“LD”) mean a fixed or pre-determined sum that is required to be paid upon breach of a contract, which may arise due to non-fulfilment of the obligations, delay in fulfilling the obligations or abandonment or termination etc. Hence, LD damages are directly connected to the actual injury and losses incurred by a party due to failure or delay in performance of obligations under the contract by either party. These LD clauses/ obligations are prevalent in construction contracts where the provisions relating to timely and milestone performance of the project are incorporated. For instance, EPC onshore/ offshore sub-contracts have milestone-based implementation, hence any delay in execution / completion of the same causes huge losses to the project owners. LDs cover this contingency.

Commercially, the LDs are considered to be a measure of compensation for a pre-determined loss arising out of breach of contract. However, in a recent matter of In re Maharashtra State Power Generation Company Limited dated May 18, 2018, the Authority for Advance Ruling, Maharashtra (“Authority”) under GST ruled that the amount of LD deducted from the payments made to the contractor/ vendors would amount to supply of service by the project owner / Taxpayer. The said ruling along with the factual background is discussed hereunder:

Factual Background

The Taxpayer approached the Authority under Section 97 of the Central Goods and Services Tax Act, 2017 (“CGST Act”) seeking an advance ruling on levy of GST on the amount of LD deducted from the contract price agreed with the contractors/ vendors. The main issue for this ruling was as to: (i) whether the LD would be treated as ‘sale’; and (ii) whether this would be liable to GST as separate from the contract value/ price. The Taxpayer relied upon the ruling in GSTR 2003/11 issued by the Australian Tax Office under the Australian Goods and Services Tax Act, 1999, wherein the deduction from the contract price was held to be towards deficiency in the provision of services, and therefore the same would not attract GST. Also, reliance was placed in the matter of Commissioner of C. Ex., Chandigarh-I v. H.F.C.L. (Wireless Division) reported as 2015 (11) TMI 893 – CESTAT- New Delhi, wherein it was held that if a taxpayer is liable to pay a lesser amount than the generically agreed price as a result of a clause stipulating variation in the price, on account of liability to ‘liquidated damages’ on account of delay in delivery of manufactured goods then such resultant price would be the ‘transaction value’. Further, the Taxpayer submitted before the Authority that the provision of such a clause in the contract is to ensure that the completion of the project does not get delayed.

Observations of Authority

The Authority observed that contract price and LD are two distinct aspects of the contract, and deduction of LD from the contract price merely facilitates the settlement of accounts. The Taxpayer contended that LD helps in mitigating the impact of higher costs in form of interest during construction and administrative charges. Taxpayer further contended that it was never its intention to get supplies/ project delayed nor did the contractors want to make delay and thereby causing it to tolerate. Therefore, LD could not be termed as service provided to the contractor. However, the Authority observed that the provision of LD in the contract is squarely covered by the clause (e) of the Para 5 of the Schedule II annexed to the CGST Act. The said entry provides that ‘agreeing to the obligation to refrain from an act, or to tolerate an act or a situation, or to do an act’, shall be treated as supply of services. The Authority ruled that the amount of LD deducted from the payments made to the contractor/ vendors is income in the hands of the Taxpayer and would amount to supply of service by the Taxpayer. Accordingly, the Authority held this would be classified under Heading 9997, and GST at the rate of 18 percent would be levied on the amount of LD deducted from the contract price.

Conclusion

While the said ruling is binding on the Taxpayer and the Revenue in respect of the particular issue in question, the same may have a persuasive precedential value. Also, it may have a bearing on how the clauses relating to LD is negotiated in contracts in the future.

Aureus’ New Office – Defence Colony

Over the past 5 years, Aureus Law Partner's Delhi office was working out of Chittaranjan Park in New Delhi - fondly called '1778' by us. 1778 gave us our first office, from where we launched, and how!  We expanded to Mumbai, to Dehradun/Haldwani, Kolkata and recently to Bhopal. Our team size grew, progress was heady, but we treaded cautiously, 'slow and steady' was the mantra.  1778 was a little out of the way, a little further off from the courts than is usual, and needed a visitor to enter the heart of what is known as Delhi's "Mini Calcutta".  We did feel that we should move to a location closer to the courts as our litigation practice steadily grows. Also, access was to perhaps be an issue going forward on account of development of Delhi Metro stations leading to traffic congestions at various key points of entry and exit to CR Park. 

We shortlisted Defence Colony -  a veritable "Wall St." for lawyers of Delhi, as it were. D-306, Defence Colony has now been finalised as Aureus' new home, and the move from CR Park stands completed. 

The location is perfect to catch up for a meeting while you wait for a hearing in the Supreme Court or the Delhi High Court. Along with various senior counsels in close proximity, D-306 offers the required comfort to be able to prepare, visit and conduct an effective briefing as well as hearings, without spending inordinate time on travel. 

Do give us a call and feel free to visit us at D-306, Third Floor, Defence Colony.  Coffee, conversation and an eclectic company of colleagues await you. 

Our other details remain the same. 

Applicability of Limitation Act to Insolvency & Bankruptcy Code, 2016

The Limitation Act, 1963 (“Limitation Act”) is a law of repose, peace and justice which bars the remedy after lapse of a particular period by way of public policy and expediency without extinguishing the right in certain cases. This is based on a public policy principle that a claimant who has slept over its claim cannot seek to enforce the said claim/rights at a later stage, as it will prejudice the right of the other party. Therefore, when the Insolvency and Bankruptcy Code, 2016 (“Code”) is silent on the applicability of the Limitation Act on the proceedings brought under the Code it poses some interesting issues: which have been discussed in the recent past in a number of cases before the National Company Law Tribunal (“NCLT”) and National Company Law Appellate Tribunal (“NCLAT”). This article aims to highlight some of the said important judicial pronouncements.

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