Cross-border insolvency report: A bird’s eye view

The Insolvency Law Committee issued a report on cross-border insolvency in October after considering public comments received on a draft framework issued by the Ministry of Corporate Affairs. The committee considered the UNCITRAL Model Law on Cross-Border Insolvency, 1997 (Model Law), and its implementation in the UK, the US, and Singapore.

Applicability: The proposed legislation may be applicable initially to corporate debtors (including foreign companies) under the Insolvency and Bankruptcy Code, 2016 (IBC). Following principles of legal reciprocity, benches of National Company Law Tribunal (NCLT) may be notified for recognition of foreign proceedings and cooperation with foreign courts and foreign representatives. Insolvency professionals or liquidators under IBC also may be authorized to act in foreign countries subject to regulations. NCLT may refuse to take action in a proceeding, if its implementation will be manifestly contrary to India’s public policy. Public policy exception is recommended to be applicable restrictively with the inclusion of the phrase “manifestly contrary”. The central government will be asked to weigh in whenever a question of public policy is involved and international jurisprudence is to be relied upon where an exception is needed. The central government may be granted the power to act on its own cognizance (suo motu) in case it feels that an NCLT order may be against public policy. Amendments to certain sections of Companies Act, 2013, have also been proposed.

Access to foreign representatives: According to the report, foreign representatives should be provided direct access to NCLT, and allowed to exercise their powers under the legislation through an insolvency professional. A code of conduct may be specified for foreign representatives including a penalty for infraction. After recognition of a foreign proceeding, foreign representatives may be permitted to participate in the insolvency proceedings of the debtor under the IBC. Foreign creditors may be extended similar rights as that of the Indian creditors for initiating or participating in insolvency proceedings.

However, claims of foreign tax and social security may be excluded. Notice to foreign creditors of a proceeding under IBC may be provided on the same terms as Indian creditors. The notice of initiation of IBC proceeding will include the time period and place for filing claims, the requirements for secured creditors and other relevant information.

Recognition of foreign proceeding: Foreign representatives may be permitted to apply for recognition of foreign proceedings before NCLT. Such an application has to be filed with documents substantiating the existence of foreign proceedings. Foreign representatives may also be required to submit a statement identifying all foreign and IBC proceedings pending against the corporate debtor in their knowledge. The corporate debtor’s registered office will be presumed to be its center of main interest (COMI).

A lookback period of three months to determine relocation of the registered office for COMI presumption is recommended. However, in case of any contradiction, NCLT may be authorized to ascertain COMI for a debtor. NCLT may recognize a foreign proceeding as foreign main proceeding, or foreign non-main proceeding. Reliefs including moratorium, distribution of Indian assets to foreign representatives may incur upon recognition of foreign proceeding as main or non-main.

With regards to cooperation with foreign courts and representatives, the central government has been mandated to act as a facilitator to ease the burden of NCLT. Notification of relevant authority for transmission of notices and correspondence with foreign courts has been suggested and cooperation and communication by the insolvency professional with foreign courts and representatives may be permitted.

Concurrent proceedings: After recognition of foreign main proceedings against a debtor, the initiation of IBC proceedings may be subject to certain conditions involving the existence of domestic assets. A creditor in receipt of part payment for a claim in a foreign insolvency proceeding may not be eligible for receiving payment in another proceeding against the same debtor. However, additional payment may be received if the same is proportionately less than the payment received by other creditors of same standing. Recognition of foreign main proceeding may be presumed as a proof of default under IBC by corporate debtor for the corporate insolvency resolution process. However, such foreign main proceeding should follow from an inability to pay debts or pursuant to a state of insolvency of the corporate debtor.