A-Insights

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.

The Reserve Bank of India (RBI) issued a circular on 12 February 2018 under sections 35AA and 35AB (Provisions) of the Banking Regulation Act, 1949, on the identification and resolution of stressed assets.

In case of occurrence of default on accounts of debtors with aggregate exposure of lenders exceeding ₹20 billion (US$272 million) in aggregate (including specified previous RBI schemes). The circular mandates formulation of a resolution plan (RP) within 180 days from 1 March 2018 or from the date of default. In the event that a debt is not repaid, even by a day, RBI requires banks to file an insolvency application under the Insolvency and Bankruptcy Code, 2016 (IBC).

The Independent Power Producers Association of India, Association of Power Producers and Prayagraj Power Generation Company filed writ petitions with the division bench of the Allahabad High Court. The petitioners sought reliefs including, inter alia, a declaration that the Provisions in the circular are ultra vires the constitution and an order for quashing of the circular. This is an analysis of the order of 27 August 2018 delivered by the court.

Main line of attack against the circular was in reference to the “sector agnostic” approach adopted by RBI. The challenge was made that the approach violates Article 14 of the constitution. Power sector should be treated differently due to “severe financial stress”. Fuel shortages, sub-optimal loading, unused capacity, absence of fuel supply agreement(s) and a lack of power purchase agreement(s) were cited as reasons justifying differential treatment. The 37th and the 40th reports of the Standing Committee on Energy (SCE) were submitted as evidence. It was argued that initiation of IBC proceedings would cause grave and irreparable harm to the sector and that the 180-day period should be extended. Petitioners applied for the circular to be suspended till the High-Level Empowered Committee (HLEC) tenders its report. Notably, RBI is not a part of HLEC.

The court observed that reliance could be placed on the SCE reports as the facts in them were not in dispute. However, the reports were not sufficient for granting interim relief as they are in nature of “advised relief”. On the issue of irreversible prejudice following IBC proceedings, the court stated that the core scheme of IBC includes timely identification of default, expeditious implementation of a resolution plan, suspension or removal of existing management.

The court noted that the 180-day period for RP under the circular (as opposed to under IBC) is in addition to the prescribed total period of 270 days under IBC. Further, judicial interference in the operation of economic legislation can take place only if the provisions of such legislation are patently arbitrary or in defiance of logic. As the circular is intended to expedite the resolution of stressed economic and financial assets, the court decided not to intervene. Agreeing with RBI, the court rejected the argument of violation of Article 14. It decided that RBI is a monetary and fiscal regulator, and hence, the formation of protective measures for a particular industry are outside its purview. Lastly, it held that the court cannot give lenders discretion whether or not to apply under IBC, as this would contravene the powers conferred upon RBI by statute.

The court therefore denied the petition for interim relief but directed the government to consider initiating consultative process under the Reserve Bank of India Act, 1934. It directed that HLEC should submit its report within two months from the date of its formation. The court went on to clarify that its order will not curtail the rights and powers of a creditor under IBC, or of RBI from issuing directions to initiate corporate insolvency resolution process.

No appeal has been filed against the order. However, application of RBI for transfer of all cases pending before high courts seeking relief from the provisions of the circular to the Supreme Court was allowed. Supreme Court agreed to transfer such cases to itself with an assertion to maintain status quo as on 11 September 2018 till further order. It appears that Allahabad High Court’s order stands effectively stayed considering the petitioners before the High Court and the Supreme Court are common, being associations of power producers. However, it is unclear if this interim order is applicable on the ongoing resolution plans. It is also unclear whether this order applies to initiation of IBC proceedings by banks in the event of default by these petitioners et al under section 7 of IBC.

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.