Cross-Border Insolvency: India’s Conundrum

Cross-Border Insolvency India’s Conundrum

Abstract

The world is shrinking into a one global village and so are the economies and markets around the globe. India, due to its favorable position in ease of doing business has attracted creditors and corporates from all over the world. This trend also demonstrates the need to amend and ameliorate the insolvency and bankruptcy laws in the country. With there being no substantive law or provision for such situations, it’s the need of the hour to adopt the UNCITRAL model law and develop its own domestic legal framework. This paper charts out the present situation in India and how it could go about imbibing cross-border insolvency laws keeping in view the UNICTRAL model law.

Since the advent of globalization in India in the year 1991, India has established itself as one of the fastest economies in the world. The credit for this designation goes to both globalization and being the most fecund destination for investment. However, with the increase in cross-border business and trade, the issues with regards to bankruptcy and insolvency also surface.

Insolvency in simple words is referred as a situation wherein any person- natural or juristic fails to pay the debts due to financial crunch. However, a different situation arises when a business enterprise having its assets and creditors in multi-jurisdictional arena falls into a situation of insolvency. This is known as “cross-border insolvency”. The issue of Cross-border insolvency is of prime importance in the evolution of insolvency jurisprudence in India and even across the world. In the year 2001, Mitra committee in its report underlined key issues in the case of cross-border insolvency.

1. If a branch of an enterprise located in one country becomes insolvent, should creditors in that country be allowed to initiate insolvency proceedings while the enterprise as a whole is still solvent?
2. In a case, where the whole enterprise becomes insolvent, should there be separate proceedings in different countries where its branches are situated?
3. Should the procedure be uniform or single, based in the country where the head office or place of incorporation is located?
4. Whether there should be a single liquidator or administrator, or one for each country where the enterprise owns a business or assets
5. Should the liquidator or administrator appointed in one country be allowed to retrieve assets that are transferred fraudulently by the debtor to another country?

United States’ Position on Cross-Border Insolvency Law

The UNCITRAL Model Law exemplifies the interplay between economic interdependencies between states and cross-border insolvency law. The United Nations Commission on International Trade Law’s (UNCITRAL) objective is to unify the world trade law. This model law actually acts as a guide to assist the countries in their insolvency laws with a more harmonized and effective set of rules on cross-border insolvency. The solutions so offered by UNCITRAL include:

1. Giving access to the person directing a foreign insolvency proceeding (foreign representative) in the courts of the enacting states, thus permitting the foreign representative to have a suitable environment for carrying out the proceedings.
2.  Providing a transparent and safe space for the right of foreign creditors.
3. Establishing when a foreign insolvency proceeding should be accorded “recognition” and in what terms of the consequences that may follow.
4. Allowing courts in the enacting states to co-operate with foreign courts as well as foreign representatives involved in an insolvency matter.
5. Providing a space for co-ordination between the enacting state and the foreign state where the insolvency proceeding is being held.
6. Providing speedy access to foreign insolvency practitioners to courts of enacting states to further the prevention of the dissolution and transfer of assets out of the jurisdiction.

Situation in India

India does not have any precise law of cross-border corporate insolvency issues. The companies act, 1956 deals with the provisions related to insolvency issues albeit vaguely. It has a provision dealing with winding up of unregistered company:

1. If, the company is dissolved or has ceased to carry on business or is carrying on business only for the purposes of winding up its affairs.
2. If the company is unable to pay its debt.
3. If the court realizes that it would be just and equitable to wind up its affair.

Thus, it is precisely in this provision the test of insolvency of a foreign company is mentioned i.e., “unable to pay its debt”. In the flat or descriptive sense, the Indian insolvency laws do not have provisions with regard to extra-territorial jurisdiction. Further, they also fail to recognize the jurisdictional right of foreign courts vis-à-vis companies operating in India. Thus, in its normative sense, if a foreign company is taken into liquidation outside the jurisdiction of India, its Indian business will be treated as a separate or discrete matter and thus its functioning will not be affected unless and until an application is filed before an insolvency court for the winding up of its branches in India.

The supreme court of India, in the case of Raja of Vizianagaram v. Official Receiver, charted out the legal position of India w.r.t international insolvencies;

1. The courts of the countries where other than where business is incorporated shall be able to conduct winding up proceedings of its business in their respective countries.
2. The court also opined that until and unless the decision of foreign court go against the Indian jurisprudence, ethics, traditions, there appears no logical reason to oppose and not follow it.
3. The supreme court also held that under the provisions of the Indian Companies Act and other such general principles, the foreign creditors can very well prove their claims in the winding up of unregistered companies in India.

In the Indian context, Sections 234 and 235 of the Insolvency and Bankruptcy code, 2016 deal with the cross border insolvency and enables the government to draft treaties that further aid the Adjudicating Authority Under the code, to issue a letter of request to a court in a country where the proceedings are being held to deal with the assets in a specific manner. For Indian proceedings to be recognized abroad, the procedural rules of that foreign jurisdiction will apply.

Conclusion

Matters of Cross-Border Insolvency must be dealt with with strenuous laws as it, directly and indirectly, affects the larger web of the country’s economy. The issues based on cross-border insolvencies have not been addressed so far. The conflicts arise in different arenas which range from jurisdiction to claim in the companies’ assets. As the world is shrinking into one small village as a result of globalization, the need for a more uniform set of laws and provisions is expanding. The ramifications of not having a substantive law for such disputes are unavoidable for a developing country such as India. Thus, realizing this need, the acceptance of UNCITRAL in our own system of laws would be a prudent step.

Reference

• Raja of Vizianagaram v. Official Receiver
• UNCITRAL
• Insolvency and Bankruptcy code, 2016

Written by Shaivya Mishra

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