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An estimated 5-minute read

Indian Insolvency Regime without Cross-border Recognition – A Task Half Done?

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The Insolvency and Bankruptcy Code, 2016 (Insolvency Code) has been one of the biggest Indian reform of recent times, which has moved the regime away from one that was highly uncertain for foreign investors. Among other important changes, the Insolvency Code contemplates change in control of the company during the insolvency resolution process to an insolvency professional (IP). The Insolvency Code comes in an environment where many Indian companies have gone global and have made acquisitions outside India.

India has not adopted the United Nations Commission on International Trade Law Model Law on Cross-Border Insolvency (UNCITRAL Model Law). It is notable that only a few countries that have adopted the UNCITRAL Model Law have specified a ‘reciprocity’ requirement for recognition of insolvency proceedings. Therefore, even if India has not adopted the UNCITRAL Model Law, Indian insolvency proceedings may be recognised in a jurisdiction that does not have a reciprocity requirement (this remains untested for Indian insolvency judgements). Also, Section 234 of the Insolvency Code provides for the Indian Government to enter into bilateral treaties with other countries for application of the Insolvency Code to assets or property outside India of the insolvent entities. However, to date, no such bilateral treaty has been signed.

Absent avenues for recognition abroad of insolvency proceedings opened in India, the proceedings and approved revival plans (and moratoriums granted under the Insolvency Code) may prove to be of limited effect and expensive for the insolvent companies. For example, while admission of an application under the Insolvency Code leads to a moratorium on all suits and proceedings against the company in India during the insolvency resolution period, a creditor or contract counterparty will be able to initiate proceedings outside India against the company and the IP appointed for the company will be forced to incur costs for such litigation.

Of course, execution of decrees / orders obtained in such proceedings will also be prohibited in India during the insolvency resolution period but given the number of Indian companies that have made overseas direct investments, possibility of execution of such decrees / orders against assets outside India cannot be ruled out. Equally, the IP will not be able to control the company’s assets abroad without first obtaining recognition of the Indian insolvency proceedings.

On the other hand, Indian courts have no provisions for recognising international restructuring plans. Therefore, if a parent company of an Indian company undergoes restructuring in a foreign jurisdiction (say a Chapter 11 or English insolvency proceedings), implementing such a plan in India will be cumbersome as Indian courts will refuse to give effect to such a plan. There does not appear to be a case where an insolvency order (interim or final) has been sought to be recognised as a judgment of a foreign court enforceable as a foreign judgment under the Indian Code of Civil Procedure.

It must be added, however, that these problems are not new or peculiar to the Indian insolvency regime. Recognition and enforcement of insolvency proceedings internationally have firmly divided scholars and courts alike in two schools: territorialism (i.e. limiting the effect of insolvency to the jurisdiction where it has been opened); and universalism (i.e. recognising a single insolvency proceedings in all relevant countries). ‘Modified universalism’ (i.e. a regime where one ‘main’ court takes the lead in insolvency, and other courts provide co-operation and assistance as is required for reciprocity and procedural fairness in treatment of creditors) has been considered a compromise between these two schools of thought and the UNCITRAL Model Law as well as the European Union’s Regulations on Insolvency proceedings now embody this principle.

Complexities that arise in cross-border insolvencies do not end there. Among other contemporary topics in cross-border insolvency, common law jurisdictions have been debating the impact of an age-old rule laid out by English courts in Antony Gibbs & Sons v. La Societe Industrielle et Commerciale des Metaux ((1890) 25 QBD 399). As per the Gibbs rule, a full discharge of a debtor’s obligations towards a certain creditor granted by a foreign court may not be readily accepted by an English court, where the debt in question pertains to an English law governed contract.

The Gibbs rule has been criticised academically but has been followed somewhat grudgingly by English courts. Recently, a Singapore court in Pacific Andes case (In Re Pacific Andes Resources Development Limited and Ors., [2016] SGHC 210) highlighted the need to do away with the Gibbs rule.

Given that many Indian companies have foreign currency denominated debt and the documentation in relation to which is governed by English law, Gibbs rule acquires significance when the debt of such company is sought to be restructured in corporate insolvency resolution process under the Insolvency Code. While a ‘resolution plan’ approved by the National Company Law Tribunal (NCLT) under the Insolvency Code is stated is to bind all creditors of the company, the creditors who are governed by English law documentation will still be able to seek relief from an English court for the entire amount of their claim, effectively disregarding the resolution plan approved by the NCLT. Depending on the debt profile of the company, this may be a vital factor to consider while implementing a restructuring plan.

It is possible that if such creditors have submitted in personam to the jurisdiction of the NCLT (by way of submission of ‘proof of claim’ or otherwise), the English courts may take a view that the creditor is also bound by the restructuring plan approved under the Insolvency Code. Gibbs therefore leaves the insolvent company with the unfortunate dilemma of having to choose between remaining at the mercy of some creditors or bearing the costs of attaining a discharge in multiple jurisdictions that abide by Gibbs.

Both the Bankruptcy Law Reforms Committee and the Joint Parliamentary Committee that reviewed the draft of the Insolvency Code recognised the implications of cross-border insolvency on corporate transactions and businesses. With the growing pace of insolvency proceedings under the Insolvency Code, cross-border insolvency is the idea whose time has come.

* The author was assisted by Gautam Sundaresh, Associate

 

Author: Dhananjay Kumar
©Cyril Amarchand Mangaldas

Cyril Amarchand Mangaldas was founded in May 2015 to continue the legacy of the 97-year old Amarchand & Mangaldas & Suresh A. Shroff & Co., whose pre-eminence, experience and reputation of almost a century has been unparalleled in the Indian legal fraternity. With a long and illustrious history that began in 1917, the Firm is the largest full-service law firm in India, with over 600 lawyers, including 91 partners, and offices in Mumbai, New Delhi, Bengaluru, Hyderabad, Ahmedabad and Chennai. Several of our professionals are cited as leading practitioners by global publications like Chambers and Partners, International Financial Law Review, Asia Legal 500 and Euromoney.

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