How they impact creditors, investors
Recently, the Insolvency Law Committee, constituted by the Ministry of Corporate Affairs, published its second report, which recommends adoption of the UNCITRAL Model Law on Cross-Border Insolvency, 1997, (Model Law) into the Insolvency and Bankruptcy Code (IBC), with certain modifications. The Model Law has been adopted globally by 44 countries, including the United States, the United Kingdom, Singapore, South Africa and Mexico. VEDIKA MITTAL KUMAR, senior research fellow, Vidhi Centre for Legal Policy, explains key principles behind the Model Law and how the rules will play out in practice
How will the Model Law impact ongoing IBC proceedings?
On adoption of the Model Law and appropriate amendments to the Code, in relevant cases, ongoing domestic proceedings may have to be transferred to the NCLT Bench handling the application for recognition of a foreign insolvency proceeding regarding the same debtor. This will ensure consolidation of proceedings against the debtor, which in turn will ensure value maximisation, increase certainty and reduce resolution cost.
The Model Law envisages concurrent proceedings in India and abroad and provides for the interplay of relief granted in such proceedings. However, domestic proceedings are granted precedence. Illustratively, domestic insolvency proceedings under the Code may be initiated even after recognition of a foreign insolvency proceeding as the main proceeding by the NCLT, if the debtor has assets in India.
How will the move help creditors and investors?
Under the IBC, foreign creditors even now can initiate and participate in domestic
insolvency proceedings. But the adoption of the Model Law will provide increased avenues for cooperation and communication between the NCLT and foreign courts, and Indian and foreign insolvency representatives. Creditors will also be able to file applications to recognise ongoing foreign insolvency proceedings.
Indian creditors of overseas debtors will be benefitted as Indian and foreign insolvency proceedings will be conducted in sync. One of the proceedings will be recognised as the main proceeding and be accorded higher deference.
In the past, insolvency courts in foreign countries that adopted the Model Law had relied on modern means of communication such as video-conferences and telephonic conversations to coordinate multiple insolvency proceedings. Time-consuming, dated methods of communication such as letters rogatory will be dispensed with. Foreign investors can be assured of the intent of the Centre to align Indian insolvency laws with the best global practices.
What are the types of foreign insolvency proceedings that will be capable of recognition by the NCLT?
The Model Law envisages recognition of (i) foreign main proceedings, and (ii) foreign non-main proceedings. An insolvency proceeding in the country which is the debtor’s centre of main interest (COMI) will be recognised as the foreign main proceeding. To ensure objectivity and speed in determining the COMI, it provides a rebuttable presumption that the COMI of a debtor shall be in the country where the debtor has its registered office. However, courts have an independent responsibility to enquire if this country is the de facto COMI based on certain objective factors.
An insolvency proceeding where the debtor has an ‘establishment’ can be recognised as the non-main insolvency proceeding. To demonstrate the existence of an establishment, it must be shown that the debtor carries out nontransitory economic activity with human means and assets in that country.
The Model Law accords a greater deference to the main insolvency proceedings. For example, on recognition as the main insolvency proceeding by the NCLT, an automatic moratorium will apply, similar to the moratorium imposed under Section 14 of the Code. Such a relief for non-main proceedings is available at the discretion of the NCLT. Overall, the goal is to prevent dissipation of the debtor’s assets and to curtail unscrupulous promoters from syphoning off assets in foreign countries.
The insolvency representative of the main or non-main insolvency proceeding may also be entrusted with the administration of the debtor’s assets, provided interests of domestic creditors are protected. This is likely to fetch a better price for the assets in comparison to the country-wise isolated sale of assets.
How will the introduction of these rules play out in practice?
For one, the adoption of the Model Law will increase awareness regarding avenues for Indian creditors and insolvency professionals to access foreign courts for relief in ongoing foreign insolvency proceedings. For example, an Indian company defaults on loans in India and has assets abroad in a country that has adopted the Model Law. In this case, if foreign creditors commence insolvency proceedings against such a company for defaults abroad or attempt to enforce their security, Indian creditors can file an application before the foreign insolvency court to recognise the Indian insolvency proceeding as the main proceeding, order a moratorium and entrust administration of all the assets of such a company to the insolvency representative administering the Indian insolvency proceeding.
The adoption of the Model Law assumes importance when Indian banks have significant exposure to companies abroad and Indian firms aggressively seek finance from overseas.