The Parliamentary joint committee examining the Bankruptcy Code had proposed many changes to the Bankruptcy Bill that was first introduced in the Lok Sabha in December last year. These changes have been accepted by the Lok Sabha, which passed the revised Bill yesterday. While some key features of the original Bill—displacement of management during resolution process, outer time limits for completion of proceedings and composition of creditors’ committee—have been retained, there are major changes. One such relates to cross-border insolvency. The Code, as originally proposed, allows foreign creditors to initiate insolvency proceedings and does not discriminate between claims of foreign and Indian creditors. The Bill now includes two additional provisions for dealing with issues related to cross-border insolvency.
When a foreign company that has assets in India undergoes bankruptcy proceedings in its parent jurisdiction (or another foreign jurisdiction), its creditors may want to prevent it from disposing of its assets in India and have such assets included in the bankruptcy estate of the company in such foreign jurisdiction. This requires the foreign insolvency professional to appear before the adjudicating authority in India and ask for recognition of foreign insolvency proceedings. The foreign debtor, on the other hand, may want to have a stay on all legal proceedings against its assets in India so that insolvency proceedings abroad take place in an orderly manner.
Similarly, when an Indian company that has assets abroad undergoes insolvency proceedings in India, its creditors (in India and abroad) may want to prevent it from disposing of its assets abroad and have such assets included in the bankruptcy estate of the company in India. This require the Indian insolvency professional to appear before foreign courts and ask for recognition of Indian insolvency proceedings. The Indian debtor, on the other hand, may want to have a stay on all legal proceedings against it in the relevant foreign jurisdiction so that insolvency proceedings in India take place in an orderly fashion.
In both situations, the relevant courts and authorities (in India and concerned foreign jurisdiction) will have to recognise the professionals and proceedings in each other’s jurisdiction. The revised Code seeks to address this by empowering the government to enter into agreements with other countries to facilitate such recognition and enforcement on a reciprocal basis. It empowers insolvency professionals to obtain appropriate orders from the adjudicating authority under the Code for approaching foreign courts to seek such recognition in connection with assets of a corporate debtor or its personal guarantor located outside India.
The implementation of these provisions will depend on the actual rules of recognition, which should be based on the UNCITRAL Model Law on cross-border insolvency that has been adopted by several countries. The Law attempts to provide a modern legal framework for regulation of cross-border insolvency. It seeks to achieve this object by mandating judicial cooperation, then by conferring on a foreign insolvency professional or a similar representative standing in local proceedings and by ensuring equal treatment to foreign and local claims. The Law is applicable in cases where the foreign creditor seeks to initiate insolvency proceedings before a local court or when a local court seeks the assistance of a foreign court or foreign representative. It is also applicable in situations where there are parallel insolvency proceedings of the same debtor company in different jurisdictions. The Law, however, does not undermine the autonomy of nations to adopt their own insolvency rules.
Recognition of foreign insolvency proceedings is a prerequisite under the Law. This is intended to ensure effective implementation of the other provisions relating to access to foreign creditors and parity of treatment. A proceeding may be a ‘Foreign Main Proceeding’ (FMP) or a ‘Foreign Non-Main Proceeding’ (FNMP). This classification determines the relief that can be granted by the foreign court. The Law defines FMP as a foreign proceeding that takes place in the debtor’s home country, or at the debtor’s ‘centre of main interest’. The initiation of FMP results in automatic stay of all proceedings in other jurisdictions and mandates transfer of all assets of the debtor to the foreign proceeding subject to local law of the state. However, in the case of FNMP, the court can only grant permissive relief that includes a further stay, an examination of witnesses and taking of evidence, and the entrustment of the debtor’s assets to the foreign insolvency representative, provided the entrustment does not prejudice the interest of local creditors.
Although the committee’s proposal to provide for enabling provisions on cross-border insolvency under the Code is laudable, its implementation will depend on the efficiency of the Indian bankruptcy system as established under the new Code. This is because bankruptcy courts and authorities in other jurisdictions will recognise proceedings and professionals under the Indian Bankruptcy Code only if the domestic regime is working properly. Unless there is reciprocity, it may not be appropriate for Indian courts and authorities to recognise the proceedings and professionals of other jurisdictions. In other words, a well-functioning domestic bankruptcy system is a necessary precondition for cross-border provisions to work.