Let it never be said that we were too hasty.
Over twenty years after it was issued, over a decade after the US, UK, Australia and others adopted it, after several government-constituted committees (the Balkrishna Eradi Committee, the NL Mitra Committee, the JJ Irani Committee) fervently recommended that it be made a part of our law, and after we had an act that called itself the Insolvency and Bankruptcy Code (that made close to no mention of even the subject), it looks like we will finally enact the UNCITRAL Model Law on Cross-Border Insolvency.
On 20th June 2018, the Ministry of Corporate Affairs called for suggestions on a proposed new chapter to the IBC, which is an almost word-by-word reproduction of the UNCITRAL Law, with a few (mainly) minor modifications.
Why is it important to have a law on cross-border insolvency? Simply because the corporate world is not neatly divided into discrete compartments. Companies and their creditors show no respect for the sanctity of national borders. It is impossible to effectively deal with the fate of an insolvent company that has its headquarters in one country, its creditors in another, and its assets and operations in yet another, unless every country agrees to cooperate.
Speaking from the standpoint of pure national interest, India cannot expect foreign creditors to lend to companies that have assets in India if they cannot recover on those debts. It is impossible to assess how much foreign investment we have lost due to the spectre of uncooperative Indian courts, but it is reasonable to suggest that such a state of affairs does not suit anyone.
The cooption of the Model Law will inject fresh new concepts into our legal firmament: terms such as ‘centre of main interests’ and ‘main’ and ‘non-main proceedings’. One of the opening sections, titled “interpretation”, cautions Indian courts that “in the interpretation of this Part, regard is to be had to its international origin…” Indian courts often embellish their judgments with quotations from foreign authorities. Rarely are they positively enjoined to look outwards.
While there are several nooks and crannies in the Model Law that are worthy of granular inspection, we are concerned here with a landscape view of the thing. The Model Law divides foreign insolvency proceedings into two: (1) proceedings taking place at the “centre of main interests” of the corporate debtor, which is generally the place where its registered office is situated (foreign main-proceedings) and (2) proceedings at any other place where the corporate debtor has an establishment (foreign non-main proceedings).
When the NCLT recognises proceedings as foreign main proceedings, there is an automatic moratorium on the assets of the corporate debtor, similar to the moratorium under the IBC. The main proceedings can therefore go on, fortified by the fact that the assets of the company are going nowhere. Describing the primacy of foreign main proceedings under the Model Law in ABC Learning Centres Limited, the US Court of Appeals for the Third Circuit said, “The Model Law…treats the multinational bankruptcy as a single process in the foreign main proceeding, with other courts assisting in that single proceeding.”
In case of non-main proceedings, the grant of a moratorium is within the discretion of the NCLT, and is to be granted only when it is necessary to protect the assets of the corporate debtor or the interests of its creditors. In short, non-main proceedings will not always get the same deference as main proceedings.
One rather strange departure from the Model Law in the proposed new chapter is that there is no provision for the granting of interim relief pending the recognition of foreign proceedings. Given the pace at which our courts work, one would think such a provision is absolutely essential, and its dropping has the worrying potential to unravel the entire scheme of the new law. Let us hope that the final draft rectifies this.
In sum, the adoption of the Model Law would be a welcome, if belated recognition of the increasingly international nature of legal disputes, and one more step towards improving the efficiency of our bankruptcy law.
