How India’s new draft law will impact cross-border insolvencies

In the recent Union Budget Session of 2022- 2023, an announcement was made to extend the jurisdiction of India’s Insolvency and Bankruptcy Code, 2016 (IBC) to cross-border insolvency.

The current Draft Part Z is based on the UNCITRAL Model Law, developed by the United Nations Commission on International Trade Law. The UNCITRAL Model Law is not a substantive codified law but provides a framework and guidelines for countries to form their own trade laws in consensus with other countries.
The introduction of Draft Part Z is important for companies doing business with or in India as several transactions can come under the ambit of cross-border insolvency, such as –
  • Indian companies having both domestic and foreign creditors so assets are spread within and outside of India.
  • Indian companies with subsidiaries outside India and the Indian holding company is guaranteeing loans obtained by subsidiaries outside India.
  • Foreign enterprises having multiple creditors across jurisdictions and one of the asset-holding creditors is in India.

The Insolvency Law Committee Report

To fulfil the gap of not having adequate provisions for cross-border insolvency, Draft Part Z was formulated as part of a 2018 report by the Insolvency Law Commission on cross-border insolvency.
The Draft Part Z will apply to all countries which have similar insolvency provisions as laid down under the UNCITRAL Model Law such as the US, UK, Singapore, Korea and South Africa.
It requires the filing of applications in Indian courts to recognise foreign insolvency proceedings.
The draft provisions ensure coordination between the National Company Law Tribunal ("NCLT"), the primary adjudicating authority under the IBC and the foreign adjudicating authority. The draft provisions introduce the concept of conducting concurrent proceedings in the NCLT and in the foreign adjudicating authority.
Concurrent proceedings will essentially involve two types of situations –
  • Recognition of the foreign main proceeding in a foreign adjudicating authority.
  • Coordination between more than one foreign proceeding initiated against the Indian corporate debtor.
The impact of Draft Part Z
The Draft is a welcome step towards Indian courts having jurisdiction over foreign insolvency proceedings but it leaves room for ambiguity and lacks detail on some of the areas which need regulation.
  • The scope of application of the Draft mentions only corporate debtors. The Draft is silent on its application to micro, small and medium-sized enterprises (“MSMEs”) and partnership firms. It is unclear whether the rules will apply to Indian MSMEs having foreign creditors or foreign MSMEs having Indian creditors.
  • The Draft provides for refusal to initiate an insolvency proceeding if it is against the public policy of the nation. However, public policy and the extent of its application has not been defined and demarcated under the Draft. The concept of public policy was briefly discussed by the Singapore High Court in the case of In Re: Zetta Jet Pte Ltd and Ors. (Asia Aviation Holdings Pte Ltd, intervener)[2019] SGHC53, wherein the Court held that the concept of public policy does not allow for recognition of the foreign proceeding to be refused.
  • What about conflicts of law?With respect to application of local insolvency laws, the Draft provides for concurrent proceedings to take place but does not take into consideration instances where foreign laws are inconsistent with the provisions of the Draft in terms of carrying out foreign insolvency proceedings in India.
  • The processes are not aligned. The Corporate Insolvency Resolution Process under the IBC provides for a strict timeline for competition of the insolvency process – 330 days. However, the Draft does not provide for a time limit within which foreign insolvency resolution process must be completed. The Draft is ambiguous to the extent of competition of the entire foreign insolvency proceeding, it however provides for a period of 30 days for the recognition of a foreign insolvency proceeding under clause 12 of the Draft.
  • Under clause 16 of the Draft, “substantial change in status” should be defined.  This would avoid ambiguity and should primarily consider only modifications that would affect the decision granting relief or the decision recognizing the proceeding..
  • Clause 19 of the Draft provides for the protection of creditors and “other interested persons”. The interest of the creditors and “others interested persons” is to be satisfied while ensuring or modifying relief. However, the section does not elaborate on who constitutes “other interested persons”. Theapplication of this section is left to judicial interpretation as the legislative intention fails to clarify the extent of application of this section.

Choice of forum

The UNICITRAL Model Law introduced the concept of COMI or Centre of Main Interest. In order to decide where the insolvency proceedings should take place, the place where the corporate debtor’s interest lies is given priority.

COMI is generally presumed based on the control and command of the corporate debtor in the concerned territory.

This could relate to the registered office of the debtor, or it could also be the location of the significant assets or operations of the corporate debtor.  However, while presuming the COMI to be the corporate debtor’s registered office, the following must be taken into consideration – the headquarters of a corporate debtor, the location of individuals who manage the assets and liabilities of the corporate debtor and the location of the majority of the creditors of the corporate debtor.

In terms of the Indian proposals, Clause 14 of the Draft provides for the determination of COMI. The extent and attributes of the COMI of the corporate debtor determine the place of commencement of insolvency proceedings.

The Draft also provides for a presumption in cases where there is no proof of contrary that the debtor’s registered office will be the COMI. This presumption is useful in cases where there is no controversy while determining the corporate debtor’s COMI.

However, to prevent forum shopping, the Draft provides for a three-month look-back period. In essence, the presumption will be inapplicable if the corporate debtor has relocated the registered office three months prior to the initiation of insolvency proceedings. The various factors taken into consideration while determining the corporate debtor’s COMI are according to the Draft:

  • the place of central administration of the corporate debtor
  • the place which is easily ascertainable by the creditors

However, in circumstances where the above two principles prove to be inadequate for the determination of COMI, additional relevant factors are laid down in the report provided by CBIRC (the Cross Border Insolvency Regulations Committee).

According to the report, the additional factors are to be notified by the Central Government. Such additional factors are only to be considered if the presumption of registered office as COMI is rebutted. The report further clarifies the effective date for determination of COMI – It suggests that the date of commencement of the foreign proceedings is the effective date of determination of COMI. Essentially, commencement of foreign proceedings determines the local jurisdiction of the corporate debtor according to local laws in which the corporate debtor is situated.

A need for more clarity

The next few years are crucial for India to have a concrete insolvency regime with a need to clear up the various ambiguities and grey areas that are present in the local laws.

The aim of the CBIRC should be to reduce the inconsistencies between domestic and foreign law to facilitate cross-border insolvency proceedings.

The Draft aims to create reciprocity between Indian and foreign laws to enable the coordination of concurrent foreign insolvency proceedings, however the present level of hesitation and confusion of reciprocal legislations, especially in matters of cross border insolvency, remains a challenge for the CBIRC.