Is the UNCITRAL law the answer to India's CROSS BORDER INSOLVENCY Problem.

Updated: Aug 13, 2020

THE ANALYSIS OF THE ADOPTION OF THE MODEL BILL ON CROSS BORDER INSOLVENCY

#UNCITRAL #CROSSBORDERINSOLVENCY #IBC #Bankruptcy

Authors-

  1. Eshaan Khera ,Girish Murugesh


Introduction


The model bill on cross border insolvency was formed under the guidelines of the United Nations Commission On International Trade Law (UNCITRAL). The general assembly endorsed the bill in December 1997. The model bill was made to endorse an equal platform for all nations to try and resolve the insolvency proceedings that related to a debtor whose assets were present in multiple nations.

The Model Law does not purport to address substantive domestic insolvency law. Rather, it provides procedural mechanisms to facilitate more efficient disposition of cases in which an insolvent debtor has assets or debts in more than one State. As at 1 December 2013, 20 States and territories had enacted legislation based on the Model Law. Australia (2008), British Virgin Islands (overseas territory of the United Kingdom of Great Britain and Northern Ireland; 2003), Canada (2005), Colombia (2006), Eritrea (1998), Great Britain (2006), Greece (2010), Japan (2000), Mauritius (2009), Mexico (2000), Montenegro (2002), New Zealand (2006), Poland (2003), Republic of Korea (2006), Romania (2002), Serbia (2004), Slovenia (2007), South Africa (2000), Uganda (2011) and United States of America (2005).[1]

India however did not adopt the model bill on cross border insolvency the problem that is faced by the country then becomes that since many countries that have adopted the model bill on cross border insolvency have included a reciprocity clause[2] in their bills which compels them to deal only with those countries that have also adopted the bill on cross border insolvency

The present cross- border insolvency-related provisions under sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 (IBC), which were included following the recommendations of the Joint Committee on the Insolvency and Bankruptcy Code, 2015, require bilateral agreements to be entered with other countries to administer the cross- border ramifications of insolvency proceedings.

This paper tries to study whether or not India needs to adopt the model bill on cross border insolvency to try and come to an equal standing with those nations that have actually adopted the bill.

The Indian Scenario


The Bankruptcy and Insolvency code 2016 has 2 clauses sec 234 and sec 235 which provide the power to the central government to enter bilateral treaties to regulate the foreign insolvency proceedings

The sec 234 of the code reads[3]

Agreements with foreign countries. — (1) The Central Government may enter into an agreement with the Government of any country outside India for enforcing the provisions of this Code.

(2) The Central Government may, by notification in the Official Gazette, direct that the application of provisions of this Code in relation to assets or property of corporate debtor or debtor, including a personal guarantor of a corporate debtor, as the case may be, situated at any place in a country outside India with which reciprocal arrangements have been made, shall be subject to such conditions as may be specified.

Sec 235 of the code reads[4]

235. Letter of request to a country outside India in certain cases.—(1) Notwithstanding anything contained in this Code or any law for the time being in force if, in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, as the case may be, under this Code, the resolution professional, liquidator or bankruptcy trustee, as the case may be, is of the opinion that assets of the corporate debtor or debtor, including a personal guarantor of a corporate debtor, are situated in a country outside India with which reciprocal arrangements have been made under section 234, he may make an application to the Adjudicating Authority that evidence or action relating to such assets is required in connection with such process or proceeding.

(2) The Adjudicating Authority on receipt of an application under sub-section (1) and, on being satisfied that evidence or action relating to assets under sub-section (1) is required in connection with insolvency resolution process or liquidation or bankruptcy proceeding, may issue a letter of request to a court or an authority of such country competent to deal with such request.

As we can clearly see that the bankruptcy and insolvency code provides sufficient power to the central government under the sec 234[5] to enter into reciprocal agreements to ensure that the insolvency proceedings in the international sphere are protected and also that the actual debtor cannot escape liability on the ground that the laws are different in different nations. By entering into reciprocal agreements the government can ensure that the wrongdoer is justifiably punished in all cases and that the debtor having assets in more than one country is also equally liable.

Such bilateral agreements empower the government to ensure that the problem of foreign creditors is also averted this means that the foreign creditors who initially had problems in dealing with the cross border insolvency as they had endless processes to prove that they actually held a stake in the assets of the local debtor and faced many problems such as uncooperative administration. Such problems have been dialled down a lot with the enactment of the present code ensuring that the bilateral agreements mean that any foreign creditor having some assets in India or local Indian debtor having some foreign creditors cannot escape liability by the improbable reasons such as uncooperative administration.

The sec 235 also provides for the letter of request to country outside India which means that any person instituting proceedings for cross border insolvency may by letter request any foreign nation to provide for a proof of assets and also the measure of value foreign assets. The provisions also provide that the proceedings may be instituted by a professional, liquidator or bankruptcy trustee.

The disadvantage however arises in form of reciprocity clause of the model bill on bankruptcy that has been adopted by many countries which prohibits them from entering into bilateral trade agreements with other nations that have not adopted the model bill

The power to make the trade agreements is given to the central government which does not completely resolve the issue of the problems faced due to an uncooperative bureaucracy

The sections although provide a simplistic structure to deal with the issue of cross border insolvency the rising number of cases of Indian debtors absconding to foreign countries and not actually getting persecuted proves to be a good example that there is a need to improve the countries law relating to cross border insolvency

The Model Bill On Insolvency


In December 1997, the General Assembly endorsed the Model Law on Cross-Border Insolvency, developed and adopted by the United Nations Commission on International Trade Law (UNCITRAL). The Model Law was accompanied by a Guide to Enactment that provided background and explanatory information to assist those preparing the legislation necessary to implement the Model Law and judges and others responsible for its application and interpretation. The Model Law does not purport to address substantive domestic insolvency law. Rather, it provides procedural mechanisms to facilitate more efficient disposition of cases in which an insolvent debtor has assets or debts in more than one State.

Therefore, the model law aims to improve the conditions of cross border insolvency in the general sense. The cross border insolvency model bill is an augmenting law that means it does not actually change the country’s existing law but merely augments the existing provision of the insolvency law. The model bill on cross border insolvency aims to be the similarity factor that diminishes the inconsistencies in laws between nations so that the debtor cannot escape liability on the account of inconsistencies between the nations.

The Model Law is designed to apply where:[6]

(a) Assistance is sought in a State (the enacting State) by a foreign

court or a foreign representative in connection with a foreign insolvency

proceeding;

(b) Assistance is sought in the foreign State in connection with a specified

insolvency proceeding under the laws of that State;

(c) A foreign proceeding and an insolvency proceeding under specified

laws of the enacting State are taking place concurrently, in respect of the

same debtor;

(d) Creditors or other interested persons have an interest in requesting the commencement of, or participating in, an insolvency proceeding under specified laws of the enacting State.

It is clear that the model bill on cross border insolvency is meant to work under very specific conditions of cross border insolvency. Thus the model bill ensures that if any foreign creditor or debtor wants to ensure that the cross border insolvency proceedings are instituted against a party they can take the help of the model bill on cross border insolvency.

The model bill on cross border insolvency is not an overriding law that means adopting the model bill does not actually render the treaties formed with other countries on the issue of cross border insolvency redundant rather it merely fills the void in procedural law where there is actually no existing provision. Thus the model bill on cross border insolvency is a way to ensure that all debtors are made equally liable to all creditors.

There are four principles on which the Model Law is built. They are:

(a) The “access” principle:

This principle establishes the circumstances in which a “foreign representative”[7] has rights of access to the court (the receiving court) in the enacting State from which recognition and relief is sought.

Thus this principle is where the creditor is of a foreign nature is represented by a another foreigner and the local courts have been given the power to decide wether they want to or not recognise the foreign representative as a valid representative of the creditor and allow him to partake I the insolvency proceedings.

(b) The “recognition” principle:

Under this principle, the receiving court may make an order recognizing the foreign proceeding, either as a foreign “main” or “non-main” proceeding;[8]

This principle grants the power of recognition to the courts it gives the local courts receiving petition from foreign creditors to recognise the insolvency proceedings instituted in a foreign court and decide whether or not to institute insolvency proceedings in the country so that the foreign creditors can claim the local assets of the debtor to ensure settlement of their claim against the debtors

(c) The “relief” principle:

This principle refers to three distinct situations. In cases where an application for recognition is pending, interim relief may be granted to protect assets within the jurisdiction of the receiving court.[9] If a proceeding is recognized as a “main” proceeding, automatic relief follows.[10] Additional discretionary relief is available in respect of “main” proceedings, and relief of the same character may be given in respect of a proceeding that is recognized as “non-main”;[11]

Thus the main concern of the model bill is to ensure that the debtor cannot escape liability. The relief principle thus is one which clearly helps to establish procedure in case where the foreign creditor needs help of the local system to ensure he gets relief the procedure is that the courts divide the proceedings between main and non-main. Main proceedings are ones where the primary insolvency proceedings are started in the local courts and a non-main proceeding is one where the insolvency proceedings are already underway in a foreign court and thus the proceedings in the local court are an additional measure to protect the interest of creditor.

(d) The “cooperation” and “coordination” principle:

This principle places obligations on both courts and insolvency representatives in different States to communicate and cooperate to the maximum extent possible, to ensure that the single debtor’s insolvency estate is administered fairly and efficiently, with a view to maximizing benefits to creditors[12]

The cooperation and coordination principle is one which ensures that all administrative and judicial bodies are in sync and are ensuring that the debtor does not escape liability. The cooperation and coordination principle ensures that the foreign representatives of both the sides cooperate with each other and make sure that all information is passed on to all the parties and that all information so passed on is accurate. This principle ensures that both the sides to the proceedings maintain a cooperative spirit and do not proceed with the insolvency for ulterior motives.

Advantages of adopting the model bill on cross border insolvency


In the Indian scenario the insolvency and bankruptcy code is the comprehensive legislation enacted in 2016 to make one legislation to provide for the substantive and procedural laws relating to bankruptcy and insolvency. The sections 234 and 235 deal with the issue of cross border insolvency. However, the code does not substantially cover the whole problem of the cross border insolvency. Cross border insolvency comes with some major problems such as creditor discriminations and non-cooperation of the administrative bodies. The insolvency and bankruptcy code also has another major problem that is it relies majorly on the country forming treaties with other nations which is a very time consuming process. The model bill on cross border insolvency is a procedural law that acts as a platform not only to potentially solve the problems faced by the bankruptcy and insolvency code but also fill the void that may be left in the law due to the no treaties or agreements existing between two nations. The model bill on cross border insolvency is a tool to procedurally enhance the country’s law and help ensure that no debtor escapes liability on the account of lack of legal procedure.

The first advantage of adopting the model bill on cross border insolvency in India is that the countries such as Mexico etc. have adopted the reciprocity clause in the bill that means that the countries can only have cross border insolvency trading only with other countries that have actually adopted the bill. Therefore, when India adopts the model bill on cross border they become eligible to ensure that the cross border insolvency proceedings with these nations become very smooth as law becomes similar when the bill is adopted and the insolvency proceedings become easier to institute against foreign debtors, it becomes easier for the foreign creditors to prove their claims against the local debtors. Thus overall the complete procedure of doing the insolvency proceedings becomes much easier on the whole.

The model law on cross border insolvency also strengthens the judicial powers over the cross border insolvency proceedings of the local courts the access and relief principles give the courts one major power that the courts do not have under the bankruptcy and insolvency code that is the discretionary powers of the courts to whether or not to take up a case of cross border insolvency. The relief principle divides the cases into two categories based on relief the main and the non-main cases. Under the bankruptcy code the bi lateral agreements made it compulsory for the courts to admit the cases related to cross border insolvency with the countries bilateral agreement are made with but under the model bill the courts get discretionary power to declare the cases as main or non-main. Main cases are those which are primarily instituted in the local courts and the relief is sought mainly in local assets. The non-main cases are those which are filed in subsequence to a proceeding instituted in the foreign court. The non-main cases are usually granted additional relief. The courts also have the discretionary power to refuse to institute proceedings in case a foreign case is already instituted and they think additional relief is not necessary. or instance, the US courts have been denied recognition on several occasions such as in the case of SEC v. Stanford International Bank.[13]

The adoption on the model bill on cross border insolvency was also discussed by the Eradi committee (2000) and they clearly laid down procedure to integrate the model bill on cross border insolvency within the companies act therefore highlighting the necessity of the need for adoption of the model bill on cross border insolvency

Th


Disadvantages of adopting the model bill on cross border insolvency

The model bill on cross insolvency is a foreign provision that when adopted will have an overriding effect on the existing provisions in the bankruptcy and insolvency code. The bankruptcy and insolvency code sec 234 and 235 deal with the cross border insolvency that gives power to the central government to enter into bilateral agreements with other nations but adoption of the model bill on cross border insolvency will give one law for situations of cross border insolvency but the bill has an overriding clause that means all treaties and agreements entered into by the country will be binding over the bill that decreases the power of the bill over the law and hence the adoption of the bill becomes although essential it also becomes not very effective if treaties have been entered into to override the provisions of the bill.

A closer scrutiny of the countries that have not adopted the Model Law is even more revealing: 175 of the 193 members of the United Nations (91%), 49 of the 60 UNCITRAL member states (82%), 22 of the 27 European Union countries (81%), 11 of the 19 G20 countries (representing 20 major economies including the EU) (58%), 23 of the 34 Organisation for Economic Development (OECD) countries (68%) and 5 of the 8 G8 countries (forming 8 of the world’s largest economies) (66%). Even among the 38 countries regularly represented on the Working Group that drafted the Model Law, 31(82%) have not adopted the Model Law.[14]

A comparison with the adoption rates of a number of other Model Laws was also made. If nothing else, it may be an indication of the importance that States attach to a model law on cross-border insolvency. Indeed, most of the other Model Laws seem to have a higher take up rate than the Cross-Border Insolvency Law, despite the latter’s purported importance to international trade. For example, the Model Law on International Commercial Arbitration (1985) has 67 adoptees (excluding many individual states in Canada, Australia and the US), Electronic Commerce (1996) 44 (excluding many individual states in Canada, Australia and the US) and Procurement of Goods, Construction and Services (1994) 29 and Electronic Signatures (2001) 21.[15]

The public policy exception in the article 11 of the model bill on cross border insolvency is also a problem faced by many countries as the exception allows the country to reject foreign representatives petition on the basis of the good of public policy. This although gives the country to apply for proceedings freely but it gives the country the right to arbitrarily reject foreign proceedings

on the courts for the relief. The model bill on cross border insolvency imposes a responsibility on the courts to recognise all the courts to recognise the foreign creditors and their claims and verify the nature of their claims.

The courts also have a responsibility to recognise the interest of the foreign creditors thus the burden on the courts increases significantly. The foreign representatives of the creditors are also to be recognised by the courts thus that makes the burden of work on the courts even more. The courts also have a responsibility to make sure that the cooperation and coordination principle is upheld and that the sharing of information between nations also problematic as that puts critical trade secrets at risk.

The access principles require the country to recognize and help the representatives of the foreign creditors that means that the foreign representatives are to be given access to justice system this would recognize foreign interest other than fundamental rights that would open access to foreign access in other spheres also.


Conclusion

The need to adopt the model bill on cross border insolvency is clearly highlighted throughout the paper and that the bill will benefit all

The government has put forth a act in the parliament based on the model bill on cross border insolvencylvency amental rights that would open access to foreign access in other sph 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 model bill comes with its own set of problems but the very implementation of the bill will solve major issues in the cross border insolvency problems a relationship of trust will be formed between will solve major issues i n the debtors and the creditors therefore increasing the FDI in the country

Thus the result of the analysis is that the model bill needs to be adopted as quickly as possible




[1] The year of enactment indicated above is the year the legislation was passed by the relevant legislative body, as indicated to the UNCITRAL Secretariat; it does not address the date of entry into force of that piece of legislation, the procedures for which vary from State to State, and could result in entry into force sometime after enactment. [2] E.g. Mexico, Romania, South Africa and Uganda [3] THE INSOLVENCY AND BANKRUPTCY CODE, 2016 [4] THE INSOLVENCY AND BANKRUPTCY CODE, 2016 [5] THE INSOLVENCY AND BANKRUPTCY CODE, 2016 [6] UNCITRAL Model Law, art. 1, para. 1 [7] As defined by art. 2, sub para. (d) of the UNCITRAL Model Law. 14Ibid., art. 9. [8] Ibid., art. 17 [9] Ibid., art. 19. [10] Ibid., art. 20 [11] Ibid., art. 21. [12] Ibid., arts. 25, 26, 27, 29 and 30 [13] www.sec.gov/litigation/complaints/2009/comp20901.pdf [14] Cross-border Insolvency Problems: Is the UNCITRAL Model Law the Answer, S. Chandra MOHAN, Singapore Management University Institutional Knowledge at Singapore Management University Research Collection School of Law [15] ibid





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