Covid-19: Indian precedent case for cross-border insolvencies is now gaining importance

Out-Law Analysis | 06 Aug 2020 | 11:39 am | 3 min. read

The Covid-19 pandemic will lead to a surge of cross border insolvencies. Indian insolvency law has not yet made provisions for this type of insolvency, but there is a groundbreaking precedent.

Written by Ishan Zahoor, a commercial law expert at Pinsent Masons, the law firm behind Out-Law.

The Coronavirus pandemic has caused many businesses to file for insolvency protection. Companies have struggled with disrupted supply chains; sharp decreases in consumer spending, and liquidity issues.

This will result in a greater number of complex cross border insolvencies, which will require cooperation and consensus to resolve.

If a company is going to be able to enforce an insolvency ruling across borders it will have to engage with one of the international agreements on cross border enforcement.

One of these is the United Nations Commission on International Trade Law (UNCITRAL) Model Law on Cross-Border Insolvency, 1997 . It does not unify the insolvency laws of different jurisdictions, but aims to make co-operation possible without damaging the sovereignty of each jurisdiction.

Precedent for cross-border insolvencies in India

India has seen a complete overhaul and consolidation of the existing laws pertaining to insolvency through the enactment of the Insolvency and Bankruptcy Code, 2016. However, the cross-border insolvency provisions were not made part of the insolvency code.

Soon after the insolvency code became effective, draft provisions incorporating the UNCITRAL model Law were recommended by the Insolvency Law Committee but they are still only proposals and have not been incorporated into law.

But a case involving Jet Airways represents an interesting attempt by judges in India to read the model law structure into the insolvency code framework .

Jet was admitted to corporate insolvency resolution proceedings by the National Company Law Tribunal (NCLT) on 20 June 2019, with the lenders' consortium led by State Bank of India. A month earlier, however, a court in the Netherlands had appointed a Netherlands-based bankruptcy trustee to take charge of Jet assets located in the Netherlands, Jet's regional hub for its European operations. The underlying petition had been filed by two European creditors of the group, which asserted claims of unpaid dues worth INR280 crore ($37 million), prompting the Dutch court to order the seizure of one of Jet’s Boeing 777 aircrafts that was parked at Schiphol airport in Amsterdam.

Following Jet's admission to corporate insolvency resolution proceedings in India, the administrator appointed by the Dutch court came before the Mumbai bench of NCLT seeking recognition of the Netherlands proceedings. However, the NCLT outright barred the trustee appointed by the Dutch court from participating in the insolvency proceedings in India and declared the overseas bankruptcy proceedings 'null and void'.

However, the Dutch court-appointed administrator appealed the NCLT's order and the NCLAT, the appellate tribunal, then set aside that order and allowed the Dutch administrator to be the part of and attend the committee of creditors (CoC) meetings. The NCLAT went further to advise the parties on exploring a framework that would allow seamless cooperation between the resolution professional in India, the Dutch administrator and the CoC.

The parties developed an innovative cross border insolvency protocol and laid down a framework for international coordination and cooperation between all the stakeholders involved in the matter while respecting the sovereignty of each jurisdiction. This was possible only because the 'cross border insolvency protocol’ was constructed on the principles of the model law, which recognised India as the 'centre of main interest' and the Dutch proceedings as the 'non-main proceedings'.

One of the important discussions that arose during the Jet' case was whether there will be a struggle between the distinct doctrinal perspectives on cross-border insolvency adopted by India and by the Netherlands. Netherlands insolvency law does not allow for cooperation with insolvency administrators in non-EU matters, which are beyond the scope of the EU Insolvency Regulation, though the Dutch Supreme Court has in the past allowed a foreign insolvency administrator to effectively exercise its powers in the Netherlands. But in essence it still adheres to the principle of 'territoriality' of cross-border insolvency,  meaning that the insolvency measure will only have legal effect within the territorial limits of the state in which the insolvency proceedings have commenced. Therefore, the legal implications of insolvency proceedings will only remain within the border of such state and any assets abroad of such debtor would remain unaffected.

On the other hand India adheres to a sort of 'universalist approach' of cross-border insolvency, which stipulates the administration of the insolvency proceedings by one court in the jurisdiction where the entity is registered or domiciled by taking into account all the assets of such corporate debtor regardless of the location in the world.

The application of either of these two distinct approaches would have failed to strike a 'balance between the relief granted to the foreign representative and the interests of those affected by such relief' which is essential to achieve the objectives of cross-border insolvency legislation as underpinned in the legislative guide of model law. However, the NCLAT recognised the importance of the modified universalism of cross border insolvency as embodied in the model law – which is consistent and coordinated with varying objectives of the two distinct insolvency authorities, the Indian and the Dutch – and succeeded in setting out an encouraging precedent for all future cross border insolvency matters.

This historical move by the NCLAT will hopefully set a precedent for future cross-border insolvency cases in India, till at least such time that the government enacts a legislation based on the model law.