Cross Border Insolvency – Corporate Restructuring, Insolvency, Liquidation & Winding-Up Important Questions
Question 1.
Discuss the provisions dealing with cases involving cross-border in-solvency under the Insolvency and Bankruptcy Code, 2016.
Answer:
- Sections 234 and 235 of the Insolvency and Bankruptcy Code, 2016 make provisions to deal with cases involving cross-border insolvency.
- Agreements with foreign countries – Section 234 empowers the Central Govt, to enter into an agreement with other countries to resolve situations pertaining to cross-border insolvency.
- The Central Govt, may apply the provisions of IBC, 2016 in relation to assets or property of corporate debtor, including a personal guarantor of a corporate debtor, situated at any place in a country outside India with which reciprocal arrangements have been made.
- Letter of request to a country outside India – Section 235 of the Code lays down that in the course of insolvency resolution process, or liquidation or bankruptcy proceedings, if the resolution professional, liquidator or bankruptcy trustee, is of the opinion that assets of the corporate debtor are situated in a country outside India with which India has reciprocal arrangements u/s 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.
- On receiving such application, the Adjudicating Authority may issue a letter of request to a court or an authority of such country competent to deal with such request.
- However, the current cross-border insolvency framework in India is dependent on India entering bilateral agreements with other countries. Finalization of bilateral agreements is a long-drawn process as it involves long term negotiations and thus takes a lot of time.
- Moreover, every trade is distinct and thus it would be difficult for the adjudicating authorities to enforce the agreements/treaties entered into with other countries.
Question 2.
A model Law is a legislative text that needs legislative guide to outline the core issues to be incorporated in the substantive law – Discuss the relevance in having Legislative Guide by United Nations Commission for International Trade Law (UNCITRAL) to supplement UNCITRAL Model Law on cross-border insolvency.
Answer:
- When lender and borrower belong to different countries, and the borrower becomes insolvent, it is termed as ‘Cross-Border Insolvency’ or ‘International Insolvency.’
- Cross-border insolvency is a terminology used to identify cases of in-solvency where assets, or liabilities, of an insolvent debtor are located in two or more countries
- The increasing rate of cross-border insolvencies shows the continuing global expansion of trade and investments. However, national insolvency laws are not effective to deal with cross-border cases. Generally, the local laws do not provide tangible solutions in such cases.
- Hence, UNCITRAL adopted a Model Law to deal with cross-border insolvencies. The Model Law is designed to assist countries to update their local insolvency laws with the modern, harmonized and fair framework. Such synchronization of local laws with the Model law will lead to better handling of cross-border insolvency cases.
- A model law is a legislative text recommended to States to enact as part of National Law, with or without modification. As such, model laws generally propose a comprehensive set of legislative solutions to address a particular topic and the language employed supports direct incorporation of the provisions of the model law into a national law.
- Later, UNCITRAL also released the Legislative Guide on Insolvency Law. The purpose of the Legislative Guide is to assist the establishment of an effective and efficient legal framework to address the financial difficulty of debtors. The Guide is supposed to be used as a reference by national legislative bodies, while preparing new laws and regulations.
- The legislative guide focuses upon providing guidance to legislators and other users and for that reason guides generally include a substantial commentary discussing and analyzing relevant issues. It is not intended that the recommendations of a legislative guide be enacted as part of law as such. Rather, they outline the core issues that it would be desirable to address in that law, with some recommendations providing specific guidance on how certain legislative provisions might be drafted.
Question 3.
UNICITRAL Model Law is binding on member countries but at the best obiter dicta for Courts of the Member Countries’ dealing in disputes relating to Cross-Border Insolvency and International Trade – elucidate.
Answer:
→ The increasing incidence of cross-border insolvencies reflects the continuing global expansion of trade and investments. However, the national insolvency laws are not effective to deal with cross-border cases. Generally, the local laws do not provide tangible solutions in such cases.
→ Hence, the United Nations Commission on International Trade Law (UNCITRAL) Model law on Cross-Border Insolvency was approved in May 1997.
→ The Model Law is designed to assist countries to update their local insolvency laws with modern, harmonized and fair framework. Such synchronization of local laws with the Model law will lead to better P handling of cross-border insolvency cases
→ Obiter dicta refers to opinion expressed in a court by the Judge but not essential to the decision and hence is not binding. Thus, the statement emphasizes to adopt the law as legislation in member countries but not binding on courts unless incorporated in a legislation.
→ Framing of UNCITRAL Model Law is necessitated due to:
(a) Global expansion of trade and investment;
(b) Inadequate and conflicting legal approaches due to difference in regulatory platform across countries that hampers the rescue of financially troubled businesses and impede the protection of the assets of the insolvent debtor against dissipation;
(c) Increasing incidences of cross-border insolvency due to integration of trade across countries;
(d) National insolvency laws of different countries are not updated with the current scenario.
→ Main thrust of the Model Law is to achieve fair and efficient administration of cross border insolvencies protecting the interest of every stakeholder.
Question 4.
A foreign representative has applied to the court for recognition of the foreign proceedings. When shall such a foreign proceeding be recognized under the UNCITRAL Model Law?
Answer:
→ The increasing rate of cross-border insolvencies reflects the continuing global expansion of trade and investments. However, the national insolvency laws are not effective to deal with cross-border cases. Generally, the local laws do not provide tangible solutions in such cases.
→ Hence, the United Nations Commission on International Trade Law (UNCITRAL) Model law on Cross-Border Insolvency was approved in May 1997.
→ The UNCITRAL Model Law is based on the following key elements
(a) Access: Provide representatives of foreign insolvency proceedings and creditors a right of access to the courts of an enacting country to seek assistance and authorize representatives of local proceedings being conducted in the enacting State to seek assistance.
(b) Recognition: Establish simplified procedures for recognition of foreign proceedings for avoiding time-consuming procedure. Provide recognition to orders issued by Foreign Courts and the appointment of foreign representatives.
(c) Relief: Provide relief for the fair conduct of cross-border in-solvencies. Key elements of the available relief include interim relief at the discretion of the Court between the making of an application for recognition and the decision on that application etc.
(d) Co-operation: These provisions address co-operation between the Courts of country where the debtor’s assets are located and co-ordination of concurrent proceedings concerning that debtor. The Model Law empowers Courts to co-operate and communicate directly with foreign Courts.
→ Hence, a foreign proceeding shall be recognized under UNCITRAL Model Law if
- The foreign proceeding is a proceeding within the meaning as defined under the Model Law;
- The foreign representative applying for recognition is a person or body within the meaning as defined under the Model Law;
- The application meets the requirements of the Model Law; and
- The application has been submitted to the court.
→ The foreign proceeding shall be recognized as a foreign main proceeding if it is taking place in the State where the debtor has the centre of its main interests.
→ A decision to recognize a foreign proceeding would normally be subject to review or rescission, as decision of any other court.
Question 5.
Though UNCITRAL Model Law is not a substantive law, yet it recommends protection to creditors and other interested persons. Briefly describe what are the protections provided under the UNCITRAL Model Law.
Answer:
→ The rise in global trade and flow of capital results in higher cases of cross-border insolvencies. However, the national insolvency laws are not effective to deal with cross-border cases. Generally, the local laws do not provide tangible solutions in such cases.
→ Hence, the United Nations Commission on International Trade Law (UNCITRAL) Model law on Cross-Border Insolvency was approved in May 1997.
→ The UNCITRAL Model Law contains following provisions to protect the interest of creditors, the debtor and other affected persons
(a) Availability of temporary relief upon application for recognition of a foreign proceeding or upon recognition is subject to the discretion of the court.
(b) It is expressly stated that in granting such relief the court must be satisfied that the interests of the creditors and other interested persons including the debtors are adequately protected.
(c) The court may subject the relief it grants to conditions it considers appropriate.
(d) The court may modify or terminate the relief granted, if so, required by a person affected.
→ In addition to those specific provisions, the UNCITRAL Model Law in a general way provides that the court may refuse to take an action governed by the Model Law if the action would be manifestly contrary to the public policy of the enacting State.
Question 6.
The purpose of the Model Law is to provide effective mechanism for dealing with cases of cross-border insolvency. Comment upon the statement.
Answer:
→ The rise in global trade and flow of capital results in higher cases of cross-border insolvencies. However, the national insolvency laws are not effective to deal with cross-border cases. Generally, the local laws do not provide tangible solutions in such cases.
→ Hence, the United Nations Commission on International Trade Law (UNCITRAL) Model law on Cross-Border Insolvency was approved in May 1997.
→ The purpose of the Model Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:
(a) Co-operation between the courts and other competent authorities of different countries dealing with cases of cross-border insolvency;
(b) Greater legal certainty for trade and investment;
(c) Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
(d) Protection and maximization of the value of the debtor’s assets; and
(e) Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.
Question 7.
Write a note on “Effect of recognition of a foreign main proceeding” under the UNCITRAL Model law.
Answer:
→ Where the lender and borrower of funds belong to different countries, and the borrower becomes insolvent, it is termed as ‘Cross Border Insolvency’ or International Insolvency.
→ Thus, Cross-border insolvency is a terminology used to identify cases of insolvency where assets, or liabilities, of an insolvent debtor are located in two or more countries
→ The rational for Cross Border Insolvency Laws is to provide effective mechanism for dealing with cases of cross-border insolvency. An effective and efficient insolvency legislation is needed for international transactions.
→ Foreign main proceeding means a foreign proceeding taking place in the country where the debtor has the centre of its main interests.
→ Upon recognition of foreign proceeding, which is a foreign main proceeding under UNCITRAL Model Law, the following are the effects:
(a) Staying the commencement or continuation of individual actions or individual proceedings concerning the debtor’s assets, rights, obligations or liabilities;
(b) Staying execution against the debtor’s assets;
(c) Suspending the right to transfer or otherwise dispose of any assets of the debtor;
(d) Providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets, affairs, rights, obligations or liabilities;
(e) Entrusting the administration or realization of all or part of the debtor’s assets located in this country to the foreign representative or another person designated by the court.
Question 8.
“Vasudev Kutumbakam or one world one family is the motto of any business entity in addition to political and cultural togetherness. This has prompted to the formation of United Nations Organisation (UNO) to ensure smooth universal trade”. Comment on the statement with special emphasis on efforts being made with respect to Cross Border Insolvency.
Answer:
- The rise in global trade and flow of capital results in higher cases of cross-border insolvencies. Where the lender and borrower of funds belong to different countries, and the borrower becomes insolvent, it is termed as ‘Cross-Border Insolvency’ or International Insolvency.
- However, the national insolvency laws are not effective to deal with cross-border cases. Generally, the local laws do not provide tangible solutions in such cases. Hence, the United Nations Commission on International Trade Law (UNCITRAL) Model law on Cross-Border Insolvency was approved in May 1997.
- The United Nations Commission on International Trade Law was formed in 1966 as on organ of UNO with guidelines to improve harmonization and unification of International Trade Laws.
- The Commission has developed a Model Law on Cross-Border Insolvency (the Model Law) in order to create and maintain harmony in regulatory aspects of insolvency mechanism across countries.
However, the Model Law respects the differences among national procedural laws. - It offers solutions that help in several significant ways to have harmony among regulatory frameworks. Its Motto is harmonization of legislations across countries.
- The purpose of the Model Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:
(a) Cooperation between the courts of different countries dealing with cross-border insolvency;
(b) Greater legal certainty for trade and investment;
(c) Fair and efficient administration of cross-border insolvencies;
(d) Protection of the interests of all creditors and other interested persons, including the debtor;
(e) Protection and maximization of the value of the debtor’s assets; and
(f) Rescue of financially troubled businesses, hence protecting in-vestment and employment.
Question 9.
What is meant by Principle of Supremacy or International Obligations as enunciated in Article 3 of Model Law.
Answer:
- The rise in global trade and flow of capital results in higher cases of cross-border insolvencies. Where the lender and borrower of funds belong to different countries, and the borrower becomes insolvent, it is termed as ‘Cross Border Insolvency’ or International Insolvency.
- However, the national insolvency laws are not effective to deal with cross-border cases. Generally, the local laws do not provide tangible solutions in such cases. Hence, the United Nations Commission on International Trade Law (UNCITRAL) Model law on Cross-Border Insolvency was approved in May 1997.
- However, as per the Principle of Supremacy of International Obligations, where the Model Law conflicts with an obligation of the State enacting the Model Law arising out of any treaty or other form of agreement to which it is a party with one or more other States, the requirements of the treaty or agreement prevail. (Article 3)
- In other words, where the Model Law conflicts with an obligation of a country under any international treaty, the obligations of the treaty shall override the requirements Model law.
- Further, it shall be noted that the Model Law does not apply to any banks or insurance companies, which are subject to any special in-solvency laws in a country and if such country wants to exclude such entities from the Model law.
Question 10.
State the procedure for serving notice to foreign creditors under UNCITRAL Model Law.
Answer:
- Where the lender and borrower of funds belong to different countries, and the borrower becomes insolvent, it is termed as ‘Cross-Border Insolvency’ or International Insolvency.
- The national insolvency laws are not effective to deal with cross-border cases. Hence, the United Nations Commission on International Trade Law (UNCITRAL) Model law on Cross-Border Insolvency was approved in May 1997.
- As per Article 14 of the Model Law, laws of the enacting State relating to Insolvency will specify that a notification is to be given to creditors.
- The purpose of notifying foreign creditors is to inform the commencement of the insolvency proceeding and of the time-limit to file their claims.
- Such notification shall be made to the foreign creditors individually. Such notification shall indicate the following
(a) Reasonable time period for filing claims and place at which to be filed;
(b) Whether secured creditors need to file their secured claims; and
(c) Any other information required to be included in such a notification to creditors pursuant to the law of this State and the orders of the court ordering Insolvency Process.
Question 11.
Describe the World Bank’s Insolvency Law System.
Answer:
→ Where the lender and borrower of funds belong to different countries, and the borrower becomes insolvent, it is termed as ‘Cross-Border Insolvency’ or International Insolvency.
→ The World Bank’s Principles for Effective Insolvency and Creditors/ Debtors Rights Systems provides benchmarks, based on international best practices for evaluating the effectiveness of domestic Insolvency and Creditor/Debtor rights systems.
→ Effective insolvency systems have a number of aims and objectives, such as
(a) integrate with a country’s broader legal and commercial systems;
(b) maximize the value of a firm’s assets and recoveries by creditors;
(c) strike a balance between liquidation and revival of poor-performers;
(d) provide for both efficient liquidation of loss-making businesses;
(e) provide for equal treatment of creditors – foreign and domestic;
(f) provide for timely, efficient and impartial resolution of insolvencies;
(g) prevent the improper use of the insolvency system;
(h) establish a framework for cross-border insolvencies, with recognition of foreign proceedings.
→ Where an enterprise is not viable, the main focus of the law should be swift and efficient liquidation to maximize recoveries for the benefit of creditors.
→ On the other hand, where an enterprise is financially viable, i.e. it can be rehabilitated, its assets shall be effectively used to generate future cash profits.
→ The rescue of a business should be promoted through formal and informal procedures.
→ Rehabilitation should permit quick and easy access to the process, protect all those involved, permit the negotiation of a commercial plan, enable a majority, of creditors in favour of a plan.
Question 12.
Discuss the provisions of UNCITRAL Model Law regarding coordination of more than one foreign proceeding.
Answer:
→ Where the lender and borrower of funds belong to different countries, and the borrower becomes insolvent, it is termed as ‘Cross-Border Insolvency’ or International Insolvency.
→ The national insolvency laws are not effective to deal with cross-border cases. Hence, the United Nations Commission on International
Trade Law (UNCITRAL) Model law on Cross-Border Insolvency was approved in May 1997.
→ Where the debtor is subject to insolvency proceedings in more than one foreign country and foreign representatives of more than one foreign proceeding may seek recognition or relief in the enacting country. The provision applies whether or not an insolvency proceeding is pending in the enacting State.
→ In respect of more than one foreign proceeding regarding the same debtor, the court shall seek co-operation and co-ordination, and the following shall apply
(a) Any relief granted to a representative of a foreign non-main proceeding after recognition of a foreign main proceeding must be consistent with the foreign main proceeding;
(b) If a foreign main proceeding is recognized after recognition, or after filing of an application for recognition, of a foreign non-main proceeding, any relief shall be reviewed by the court and shall be modified or terminated if inconsistent with the foreign main proceeding;
(c) If, after recognition of a foreign non-main proceeding, another foreign non-main proceeding is recognized, the court shall grant, modify or terminate relief for the purpose of facilitating coordination of the proceedings;
(d) In case of concurrent proceedings, the objective the Model Law is to promote co-operation, co-ordination and consistency of relief granted to different proceedings.