File Copyright Online - File mutual Divorce in Delhi - Online Legal Advice - Lawyers in India

Cross Border Insolvency: Is It Really At Crossheads

The insolvency regime in India has allegedly undergone a paradigm shift as a result of the IBC. The Committee of Creditors' business judgment is given precedence in the institutional form of the IBC, which allows for little judicial intervention. The NCLTs, which are located throughout India, are the adjudicating authorities for all insolvency cases under the IBC with regard to resolution and liquidation. Depending on the corporate debtor's registered office, an application to declare bankruptcy against them may be submitted to any of the NCLTs located around the nation.It has been proposed that the NCLT could be hesitant to embrace a cooperative and universalist system in its entirety.

In general, the IBC was specifically created to lessen the role of the courts in instances involving insolvency and bankruptcy. Under the IBC, creditors or resolution experts were supposed to make the majority of significant decisions, and they were bound by stringent deadlines.

The judicial functions required to administer the insolvency and bankruptcy system as well as the open issues the IBC left for the tribunals to interpret and construe were almost definitely underestimated in its design.

It seems that the NCLT will not be able to exercise powers arising from inherent common law jurisdiction and comity of courts, so to speak. Thus, it is necessary to give thought to the following query: if the NCLT is unable to use its authority, is it illegal for other courts to use its authority in India? The issue of what would be the appropriate forum for resolving such disputes emerges if India is able to exercise such authority?

It is evident that the NCLT has been granted sole jurisdiction to decide cases involving the IBC's resolution and liquidation. The IBC stipulates that: "Any suit or proceedings pertaining to any matter on which NCLT or the NCLAT has jurisdiction under the IBC shall not be entertained by any civil court or authority."

With regard to applications and proceedings by or against a corporate debtor covered by the IBC, the Supreme Court has further clarified that: "The non-obstante Clause in Section 60(5) is designed to ensure that the NCLT alone has jurisdiction, making it clear that no other forum has jurisdiction to entertain or dispose of such applications or proceedings."

As a result, when it comes to settlement and liquidation issues arising under the IBC, the NCLT has exclusive jurisdiction. It follows that the NCLT has no authority over issues that are not covered under the IBC.

Investigating the aspects of cross-border insolvency that the IBC addresses is crucial. Foreign creditors of the corporate debtor may present their claims to the NCLT through the IBC. This gives the NCLT the authority to decide how to handle international creditors' claims under the IBC. Nevertheless, the IBC has no rules for the acknowledgment and support of international proceedings.

Who Wields Overriding Power:
  • Given that IBC rules take effect regardless of any inconsistencies in other laws, the IBC has been regarded as having the characteristics of a code.
  • This is further supported by the inherent common law authority that an ordinary civil court in India already possesses to exercise jurisdiction in the interests of justice and to guard against procedural abuses.
  • According to first principles, the NCLT will not have jurisdiction over an issue relating to insolvency that is not covered by the statute; as a result, an ordinary civil court may be able to fill the legal void.
  • A foreign creditor may make claims under the IBC about an Indian corporate debtor that is going through insolvency. As a result, the NCLT must decide on any matter relating to how foreign creditor claims are handled.
  • A regular civil court lacks the authority to hear cases involving these types of issues.
  • Upon confirmation that the IBC does not grant any authority to acknowledge or support a foreign insolvency process, the question of whether the common law ought to intervene to fill the gap arises.

When the facts of the case warrant it, the inherent powers of the common law courts are typically used to fill a legal gap and primarily on the basis of equitable considerations. Regarding the Industrial Disputes Act, for instance, the Supreme Court has decided that a plaintiff must approach the Industrial Tribunal if the relief they are seeking is covered by the act. However, a regular civil court may also be contacted if the cause of action is founded on common law principles.

Conflict With Law:

First principles imply that, in this ostensible void, a civil court with jurisdiction may apply well-established common law standards to identify and support a foreign insolvency process. As was previously stated, the CPC does not restrict this authority to the implementation of foreign judgments. It includes identifying and supporting international insolvency procedures.

Nonetheless, the court cannot deviate from the IBC's stated provisions while using this authority. When exercising inherent common law jurisdiction, the application of local legislation becomes crucial. Domestic law will be taken into consideration, but it won't be the deciding factor.

The IBC cannot be used against a foreign firm in its current form. The concept of a corporate debtor is limited to companies incorporated under the Companies Act 2013 and is not defined in the IBC for foreign corporations. Nonetheless, if a foreign business fails to pay its debts and is not incorporated in India, it may be wound up as an unregistered company under the Companies Act 2013 of 2013.

Foreign creditors have the right to present their claims before the Official Liquidator in the event that a foreign firm is requested to be wound up as an unregistered company in India. The topic of whether a foreign company's Indian assets can be returned to its place of incorporation has not been addressed before Indian courts, despite the fact that a foreign creditor is permitted to demonstrate its debts in an Indian liquidation.

One can apply to an Indian commercial court for recognition and aid with a foreign insolvency process prior to the enactment of the cross-border insolvency law.

In order to expedite the resolution of disputes, the Commercial Courts Act of 2015 established commercial sections in a number of District Courts and High Courts. The benefit of going through a commercial court is that there are less formalities involved.

The case must meet the Commercial Courts Act's definition of a commercial dispute in order to be brought before a commercial court. A "commercial dispute" is defined as "an ordinary transaction of merchants, bankers, financiers and traders, such as those relating to mercantile documents, including enforcement and interpretation of such documents" under Section 2(1)(c)(i) of the Commercial Courts.

The submission is that the concept includes a foreign liquidator or resolution professional's request for recognition and support in a foreign action. This conclusion is further supported by a recent Delhi High Court ruling that acknowledged the ability of a foreign bankruptcy trustee to bring a commercial suit in India to void certain transactions made in order to deceive foreign creditors and to issue an injunction prohibiting the debtor from selling any more assets in India.

In addition, the Madras High Court has acknowledged that, in accordance with the concept of comity of courts, a foreign liquidator appointed in a foreign liquidation case may cast a vote in the extraordinary general meeting of its Indian subsidiary. Based on the principle of court comity, which demands that Indian courts honor judgments rendered by foreign courts, this decision was reached.

Approach of courts in dealing with request for recognition and assistance for foreign insolvency proceedings:

In India, there are two circumstances in which cross-border recognition and aid are requested. We talk about these two options down below.
  1. An international business maintains assets and a location of business in India.

    The Companies Act of 2013 requires a foreign corporation with a place of business in India to register as a foreign company, subject to specific requirements. A foreign business can operate through its agents, by opening a branch office, or by establishing a liaison office. Due to its incapacity to pay obligations, a foreign firm that isn't registered in India may end up being unregistered.

    The Commercial Court in India may permit the ancillary liquidation of a foreign business, subject to the corporate structure. If allowed, the ancillary liquidation must be handled by the NCLT in accordance with the exclusive authority granted by the IBC. Nonetheless, the Commercial Court will support and assist the foreign proceedings and maintain overall authority over the case, including deciding how much money should be sent to the foreign court.

    The liquidations before the NCLT will be ancillary in that the Indian liquidators will only be able to access and sell the company's Indian assets; they will not be able to access and sell the company's assets anywhere in the world.
     
  2. A foreign corporation does not have any operations in India; it just possesses assets

    In such a scenario, there shouldn't be any ancillary liquidation in India since the corporation simply owns assets there and no physical location. The entire process needs to be directed by the Commercial Courts.

    Impact of draft law on exercise of common law in court jurisdiction

    India will shortly be implementing the Model Law. As a result, it becomes vital to investigate whether a commercial court's authority to provide recognition and support in a cross-border insolvency process would be maintained following its adoption.

    The proposed framework allows for the filing of an application under the IBC against a foreign firm in order to recognize a foreign case in India or to start insolvency proceedings in India.
     
Fascinatingly, the Cross Border Insolvency Rules and Regulations Committee's proposed rules on cross-border insolvency laws in India specify that the following criteria will be used to determine whether adjudicating authority has jurisdiction over cross-border insolvency matters:
  • The National Company Law Tribunal's respective benches, as established under subsection (1) of Section 419 of the Companies Act 2013 (18 of 2013), and notified by notification number S.O. 1935 (E), dated July 1, 2016, under the Companies Act 2013, are the adjudicating authority in relation to a corporate debtor whose registered office is situated within the territorial jurisdiction of the respective bench (18 of 2013).
  • The National Company Law Tribunal, Principal Bench, as established under sub-section (1) of Section 419 of the Companies Act 2013 (18 of 2013) and notified by notification number S.O. 1935 (E), dated first day of July 2016, under the Companies Act, 2013 (18 of 2013), is the adjudicating authority in relation to any body corporate incorporated with limited liability outside of India.
  • Thus, in practice, the NCLTs spread out around the nation serve as the Adjudicating Authority for all cross-border insolvency matters in India under draft Part Z of the IBC. No civil or commercial court has concurrent jurisdiction with the NCLT.
  • No other Indian court may have concurrent jurisdiction over the same subject matter when an NCLT has subject matter jurisdiction over cross-border bankruptcy issues.
  • Since the Model Law is a comprehensive legislative framework, it should cover every aspect of cross-border bankruptcy in India, even though a Commercial Court may have jurisdiction over such situations that are not covered by the IBC. This creates a dilemma for the legislative branch. Model Law permits additional help under other statutes, but it restricts the authority to provide such relief to the NCLT, a forum lacking any inherent powers under common law. As such, the NCLT's authority is limited by the IBC. The NCLT cannot grant relief to a foreign representative under the principle of the comity of courts unless specifically authorized by the Code.
  • As a result, we find ourselves in an odd situation. The legislation in India does not expressly indicate that the cross-border insolvency laws are the only avenue for obtaining relief in cross-border insolvency proceedings.
  • The NCLT's orders are considered final by the IBC. It is expressly forbidden for the civil court to handle cases governed by the IBC. Although the NCLT has extensive authority over corporate insolvency and the liquidation process, it does not possess all the authority that the civil courts typically do.
  • It could be helpful at this point to contrast the provisions of India's proposed law with those of the Model Law. Nothing in this Law limits the authority of a court or the person or body administering a reorganization or liquidation under the law of the enacting State to provide additional assistance to a foreign representative under other laws of this State, according to the UNCITRAL Model Law.


Proposed Draft Z of the IBC provides as follows:

  • A foreign representative may get further help from the adjudicating authority, the resolution professional, or the liquidator, as applicable, in accordance with any other Indian legislation, subject to the provisions of this Part.
  • According to a comparison of Draft Z of the IBC, a "Adjudicating Authority, resolution professional, or a liquidator as the case may be" has been granted the authority to provide extra assistance.
  • The Model Law does not contain any mention of "court."
  • There has been no suggestion to broaden the National Company Law Tribunal's authority to handle cases involving cross-border insolvency.
  • The intention has been to handle domestic insolvency problems while maintaining its restricted jurisdiction. According to bankruptcy Law Committee's report, even though the NCLT has jurisdiction over cross-border bankruptcy issues, it should not have the authority to award interim relief because the domestic insolvency regime does not grant it.
  • As a result, there might be situations in which the NCLT is unable to grant relief that would often be granted by a commercial civil court.
  • This highlights how important it is to maintain the Commercial Courts' jurisdiction.
  • Therefore, outside of the IBC's provisions, the exercise of jurisdiction under the inherent common law jurisdiction should continue to exist.

Circumstances for exercise of power and limitations:

The cross-border corporate bankruptcy issues will fall under the jurisdiction of the National Company Law Tribunal (NCLT), which has multiple locations across India, following the implementation of legislation related to cross-border insolvency. Regarding all disputes governed by the IBC, the NCLT will have exclusive jurisdiction. But as has been said before, the IBC is not the only doorway for international insolvency support. In three situations, it will be crucial to maintain the inherent common law jurisdiction's continuous capacity of recognition and aid in cross-border insolvency issues.

First, the inherent power ought to be maintained with regard to subjects outside the purview of the IBC. Second, in certain cases, the Center of Main Interest and the establishment of the corporate debtor may not be located in India. In these cases, recognition and support for such a cross-border insolvency proceeding may only occur in accordance with the inherent common law jurisdiction, not in accordance with the IBC. Third, since the demand for reciprocity will form the foundation of India's cross-border insolvency system, it may be advantageous for nations that do not meet this criteria if there is an independent basis for recognition in India.

Unaddressed topics:
NCLT lacks the authority to establish an injunction to prevent the liquidation of a foreign corporate debtor's assets in India, to halt legal proceedings, to uphold foreign judgments, to designate receivers for a foreign corporate debtor's property or in relation to its properties, to designate a Court Commissioner to determine the property's status, to subpoena documents from third parties, and to mandate the questioning of witnesses in support of a foreign insolvency procedure

Furthermore, when it comes to registered instruments or agreements, the NCLT lacks the authority to cancel. Only a Civil Court operating under the Indian Civil Procedure Code (CPC) may use these powers. It has been decided that the NCLT does not have all of the civil court's authority because it is not even a civil court for the purposes of the CPC. In some situations, it can be wiser for a foreign representative to use the inherent common law jurisdiction by going straight to a commercial court.

When a cross-border insolvency case is sought to be recognized but does not meet the requirements to begin an insolvency under the IBC, the Commercial Court's jurisdiction may also be kept. Only a financial and operational creditor may declare bankruptcy under the IBC.

Recognition under the IBC may be refused in situations where any other party started the cross-border insolvency procedure.

For the purposes of the cross-border bankruptcy rules under the IBC, relief in support of international restructuring plans may also not be considered a foreign insolvency process and will thus fall under the inherent common law jurisdiction.

Neither center of main interest nor any establishment is present in India:

In this situation, the Indian procedures are, at most, incidental to the primary proceedings, and the option to seek aid and assistance from ordinary civil courts for the international insolvency should be maintained.

Conclusion
There are several benefits to maintaining India's courts' innate common law jurisdiction.

First, the NCLT members designated to carry out limited judicial functions probably won't have the knowledge or experience necessary to handle complicated cross-border disputes, therefore they should submit to the jurisdiction of courts using the business division's authority. Second, years' worth of Indian court precedent´┐Żalbeit outside the context of bankruptcy´┐Żbased on the common law jurisdiction and the comity of courts concept would be superseded by the NCLT's exclusive jurisdiction. Additionally, years of rich common law doctrine on cross-border insolvency help would be rendered ineffective by this.

Model Law permits additional help under other statutes, but it restricts the authority to provide such relief to the NCLT, a forum lacking any inherent powers under common law. As such, the NCLT's authority is limited by the IBC.

Acknowledgement:
  • Dhananjay Kumar, 'The New Corporate Insolvency Regime in India: A Paradigm Shift' (2019) 38(3) American Bankruptcy Institute Journal.
  • Bahram Vakil, Suharsh Sinha and Saloni Thakkar, 'To Adjudicate or not Adjudicate: Conflict of Jurisdiction between NCLT and Civil Courts', in Anusandhan-Exploring New Perspectives on Insolvency (Insolvency Bankruptcy Board of India, 2022)
  • Section 375(3)(b), Companies Act 2013; Arunachala Ramaiya, Guide to the Companies Act (Vol 3) (18th edn)
  • (Lexis Nexis, 2015), 5,420; Insolvency Law Committee, Report of Insolvency Law Committee on Cross Border Insolvency (October 2018)

Law Article in India

Ask A Lawyers

You May Like

Legal Question & Answers



Lawyers in India - Search By City

Copyright Filing
Online Copyright Registration


LawArticles

How To File For Mutual Divorce In Delhi

Titile

How To File For Mutual Divorce In Delhi Mutual Consent Divorce is the Simplest Way to Obtain a D...

Increased Age For Girls Marriage

Titile

It is hoped that the Prohibition of Child Marriage (Amendment) Bill, 2021, which intends to inc...

Facade of Social Media

Titile

One may very easily get absorbed in the lives of others as one scrolls through a Facebook news ...

Section 482 CrPc - Quashing Of FIR: Guid...

Titile

The Inherent power under Section 482 in The Code Of Criminal Procedure, 1973 (37th Chapter of t...

The Uniform Civil Code (UCC) in India: A...

Titile

The Uniform Civil Code (UCC) is a concept that proposes the unification of personal laws across...

Role Of Artificial Intelligence In Legal...

Titile

Artificial intelligence (AI) is revolutionizing various sectors of the economy, and the legal i...

Lawyers Registration
Lawyers Membership - Get Clients Online


File caveat In Supreme Court Instantly