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Suspension Of IBC Proceeding And Bilateral Investments: How It Affects India?

Insolvency and Bankruptcy Code (Amendment) Ordinance, 2020 and The Insolvency and Bankruptcy Code (Second Amendment) Act, 2020 was passed by the government to suspend the IBC proceeding under Section 7, 9, 10 of the IBC filed on or after 25th March 2020 in light of the problems faced by the companies and various other sectors due to COVID-19 till 31st March 2021.

With this step, the government tried to support the companies adversely affected by the COVID- 19 but this brings antithetical results on the foreign investors that are parties to the Bilateral Investment Treaties (BIT�s) signed with India. FDI is a source of income and it helps in boosting the economy of any country. Foreign investors before investing in any country see the municipal law and insolvency law of the country.

The investors would only be interested to invest in the country where the country can assure the promotion and protection of their investments. The government should boost the confidence and the sentiments of the investors as this is a progressive step in a country�s overall economic development. But the government by suspending the IBC proceeding forsaken the interest of the foreign investors has violated the fair and equitable treatment clause of BIT�s by restricting the right of investors to initiate insolvency proceedings.

Bilateral Investment In India

Bilateral investment Treaties are the treaties between two countries aimed at protecting the investments made by the investors of both countries. BIT�s have been the major drivers of the FDI inflows in India. FDI is a major source of income in foreign currency and provides a major boost in an economy.

India has always been an attraction for foreign investment due to its diversified market and low wage rate. However, the protection of the rights of investors from arbitrary unilateral decisions in the country is an indispensable factor for influencing the decision of investors investing in a country.

There have been a plethora of cases in which the penalty and compensation have been imposed by the International dispute Settlement Tribunal against India. Like in White Industries Australia Ltd v. The Republic of India, it has been ordered by the International Dispute Settlement Tribunal to pay 4.10 Aus Dollar to White industries Australia Ltd under the Indo-Australia Bilateral Investment Treaty of 1999 for not fulfilling its obligation of providing an effecting means of ascertaining claims.

These piles of cases led to the review of BIT�s. The new Model of Bilateral Investment Treaty (BIT�s) was introduced in 2016 which after due analysis show that the new BIT is giving proper protection and security for the effective assertion of the right of foreign investors. This step attracted a lot of foreign investors to come and invest in India due to its

Suspension Of Ibc Proceeding & Bilateral Investment Treaty

A Bilateral Investment Treaty (BIT�s) is an agreement made for the purpose of promotion & protection of the foreign investors and their investment so that to promote and encourage cross border investments. As the country pushed into the shackles of Covid-19, the government has to suspend the proceedings under Section 7, 9 10 of the Insolvency and Bankruptcy Code to save the creditors which have considerably restricted the rights of foreign investors.

Due to the suspension of the proceedings, there has been a violation of the promises made by the Indian companies to the foreign investors before the suspension of the IBC proceedings as they are not able to initiate proceeding against India under BIT�S for the breach of fair and equitable treatment.

The purpose of introducing IBC code was introduced for the purpose of increasing foreign investment in India but by suspending it the government neglects the interest of the investors especially the foreign investor and discouraged future FDI�s in India. This step created a negative image of India in the credit market because if the investors will not be allowed to recover their debt in the host country then India�s reputation will be deteriorated in the global market and future investment will be discouraged.

Fair And Equitable Treatment

The government stands with great promises to the foreign investors by alluring them through the �Fair and Equitable Treatment� clause in the Bilateral Investment Treaties (BIT�s). India has been ranked 63rd out of 190 countries in the World Banks' Ease of Doing Business Index published in 2020 with respect to 142nd position in 2014. This was only possible due to the promises made to the foreign investors through the alluring BIT�s.

But now by suspending the proceeding under the IBC code, they have become insecure regarding their investments as the right to approach the court to initiate insolvency proceeding is being restricted. This is violating the Fair and Equitable treatment clause in the Bilateral Investment treaty with other countries.

There have been cases where it has been alleged by the investors that their rights are disrupted under this Fair and equitable treatment clause in the BIT of India. Recently in an arbitration dispute between India and Cairn Energy Pvt. Ltd., India lost the suit due to the violation of the Fair and equitable Treatment clause in the BIT�s between the United Kingdom and India.

The Cairn Energy Pvt. Ltd. approached the Permanent arbitration dispute redressal as India changed the tax laws in 2012 which is applicable from 1962 i.e. retrospectively. India has been asking for the tax from Cairn Energy Pvt. Ltd. retrospectively and due to which it was challenged in the Arbitration. Similarly is the case with the Vodafone Pvt. Ltd. where due to the BIT�s with Netherland, the above decision was challenged on the FET clause mentioned in the Bilateral Investment Treaty with Netherland. Both these cases are lost by India due to the breach of the FET Clause.

Further, it was also held in T�cnicas Medioambientales Tecmed, S.A. v. The United Mexican States that it is the duty of the state to adhere to the Fair and Equitable Treatment clause and to the expectations of the foreign investors as declared in Article II of the Agreement on the Reciprocal Promotion and Protection of Investments which they agreed at the time of making the investments.

A similar situation has now been arising with the suspension of the proceedings under IBC as it is restricting the foreign investors in asserting their rights. As we have discussed in the White industries v. the Republic of India, it was quoted that:
India had not provided effective means of asserting its claims and enforcing rights.
In counter-arguments, India argued that the suspension is only for a temporary period and will not last forever but the tribunal held that although the suspension is temporary but they cannot restrict the partner country investors under the fair and equitable treatment clause to initiate insolvency proceeding.

The Government, although, making good efforts to promote Foreign Direct Investments in India like Made in India initiative, Stand up India, Smart cities mission and many more but when it comes to the new IBC ordinance 2020, the government failed to attract foreign investors and bringing insecurities among them.

The important factor for an investor to invest in a country is their insolvency law. When the main motive of this law is itself suspended then how the laws of India would be able to attract FDI in India. Before taking the decision of suspending the IBC proceeding, the government should have considered their duties under BIT�s as it is already been seen that ignoring those duties will lead to defeat in the various case in International tribunals Like we see in dispute with Cairn Energy Pvt. Ltd., Vodafone and White Industries.

There is an immediate need to revisit the decision taken a long back and fulfil its duties under BIT�s so as to minimize the loss that already happened to India. By amending the Insolvency and Bankruptcy code, the government has contradicted its own point of making India a 5 trillion dollar economy by means of alluring more and more FDI in India. Before the suspension of IBC proceedings, India was on its way to achieving a good reputation in the international market as it was safeguarding the rights of investors but post-IBC ordinance, it has started demotivating the investors and taking a decision that is pernicious to them.

Written By:
  1. Aayush Akar, National Law University Odisha
  2. Apoorv Bansal, Bharati Vidyapeeth Deemed University Pune

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