WHAT IS CROSS-BORDER INSOLVENCY
Cross-border insolvency is a term used to describe circumstances in which an insolvent debtor has assets and/or creditors in more than one country.
Many businesses have interests stretching beyond their home jurisdictions. Firms are increasingly organizing their activities on a global scale, forming production chains including inputs that cross national boundaries. With the advent of sophisticated communications and information technology cross-border trade is no longer the preserve only of large multi-national corporations.
These factors have led to an increasing number of situations where Australian businesses are involved in matters where cross-border insolvency issues arise. This trend is not likely to change.
RISKS OF CROSS-BORDER INSOLVENCY
One of the risks that all businesses face is that of a trading partner’s failure. Most domestic laws provide for the handling of an insolvent enterprise. Typically, domestic laws will prescribe procedures for:
- Identifying and locating the debtors’ assets;
- Calling in’ the assets and converting them into a monetary form;
- Identifying and reversing any voidable or preference transactions which occurred prior to the administration;
- Identifying creditors and the extent of their claims, including determining the appropriate priority order in which claims should be paid; and
- Making distributions to creditors in accordance with the appropriate priority.
CROSS-BORDER INSOLVENCY AND ITS ADDITIONAL COMPLEXITIES
- The extent to which an insolvency administrator may obtain access to assets held in a foreign country;
- The priority of payments: whether local creditors may have access to local assets before funds go to the foreign administration, or whether they are to stand in line with all the foreign creditors;
- Recognition of the claims of local creditors in a foreign administration;
- Whether local priority rules (such as employee claims) receive similar treatment under a foreign administration;
- Recognition and enforcement of local securities over local assets, where a foreign administrator is appointed; and
- Application of transaction avoidance provisions.
The additional complexities surrounding cross-border insolvencies necessarily result in uncertainty, risk and ultimately cost to businesses. It would be of overall benefit to businesses in all countries to have adequate mechanisms in place to deal efficiently and effectively with cross-border insolvencies. Given Australia’s place in the world economy, it is especially important to adopt policies that promote efficiency, reduce legal uncertainties and transaction costs and enhance international trading efficiency.
APPROACHES TO CROSS-BORDER INSOLVENCY
There are two broad approaches that countries have adopted in designing laws and mechanisms to guide cross-border insolvency administrations: the universal approach and the territorial approach.
The universal approach assumes that one insolvency proceeding will be universally recognized by the jurisdictions in which the entity has assets or carries on business. All the assets of the insolvent company will be administered by the court or the administrator in, and possibly also according to, the law of the place of incorporation. All creditors seeking to claim in the winding up submit claims to that court or administrator. When assets of the insolvent company are located in foreign countries, the court has the power to apply for assistance from the courts of those countries.
The territorial approach assumes that each country will have exclusive jurisdiction over the insolvency of a particular debtor and that separate proceedings for each country under that countries’ laws will be undertaken. No recognition is given to proceedings in course or completed in other jurisdictions.
A major disadvantage of the territorial approach to cross-border insolvency is that separate insolvency proceedings may be undertaken in each jurisdiction where the debtor’s assets are located with the cost of such proceedings being borne ultimately by creditors. The cost and time involved in numerous proceedings encourages inefficiencies and duplication. Debtors and creditors can take advantage of time delays and differing laws concerning voidable transactions and preferred creditors to minimize any loss resulting from the debtor’s inability to pay all debts.
There are several types of legal mechanisms that have been used to address cross-border matters, which vary in their degree of formality. They include:
- Common law doctrine,
- Judicial cooperation and inter-governmental agreements.
- Often more than one of the above mechanisms is combined.
RECENT DEVELOPMENT IN CROSS BORDER INSOLVENCY
On July 25, 2019, the Judicial Insolvency Network announced its adoption of the Modalities of Court-to-Court Communication (the “Modalities”), which “apply to direct communications (written or oral) between courts in specific cases of cross-border proceedings relating to insolvency or adjustment of debt opened in more than one jurisdiction.”
The Modalities are intended to facilitate implementation of the Guidelines for Communication and Cooperation Between Courts in Cross-Border Insolvency Matters, which since 2017 have been adopted by courts in several countries, including the Supreme Court of Singapore, the U.S. (United States) Bankruptcy Courts for the District of Delaware, the Southern District of New York and the Southern District of Florida, and courts in the United Kingdom, Australia, The Netherlands, South Korea, Canada, Bermuda, and the Eastern Caribbean. The U.S. (United States) Bankruptcy Court for the District of Delaware adopted the Modalities on an interim basis on July 25, 2019. It is anticipated that other courts will do so as well in the near term.
Mark G. Douglas (Jones Day) summarized key features of the Modalities and other developments since the Guidelines for Communication and Cooperation between Courts in Cross-Border Insolvency Matters as developed and implemented by JIN (the judicial Insolvency Network).
CROSS-BORDER INSOLVENCY AND INDIA
At present, cross border insolvency is regulated by Section 234 and 235 of Insolvency and bankruptcy code 2016. Section 234 of the code states that the Central Government can make any agreements with the foreign country to start with the insolvency proceedings. Central Government will do so with those countries with which there are reciprocal arrangements.
While further Section 235 of the said code states that the letter of request can be made to the authority of foreign nation with which such reciprocal arrangements have been made under Section 234. This application should be addressed to the relevant authority that is an adjudicating body in a particular country to provide for evidence in relation to assets of the debtor in country. This application can only be sent to the countries having reciprocal arrangements with India. But entering in the reciprocal arrangements with different countries is itself a very cumbersome process as this method would intake a lot of time and the objective of the code i.e. timely recovery of debts would not achieve. Also, when the assets are located in different countries it would make the procedure of insolvency much more complicated through reciprocal agreements.
While further looking into the code, making reciprocal arrangements doesn’t state the procedure which has to be established in order to conduct the insolvency procedure. As there is no proper procedure for the insolvency procedure to be conducted then that makes the law incomplete. By only giving the right to make reciprocal arrangements with countries through the act doesn’t solve the problem of cross border insolvency.
There should be a proper procedure for the same. While on the principle of transparency and justice to all, the insolvency procedure conducted should be equivalent for all the countries entering into the reciprocal arrangements. But here there is no such procedure established by the Legislature of India.
When there is a situation that certain countries have entered into reciprocal arrangements and if for every nation there is a different process then it wouldn’t work out properly as there would be a point of conflict if in one insolvency proceedings there are creditors from different countries or assets of the company in different countries. As reciprocal agreements doesn’t have a feature of coordinating the procedure of insolvency which is in concerned with multiple jurisdiction.
So in order to have proper structure and justice to all the investors investing from different nations, there should be proper procedure of insolvency which would be governed with all the foreign nations. When we further look into the cross border insolvency it has three dimensions mentioned above in the article.
When we compare those three dimensions with the IBC out of which the code has adopted only the first dimension as the definition of persons in code also includes the “persons not resident in India”.4 Here in this definition, the new code permits the creditors of the foreign nation to be a part of the insolvency proceeding or to commence the procedure as the foreign creditors having the same rights which the Indian resident possess in relation to the distribution of assets when the company is liquidated by being insolvent. While the second and the third dimensions are not dealt by the code.
As the code lacks any mechanism for seeking proper procedure of insolvency with respect to having different jurisdiction where in Indian courts have to seek assistance of foreign courts in case of insolvency proceedings. Though there is implication of bilateral arrangements between nations under the code but it doesn’t show any proper implementation procedure for the insolvency.
While when the situation arises where India doesn’t have a bilateral agreement with that particular country and Indian debtor’s assets are in that country, then there will be no assistance on remedies given to insolvency professional in order to have evidence on such assets.
As we look into the aspect of cross border insolvency, it requires a proper legal framework. This necessity has been recognized by the legislature as without proper legal provisions there would be a threat for the foreign investors to invest in India. While when we look at the current situation in India, India is inviting many foreign nations to invest in the country and to even set up their manufacturing units in the country. So in order to save their interest and motivate them to invest in the country the formulation of the law is of great importance.
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