Meaning and Adoption

The UNCITRAL (The United Nations Commission on International Trade Law hereinafter referred as UNCITRAL) Model Law issued by the secretariat of UNCITRAL on 30 May 1997 to assist states in relation to the regulation of corporate insolvency and financial distress involving companies which have assets or creditors in more than one state.

Definition

The Model Law defines a foreign proceeding as “a collective judicial or administrative proceeding in a foreign State, including an interim proceeding, pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation”. Accordingly, a number of regimes relating to the enforcement of security interests (such as receivership and administrative receivership) are not caught. Similarly, a number of debtor-in-possession rehabilitation and reorganizational processes which do not require the intervention of the courts are similarly not caught.

Purpose of UNCITRAL Model Law

The preamble to the Model Law provides:

The purpose of this Law is to provide effective mechanisms for dealing with cases of cross-border insolvency so as to promote the objectives of:

  • Cooperation between the courts and other competent authorities of this State and foreign States involved in cases of cross-border insolvency;
  • Greater legal certainty for trade and investment;
  • Fair and efficient administration of cross-border insolvencies that protects the interests of all creditors and other interested persons, including the debtor;
  • Protection and maximization of the value of the debtor’s assets; and
  • Facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.

The Model Law is designed to provide a model framework to encourage cooperation and coordination between jurisdictions. Despite earlier proposals to do so, it does not attempt to unify substantive insolvency laws, and the Model Law respects the differences among the substantive and procedural laws of states.

The Model Law defines a cross-border insolvency is one where the insolvent debtor has assets in more than one state, or where some of the creditors of the debtor are not from the state where the insolvency proceeding is taking place.

UNCITRAL published the Model Law in response to concerns that the number of cross-border insolvency cases had increased significantly during the 1990s, but national and international legal regimes equipped to address the issues raised by those cases has not evolved at a similar pace. The absence of effective cross-border insolvency regimes was thought to have resulted in inadequate and uncoordinated approaches to cross-border insolvency which were both unpredictable and time-consuming in their application, lacking both transparency and the tools necessary to address the disparities between different national laws. As a result, it had become difficult to protect the residual value of the assets of financially troubled businesses, and impeded corporate rescue culture for cross-border entities.

Objective of UNCITRAL Model Law

The basic object behind this model law is to ensure that the interest of banks and person involved including the creditor are protected in regard to cross border insolvency matters. By formulating these provisions there will be substantial growth in mergers and acquisitions which would thereby enhance the economy of the country.

Methodology of UNCITRAL Model Law

Rather than prescribing a single set of rules for all states to adopt, the Model Law focuses on trying to:

  • Identify the most relevant jurisdiction in relation to a cross-border insolvency (called the “foreign main proceeding”);
  • Ensure that insolvency officials from that jurisdiction are recognised in other states; and
  • Ensure that other states provide the necessary cooperation to facilitate the insolvency process in the principal jurisdiction.

In order to identify the principal jurisdiction, the Model Law utilizes the “Centre of Main Interest” (or COMI) concept the working assumption is that any international business will nonetheless have a Centre of Main Interest, where the principal insolvency should take place. As far as possible the assets and claims should be channeled back to that main jurisdiction, and all other jurisdictions should seek to limit the exercise of their insolvency regimes to assisting with the liquidation of assets in their countries, the staying of claims, the redirecting of claims back to the principal jurisdiction. The basis of the Model Law is sometimes referred to as modified universalism.

The Model Law recognizes the risk that certain provisions of one state’s insolvency laws may be repugnant to another state, and creates a public policy exception in relation to foreign laws, although the guidance notes express the hope that this would be utilized rarely in commercial insolvency matters.

The need of this model law aroused due to the issue that every nation has its own specific manner of managing the issues of Cross Border Insolvency and bankruptcy laws which were too varied. A few nations had made arrangements with each other but still there was no uniform way to deal with the Cross Border Insolvency issues. For dealing such issue, UNCITRAL (The United Nations Commission on International Trade Law) received the content of Model Law on Cross Border Insolvency issues on 30 May 1997 and thereby was passed by United Nations (UN) United Nation General Assembly on 15 December 1997.

To provide greater flexibility, it was passed as a model law and not as a convention so that the nations can make necessary changes in their domestic laws regarding cross-border insolvency as per the model. Till now 44 states have adopted this model law. It focuses on authorizing, encouraging cooperation and coordination between jurisdictions, rather than attempting the unification of substantive insolvency law, and respects the differences among national procedural laws.

In India the existing provisions for cross-border insolvency i.e. Section 234 & 235 of IBC (Insolvency and bankruptcy code 2016 ) are insufficient and time taking, for which the government is adopting this model law as this will strengthen the framework of insolvency resolution. In context of bankruptcy laws it was recommended in Justice Eradi Committee Report of 2000 for implementation of model law by amending Part VII of Companies Act, 1956, Recognition, co-ordination and participation of creditors in foreign proceedings. Also in 2001, the N.L. Mitra Committee Report also provided that the cross border insolvency laws of India is outdated and there was a need of Bankruptcy Code.

In order to overcome the drawbacks of current law which are stated in the previous chapter, this Model Law was adopted which is applicable in situation when;

  • A Foreign court or a foreign insolvency professional needs support in State.
  • Both foreign and domestic proceedings are simultaneously in progress.
  • Insolvency proceedings need to be commenced in State by foreign creditors and other interested parties.
  • In a foreign State assistance is required relating to domestic proceedings.

This Model Law will;

  • Provide creditor right to access assistance to the court and to the representatives of foreign insolvency proceedings.
  • Give simple procedure for recognition of foreign proceeding and appointment of foreign representative.
  • Provide interim relief and automatic stay at court discretion.
  • Coordination of proceedings and cooperation among courts of States where assets of debtor are located.

Benefits of Enacting UNCITRAL Model Law

With the enactment of this model law, India will become an attractive destination for foreign creditors for investment. The three main economic benefit achieved by Model Law are:

  1. reduction in time for exchanging necessary information between countries
  2. increase in credit recovery efficiency and
  3. cooperation and assistance helps in preserving the company’s assets from dissipating, resulting in successful reorganization.
  • This law is much clearer than the IBC in terms of remedy and procedure followed for foreign entities.
  • This law is more flexible as a State can make changes in the model law as per the conditions and the local insolvency laws. Ex. US law provide remedies only after foreign proceedings are recognized.
  • A country could refuse validity of the foreign proceedings if such is against the public policy of the country.
  • Through this Model Law coordination between courts and insolvency professionals will exist in domestic as well as foreign jurisdiction.
  • The Model Law lays down circumstances when the foreign proceedings are to be recognized and how they should be recognized. The recognition is granted based on where the debtor has its “centre of main interests” (hereafter referred to as “COMI”) which is in turn dependent on its place of establishment. If such a debtor has COMI in the country where such proceedings are going on or if not as foreign non-main proceedings then, such proceedings will be recognized as foreign main proceedings.
  • The relief that is provided after recognizing foreign-main proceedings is in form of granting stay on local proceedings by creditors against debtor undergoing insolvency. This suggests that moratorium would be imposed on assets of debtor and administration of debtor’s assets in that State is to be entrusted to foreign representative.

Analysis – Public Notice on Cross-Border Insolvency

“The application for the recognition of foreign proceedings in India will have to be made to the NCLT (National Company Law Tribunal) by the foreign representatives pursuant to the Model Law as the tribunal is not compelled to automatically recognize the concurrent proceedings.”

The Insolvency Law Committee Report on March 2018 recommended to have an all-included mechanism for cross border insolvency matters as the current provisions i.e. Section 234 & 235 of IBC (Insolvency and bankruptcy code 2016) do not provide a comprehensive framework so a separate chapter was required to be inserted in the Code which will be based on UNCITRAL (The United Nations Commission on International Trade Law) Model Law on Cross Border insolvency.

For this, a public notice was issued by Ministry of Corporate Affairs (hereafter referred to as MoCA) on 20th June 2018. As per this notice Central Government after entering into agreement with other countries, may bring overseas asset of domestic corporate debtor into consideration of insolvency resolution in India. While initially cross border insolvency framework will apply only to corporate debtors, it can be extended to cases of personal insolvency resolution as well.

The basic provisions provided in the public notice are:

  • Section 1(1) of this public notice covers:
    • Assistance in India by foreign court or representative for foreign proceedings and assistance by Indian representative from foreign courts.
    • Dealing with the situations where multiple proceedings are going on against a corporate debtor in different jurisdictions.
  • The foreign main proceedings will commence at the COMI (centre of main interests). Section 14 of public notice explains COMI (centre of main interests) which is the state in which registered office of the corporate debtor lies.
  • There was no such law apart from Section 13 of Civil Procedure Code which talks about recognition of foreign judgment in India. The Chapter III of the public notice provides for such recognition by Adjudicating Authority. Also the Chapter IV provides for cooperation and communications between Adjudicating Authority and foreign courts.
  • This public notice empowers foreign representatives under Section 7, 9 & 10 of the Code to commence or participate in the proceedings against corporate debtor.
  • The effects of the recognition of foreign main proceedings and the relief granted are specified under section 17 and 18 of the public notice respectively.

Inclusion of cross-border insolvency framework will further enhance ease of doing business, provide a mechanism of cooperation between India and other countries in the area of insolvency resolution, and protect creditors in the global scenario.

But still there are certain deficiencies in the public notice too;

  • By including the provision of foreign creditor right to participate in Indian proceedings, duplication will arise as there is already an existing structure for foreign creditors.
  • The word ‘State’ is used a lot in the public notice but is nowhere defined in it.
  • Section 2(c) defines establishment which means the place where corporate debtor carries out non-transitory economic activity three months before commencement of insolvency proceedings in COMI of debtor. But it fails to include all other places where the corporate debtor carries on principle economic activity.
  • Section 12(1) provides that a foreign representative may apply for recognition of the foreign proceedings to the Adjudicating Authority but does not specify what recognition of the foreign proceedings mean.
  • There is no such provision in the public notice relating to prohibition/stay of foreign non-main proceedings.
  • The public notice does not impart individual bankruptcies which thereby restrict cross-border insolvencies scope to corporate debtors.

CONCLUSION

The UNCITRAL (The United Nations Commission on International Trade Law) has also given aspects of cross border insolvency and has given procedural framework in regards to insolvency for efficiency in the administration. As when we look into the aspect of insolvency it requires many complex issues in several areas of law in different jurisdictions.

So keeping in view the Model Law, MoCA (Ministry of Corporate Affairs) has issued a public notice on cross border insolvency which would be added in the IBC itself. With the incorporation of this public notice in the Code, a uniform mechanism will be followed by various countries which also enhance cooperation among them. But there are various flaws in the public notice like the definitions of certain terms are not provided or are ambiguous, also there are flaws in certain provisions which should be taken into consideration before enacting such a public notice as a chapter in the Code. This public notice once incorporated into the IBC (Insolvency and bankruptcy code 2016) will resolve the problem of the cumbersome process provided in Section 234 and 235 of the IBC (Insolvency and bankruptcy code 2016) which has been followed till now and thereby will provide faster and proper remedy to the foreign creditors in cross border insolvency matters if the deficiencies provided are resolved too.

This is Article is Written by Mr. Keval Tachak, Final Year Student of KES College of Law, Mumbai University.

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