Issue in Insolvency of Enterprise Groups


Introduction


In Part III of the UNCITRAL Legislative Insolvency Guide, an enterprise group has been loosely described as 'two or more enterprises interconnected by control or substantial ownership.' The interdependence of community members across jurisdictions, in particular financial interdependence, attracts provisions of the system of cross-border insolvency law. The major problem with company insolvency is either to give effect to the economic reality of organized business operating by separate entities, thus referring to the corporate organization as a whole, or to strictly stick to the corporate type and approach each member of the group separately.

In the case of transnational insolvency, this dilemma is intertwined with the indeterminacy of universalism or territorialism as the right solution to cross-border insolvency. The operation of transnational insolvency proceedings in respect of business groups will always require the properties of the various insolvency estates to continue to be used, realized, or disposed of in the course of the proceedings. The UNCITRAL Legislative Guide to Insolvency Law also sets out a list of concerns to be addressed when creating a system for cross-border cooperation. These issues include the identification of the position of the various assets and the jurisdiction to which they are subject; the determination of the law regulating the assets and the parties responsible for deciding how they can be used or disposed of; the degree to which the responsibility for those assets can be divided between or assigned to different parties in different States; how information on the affairs of various debtors in different jurisdictions can be collected and exchanged in order to ensure coordination and cooperation; and the sequence in which the proceedings should be performed.


The UNCITRAL Legislative Guide to Insolvency Law Part III recommends the identification of a coordinating center for the party. This coordinating center can be decided by reference to the position of the parent of the group or by authorizing the members of the group to file for insolvency in the jurisdiction in which proceedings have begun with respect to the insolvent parent of the group.

As regards the measures to be taken for the insolvency proceedings of the group firms, there are three types of procedural conduct followed in the domestic proceedings: joint application, substantial restructuring, and procedural cooperation. The joint application requires the filing of an application by all members of the community who meet the requirements for the initiation of insolvency proceedings.

Procedural coordination allows for the coordination of the insolvency proceedings of the different members of the community, such as the appointment of a common insolvency specialist. Substantial consolidation involves the assessment of all group entities as a single organization with the redistribution of their properties. UNCITRAL Working Group (WG) V has published a proposal for legislation to promote transnational community insolvency. The WG has defined and agreed to discuss areas of (a) coordination and cooperation of insolvency proceedings relating to an enterprise community; (b) the elements required for the creation and acceptance of a group insolvency solution involving multiple entities; (c) the use of 'synthetic proceedings' instead of beginning non-main proceedings; (d) the acceptance of a group insolvency solution on a more streamlined basis by reference to the appropriate protection of the rights of the creditors of the members of the group concerned.


Insolvency Resolution Regulation in India


As far as cross-border insolvency law in India is concerned, under the Companies Act, 1956, a court could order the liquidation of a non - registered company, which includes a foreign company. The Companies Act 2013 also allows for the winding-up of international companies. However, if an Indian corporation overseas is to be made redundant, there is no clear legislative procedure for the proceedings. It is centered on the reciprocal acceptance of international decrees as laid down in the Code of Civil Procedure, 1908. International creditors may also independently take action against the properties of a corporation based in a foreign jurisdiction. In the absence of such identification, it is difficult for the liquidator to collect information on the assets and to implement the disposal of international assets in liquidation.

Later on, the Justice V. Balakrishna Eradi Committee acknowledged this issue in 2000. It called for the immediate adoption of model legislation, in whole or in part, to ensure that India has an efficient cross-border insolvency regime. The N. L. Mitra Committee report then set out in detail the then-existing cross-border insolvency system and repeated the proposal for the implementation of the model legislation. The report of the Banking Law Reform Committee, on the basis of which the current Code was formulated, sidelined the problem of cross-border insolvency and claimed that the Committee would take up the matter at its 'next stage of deliberations.'

The Insolvency and Bankruptcy Code (IBC), 2016 ('The Code'), at current, includes two main provisions that can, if necessary, allow and assist the liquidator with regard to a company having assets under foreign jurisdiction. Section 234 requires the Government of the Union to enter into mutual arrangements with other countries to implement the provisions of the Code. Section 235 allows for a 'Letter of Request' from the Liquidator to take action on the assets of a corporation located in another country. There must, however, be a reciprocal agreement with that country. The Code shall extend to businesses and consumers. It allows for a time-limited insolvency resolution process. If defaults occur, creditors have control of the assets of the debtor and must decide things to address insolvency within a period of 180 days. In order to ensure a continuous settlement process, the Standard requires the debtors with protection from claims made by creditors during that period. The Code further consolidates the provisions of the existing legislative structure in order to form a shared platform for debtors and creditors of all groups to address the insolvency. The need for a separate regime for cross-border insolvency was felt by the Ministry of Corporate Affairs, which released a public notice inviting recommendations and feedback on the proposed chapter on cross-border insolvency that it aims to implement underneath the Code, primarily dependent on the 'UNCITRAL Model Law.'

Cross-border insolvency issues could be triggered by a number of circumstances, especially in the Indian context:

  • Where the creditors of an Indian debtor want to enforce their rights, Indian debtor's savings, which are located internationally;

  • Where the creditors of a foreign debtor wish to exercise their rights over the properties of that foreign debtor in India and

  • Where Indian creditors wish to enforce their rights over the international debtor's properties under foreign jurisdiction.

A foreign creditor may initiate or participate in any insolvency proceedings against an Indian debtor initiated under the Indian Code. The problems resulting from these situations are complex, and cross-border insolvency inevitably raises questions among creditors across jurisdictions as to how their individual lawsuits can be dealt with by launching insolvency proceedings against the debtor.

The management of financially distressed debtors, with assets across jurisdictions, has two main theoretical approaches and a third, more realistic model.

  1. There is a geographical approach that typically provides that each jurisdiction applies its own laws on properties found in that jurisdiction to the exemption of other jurisdictions.

  2. There is a Universalist solution with a single administrator implementing a single global asset framework across borders.

  3. There is a hybrid approach in which jurisdictions try to figure out the most appropriate center for conducting proceedings in collaboration with other jurisdictions in relation to properties that may be found there.

Although the Code enables the government to enter into agreements to enforce the UNCITRAL Model Law, negotiating up to 200 different bilateral treaties in a short period of time is simply not realistic and will further compound the problem, with the Indian courts needing to take into consideration the complexities of each treaty in any cross-border insolvency matter. Certainly, the easiest solution is for India to immediately sign and ratify the UNCITRAL Model Law but instead integrate it into the Code.


Conclusion


As far as business groups are concerned, as has already been pointed out, very few jurisdictions have laws regulating the insolvency of business groups and, to date, no major developments have been made in international law on this issue.

An issue that may impact India is still focused on whether to follow the MLCBI, 1997. Mainstream contemplation in international fora such as UNCITRAL is now centered on the insolvency resolution of business organizations, the acceptance and implementation of insolvency judgments, and the creation of an effective instrument for this reason. More than two decades ago since the MLCBI was introduced on 30 May 1997. After the IBC has been adopted, it is relevant for India to concentrate on the existing needs, along with the current phase of global law reform, while at the same time drafting/adopting the required legislation regulating insolvencies of the business community, in addition to moving in the direction of the adoption of a cross-border insolvency regime.


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