By: Asia Ifill
The rise of multinational corporations and international business deals demands that countries around the world refine their legal framework for adjudicating cross-border insolvency proceedings. Much of the jurisprudence examines how courts of different jurisdictions interact with each other to resolve insolvency proceedings when creditors and debtors reside in different countries. Specifically, the insolvency codes of some jurisdictions focus on facilitating cross-border cooperation while others seek to hinder it in favor of sovereign domestic codes. These approaches are paralleled by the broad theories of universalism and territorialism, which have been traditionally used to interpret the interactions of courts in insolvency proceedings around the world. Here, we will contrast the theories of territorialism and universalism in cross-border insolvency proceedings by comparing the common law and insolvency code of India with the UNCITRAL Model Laws, as incorporated by the United States in Chapter 15.
Territorialism dictates that “courts in each national jurisdiction seize the property physically within their control and distribute it according to local rules.” Historically, territorialism was the prevailing approach to cross border insolvency because it reinforced national sovereignty. In contrast, universalism avers that “all bankruptcy assets and claims should be resolved in the debtor’s home country under the laws of that country.” Universalism is predicated on an idealistic world where international comity binds foreign courts to enforce the judgments of domestic insolvency proceedings. Universalism facilitates efficiency by lowering transaction costs. Modified universalism balances the idealistic cooperation of universalism against the need for discretion of local courts to protect the procedures of the domestic court. These theories are useful paradigms for analysis, but no country perfectly fits into either category.
Although there is no substantive international insolvency framework, the United Nations Commission on International Trade Law (INCITRAL) issued the Model Laws on Cross-Border Insolvency (“the Model Laws”) in 1997 to remedy the procedural disconnects of cross-border insolvency proceedings. The Model Laws do not supplant domestic bankruptcy codes, but rather they provide a procedural framework to facilitate cooperation between the bankruptcy codes of different jurisdictions.
When the U.S. Congress passed the Bankruptcy Abuse Prevention and Consumer Act (“BAPCA”) in 2005, it incorporated the Model Laws into the Bankruptcy Code as Chapter 15. Chapter 15 treats cross-border insolvency as a single process where an ancillary proceeding in one country assists the primary proceeding in the court of another country. These function as either an inbound request, where a foreign proceeding request the support of U.S. Bankruptcy Court, or an outbound requests, where a U.S. Bankruptcy Court seeks assistance from a foreign court. Foreign creditors have the same rights as domestic creditors to initiate and participate in bankruptcy proceedings. In fact, Section 1513(b)(1) explicitly states that “foreign creditors . . . shall not be given lower priority . . . solely because the holder of such claim is a foreign creditor.”
A foreign representative can initiate a Chapter 15 request by filing a petition for recognition, which includes documents authenticating the foreign proceeding and representative. When granting recognition, a U.S. bankruptcy court must categorize the foreign proceeding: a main proceeding occurs when the proceeding is pending in the country where the debtor has its “center of main interest,” and a non-main proceeding occurs when the debtor has merely an establishment of “non-transitory comic activity.” The bankruptcy court will only deny recognition when the debtor’s interest in the foreign proceeding is too insignificant to satisfy either of the prior requirements, or if recognition would “manifestly contrary to the public policy” of the United States. This public policy exception derives from the text of the Model Laws and must be narrowly construed to mean things like conflicting with treaty obligations.
India has not incorporated the Model Laws into insolvency code. Instead, it continues to rely on its common law and its domestic insolvency code to address issues of cross-border insolvency. Under the Indian Code of Civil Procedure (CPC), Indian courts are only allowed to recognize and enforce foreign judgments. This recognition is not automatic because the judgment of a foreign court when it comes from a superior court of a ‘reciprocating territory.’ For example, in the case of Stanbic Bank Ghana, a Ghanian creditor requested the Indian court recognize an English Court order against the defaulting debtor in India. Despite admitting the application for recognition of the foreign judgment, the Indian tribunal held that it had “no jurisdiction to enforce the foreign decree.” Moreover, UNCITRAL allows foreign representatives to make decisions, but the provisions of the CPC do not allow for recognition of those decisions.
Nonetheless, India has taken steps froward regarding adjudication of insolvency proceedings. In 2016, India’s Insolvency and Bankruptcy Code (IBC) created a single legal framework for insolvency in India. This regime uses he Committee of Creditors to prioritize commercial wisdom and mitigate judicial intervention. The National Company Law Appellate Tribunal (NCLAT) is a tribunal created by the IBC that has limited jurisdiction. It is the functional equivalent of federal bankruptcy court in the United States. The IBC provides two provisions under which cross-border insolvency disputes can be addressed – Section 234(1) and Section 235(2). Under these sections, the Indian government must enter into a bilateral agreement with the government of the foreign country to resolve and enforce the provisions of the IBC. This bilateral agreement requires lengthy negotiations between the Indian and foreign government. The process also entails the foreign party file an application with the Indian court, and the CPC and common law shall apply to the recognized foreign proceeding.
Although the IBC failed to ratify Model Law, there is some evidence indicating that Indian courts understand the importance of comity and cooperation for cross-border insolvency proceedings. In the case of Jet Airways Limited v. State Bank of India & Anr., issues arose due to lack of cooperation in parallel insolvency proceedings in Netherlands and India. As a result, Dutch trustees were allowed to participate and cooperate in the proceeding to help create a debt repayment plan. This case marked the first cross-border insolvency proceeding under the IBC. Two years later the Indian Insolvency Law Committee published a report calling for the incorporation of the Model Laws into the IBC.
India’s approach to cross-border insolvency seems to exist in between territorialism and modified universalism. Refusal to adopt the Model Laws allows India to protect the sovereignty of its law and the discretion of its courts. In doing so, India can prioritize its citizens and protect small business from claims made by multinational corporations. However, the drawbacks of India’s approach are unavoidable. The unpredictability of judicial discretionary to recognize foreign judgments and the preferential protection of local creditors disincentives international investors from doing business in India. Moreover, the disjunction between India and foreign jurisdictions creates higher transaction costs because of a steeper learning curve for foreign parties and protracted proceedings. In contrast, Chapter 15 clearly reflects the ideals of modified universalism. The uniform approach of the Model Laws reassures foreign creditors of the predictability and low transaction costs of the Chapter 15 process. Moreover, the caveat of the public policy exception allows U.S. bankruptcy courts to narrowly protect essential domestic interests. The efficacy of the Chapter 15 exemplifies why to Model Laws will likely be incorporated into more bankruptcy codes around the world – including India.
