INTRODUCTION TO CROSS BORDER INSOLVENCY REGIME
The necessity for a strong cross-border bankruptcy framework has increased due to the growth of global trade and investment. Operations in multiple jurisdictions also give rise to the possibility of the effect of any business failure to transcend national borders. Thus, making the insolvency resolution process in need of cooperation amongst insolvency coordinators in multiple jurisdictions.
Section 234 and Section 235 are the primary provisions in relation to cross-border insolvency in the Insolvency and Bankruptcy Code 2016 (IBC). Section 234 provides with the procedure addressing treatment of cross-border insolvency cases in India. It allows the application of the Indian insolvency regime to assets or proceedings located outside India only if reciprocal arrangements are in place between India and other countries. This means that India will recognize foreign insolvency proceedings if there is a specific agreement or arrangement with that country. Section 235 provides that if a foreign court in a foreign insolvency proceeding requires action or evidence in relation to the assets of a Corporate Debtor situated in India, a letter of request can be issued to the appropriate authority in India. This facilitates cooperation between foreign courts and Indian authorities in cross-border insolvency matters. However, since India has not entered into any such reciprocal arrangements under IBC, the above-mentioned provisions remain ineffective. Resort is therefore made to other civil remedies available.
Section 13 of the Code of Civil Procedure 1908 (CPC) provides for conditions when a foreign judgment can be considered conclusive. However, the CPC fails to provide a procedure for the enforcement of a foreign judgement unless the same is a money decree passed by a reciprocal territory as required under Section 44A of the CPC. In such a scenario, both the statutory provisions under IBC and the codified laws under CPC lack the procedure under which cooperation can be sought with respect to cross border insolvency cases. This has called for litigators to take recourse to other common law remedies under the inherent power of the court to do justice.
IMPLICATION AND ANALYSIS OF THE UPHEALTH HOLDINGS, INC. VS. DR. SYED SABAHAT AZIM & ORS. [UPHEALTH HOLDINGS] JUDGEMENT
In an anti-arbitration suit, seeking stay over initiation of an arbitration proceeding until the continuation of moratorium under the US Bankruptcy Code, the Hon’ble Calcutta High Court ruled “the moratorium order of the U.S Bankruptcy Court was not applicable in India. U.S.A had not been declared as a reciprocating territory for the purpose of Section 44A Code of Civil Procedure.”
It is pertinent to note herein, that the in the Uphealth Holdings case, the Petitioner was neither seeking implementation of the moratorium order, nor did the petitioner suggest that the moratorium order was binding. In fact, the petitioner requested the proceedings under the US Bankruptcy Code to be recognized in India by invoking the inherent power of the court and to subsequently grant a worldwide stay over initiation of parallel proceeding under its obligation under the principle of Comity of Courts.
The doctrine of Comity of Courts requires that courts of one nation or jurisdiction should respect and recognize the decisions rendered by courts of other jurisdictions as long as the same are not in conflict with the domestic laws. While reaching its decision over the inapplicability of moratorium over the arbitration proceeding, the court reasoned that since the present case involved an anti-arbitration suit, which does not fall within the categories of insolvency, reorganization, restructuring etc. the principle could not be applied in this case. It stated that the purpose of the principle of comity was to facilitate main insolvency proceeding i.e., where the Corporate Debtor is primarily situated by ensuring that simultaneous insolvency proceedings are not initiated elsewhere. Therefore, the principle of comity was only applicable where the application is to prevent initiation or continuation of insolvency or related proceedings.
This brings us to question the effect of the recognition of the principle of comity of courts in India; Especially in view of the proposed adoption of the UNCITRAL Model Law 2014 (Model Law 2014).
THE PRINCIPLE OF COMITY OF COURT VERSUS THE UNCITRAL MODEL LAW 2014
Principle of Comity of Court stands as a well-recognized principle under Common Law. Under this Principle, out of respect for foreign sovereignty, courts should limit their jurisdiction and adopt application of foreign law in matters subjected to international law. The Principle has experienced a shift from mere courtesy to an obligation under domestic law. Presently, courts recognize application of foreign law based upon the balance of private and public interest that could be secured through it.
In the Galbraith v Grimshaw, (1910) AC 508 case it was held that “So far as the general principle is concerned it is quite consistent with the comity of nations that it should be a rule of international law that if the Court finds that there is already pending a process of universal distribution of a bankrupt’s effects it should not allow steps to be taken in its territory which would interfere with the process of universal distribution“
The effect of principle of comity in India would be the invocation of the inherent powers of civil courts to recognize foreign insolvency proceedings and prevent initiation of any separate local proceedings or render them subservient or secondary to the primary proceedings.
The Model Law 2014’s Universality Principle, which is recognized under Article 21 of the law, requires an automatic stay over the beginning or continuation of individual actions against the Corporate Debtor’s rights, assets, liabilities, or obligations with regard to its assets, as well as the transfer of the debtor’s assets, etc. after the primary insolvency proceedings have been recognized in the enacting State. It is pertinent to note that Article 29 of the Model Law 2014, provides for pre-eminence of the local proceeding over any foreign proceeding in case of initiation of multiple proceeding against the Corporate Debtor, in different jurisdictions.
One of the primary objectives of the Model Law 2014 is to promote coordination and cooperation for the resolution of cross border insolvency cases through asset protection and value maximization. However, since the Model Law 2014 does not prohibit initiation of new proceeding in the enacting state, it fails to effectively address the problem of initiation of multiple and concurrent proceedings. The objective of the Principle of Comity of Court is to provide for a single court from where the debtor is domiciled to oversee insolvency proceedings with the power to consider all assets irrespective of location. On the other hand, the Principle of Comity runs broader than mere recognition of foreign judgments and their subsequent enforcement. It demands superiority to be provided to the main proceedings as opposed to the local proceedings. However, the Model Law 2014 is not strict with the primacy of the main proceeding. This is evidenced under Article 21 of the Model Law 2014, wherein entrusting the assets of the Corporate Debtor to the foreign representative is a discretionary relief. Therefore, the Model Law 2014 is a combination of the Universalist along with the Territorial approach to cross border insolvency. The framework for cooperation and recognition under Model Law 2014 has elements of the Universalist approach to insolvency which mandates a singular court to oversee insolvency proceedings where the debtor is domiciled, considering all assets irrespective of their location. On the other hand, the provision for initiation of simultaneous insolvency proceeding in local jurisdictions showcases elements of the Territoriality approach which confines jurisdiction to assets within their borders and disallowing administrators from managing extraterritorial assets. . As opposed to this, the Principle of Comity refers to the superiority and primacy given to the main insolvency proceedings over any other local proceedings to the extent of preventing initation of multiple and simultaneous insolvency proceedings.
THE NEED TO DISTINGUISH THE TWO PRINCIPLES
In the Uphealth Holdings case the Hon’ble High Court has equated the Principle of Comity with that of Universalist Principle. However, as highlighted above the Universalist Principle, at least the form in which the same has been recognized under the Model Law 2014 needs to be distinguished from the Principle of Comity. The same is required since the Insolvency Law Committee Report 2018 proposed adoption of the Model Law 2014 in India. Therefore, it becomes pertinent to understand the differences between the two principles and decide upon whether the Model Law 2014 shall be adopted in its current form in absence of the Principle of Comity as recognized by courts in India or with necessary modifications.
The decision shall also depend upon the form in which the Model Law 2014 is adopted in the country. The adoption of the Model Law 2014 can take two forms. One, the model akin to the US model, wherein the Model Law 2014 has been incorporated under the Bankruptcy Code as the sole mechanism for resolving cases of cross border insolvency or the UK model wherein alternate means are available under the inherent powers of the civil courts to invoke the jurisdiction of the courts in the United Kingdom. Since, the adoption of the Model Law 2014 in the Indian Bankruptcy Code in its current form would prohibit the alternate gateway of invoking the inherent powers of the civil courts, the decision needs to be made promptly.
CONCLUSION
An absolute recognition of the principle of comity of courts as envisaged by the courts in India shall have significant implication over the operation of the Model Law 2014. The Model Law 2014 provides for the option of initiation of insolvency proceedings in the enacting state in order to ensure fair treatment to local creditors. However, the same has the effect of increasing cost and complexity in the resolution of the corporate debtor, especially in cases of group insolvency cases. Therefore, India must tread carefully in balancing the interest of the creditors as against that of the corporate debtor while adopting the Model Law 2014 or developing its own cross border insolvency regime.
This blog is written by Aditi Rathore, Final Year Student at the Institute of Law, Nirma University