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This post, the selected entry of the RFMLR-IBBI Blog Series Competition, 2021, is authored by Kaustubh Kumar, a second-year student pursuing B.A. LL.B (Hons.) at National University of Study and Research in Law, Ranchi.
1. INITIATION PHASE OF THE CROSS-BORDER INSOLVENCY IN INDIA
In Swiss Ribbons Pvt. Ltd. & Anr. v. Union of India & Ors., while taking into account the working of the Insolvency and Bankruptcy Code, 2016 (“the Code”), the Hon’ble Apex Court stated that the Code has remained effective in achieving its objective, i.e., to streamline and ease out the insolvency and bankruptcy regime in India which past legislations failed to perform. The Hon’ble Court also noted that the credit flow given by banks and financial institutions also jumped up along with the non-bank, domestic, and foreign commercial sector after the enactment of the Code. However, though the Code has remained largely successful, a few gaps keep on surfacing out of the same.
One such gap is to deal with the cases of Cross-border Insolvency in India. Through its pronouncements, the National Company Law Appellate Tribunal ("NCLAT") has played a vital role in filling most of the gaps present within the legislation. In one of its kind case of Jet Airways, two parallel proceedings were started in the Netherlands under the Dutch Bankruptcy Act and in India under the Code. The Dutch Administrator approached Hon’ble National Company Law Tribunal ("NCLT"), Mumbai bench requesting the recognition of insolvency proceedings in the Netherlands and to withhold the Indian insolvency proceedings. However, the NCLT rejected the prayer citing that there is no concrete cross-borders insolvency regime in India, and declared the proceedings of the Netherlands null and void. Aggrieved by the same, the Dutch Administrator reached Hon’ble NCLAT where NCLAT set aside the NCLT’s order on the conditions that the Dutch counterparts shall not alienate the offshore assets of the Jet Airways, cooperate with the Indian parties in finalization of resolution plan, and participate in the meetings of the Committee of Creditors only to the extent to prevent any overlap between both the proceedings.
Though through this judgement the Hon’ble NCLAT gave a push to evolving cross-border insolvency jurisprudence in India, however, it is not considered suitable for any quasi-judicial and/or judicial body to play a proactive role time and again and address the voids present in any legislation as it is bound to abide by the basic tenets of the Constitution of India (i.e., separation of powers). Time and again it is stated that the legislature is in the best position to cater to the needs of the citizens and formulate the policy that it deems fit in the best interest of the nation.
As a result, considering the ineffective sections (i.e., Sections 234 and 235) of the Code that merely provide the Central Government to enter into bilateral agreements for the recognition of cross-border insolvency and in the backdrop of the NCLAT’s ruling in Jet Airways case, the Hon’ble Ministry of Corporate Affairs came up with ‘Draft Part Z’ and created a web link for comments, the deadline being December 15, 2021. The article is an endeavour to first define the ‘Centre of Main Interest’ ("COMI") qua cross-border insolvency and then analyse the challenges concerning COMI put forth by the European Union (EU) states’ insolvency laws. The article aims to provide a holistic viewpoint over the issue so that the challenges faced by the EU concerning COMI shall not be faced by the Indian cross-border insolvency regime.
2. CENTRE OF MAIN INTERESTS
In October 2018, the Insolvency Law Committee recommended the Government of India to adopt the UNICTRAL Model Law on Cross-Border Insolvency with a few modifications. The Model Law with slight modifications was attached as the Draft Part Z in Annexure-II of the report. Further, in January 2020, the Ministry of Corporate Affairs seeking recommendations on subordinate legislation for Draft Part Z constituted a cross-border insolvency rules/regulations committee ("CBIRC") that submitted its report to the government in June 2020 with a few modifications in the Draft Part Z. After the changes, the Draft Part Z defines Centre of Main Interest as the place where the office of the corporate debtor is situated. Clause 14 further provides that the same shall be presumed only when after the commencement of the insolvency proceedings, the office of the corporate debtor has not been moved to any other state within three months.
The COMI is not defined in the US Bankruptcy Code; however, there exists a presumption that the corporate debtor’s office or the place of residence in the cases of individuals shall be the COMI. The COMI acts as a linchpin in further giving effect to the Foreign Main Proceedings and Foreign Non-main Proceedings.
The US Bankruptcy Code under Chapter 15, as well as the Clauses 2(e) and 2(f) of the Draft Part Z, define ‘foreign main proceedings’ as the foreign proceedings taking place in a state where the [corporate] debtor has its COMI while the foreign non-main proceedings are defined as the foreign proceedings that do not satisfy the definition of foreign main proceedings and take place in a state where the [corporate] debtor has an establishment. Moreover, the European Union Insolvency Regulations also nowhere defines COMI and aims to work on some ‘presumptions.’ These presumptions have seen the light of the day through an explanatory report – Virgos-Schmit Report – prepared in relation to European Union Insolvency Regulations and are even acknowledged by the UNCITRAL Model Law on Cross-Border Insolvency (1997) as it also fails to define COMI.
COMI is a quintessential feature of cross-border insolvency as it determines where the main insolvency procedure against the corporate debtor shall be initiated and what laws the corporate debtor shall be subjected to.
3. EU REGULATIONS qua CENTRE OF MAIN INTERESTS
To deal with the issues pertaining to cross-border corporate insolvency, the EU member states came up with the Insolvency Regulation (Council Regulation (EC) 1346/2000) way back in 2000 that did not define COMI and gave effect to the presumption that if no contradiction exists, the COMI would be the place of corporate debtor’s registered office or individual’s residence, in a similar manner as with the US Bankruptcy Code. Moreover, the EU Regulations under Recital 13 also require that the COMI of the corporate debtor must be ascertained by third parties, i.e., creditors. This vague concept backed with a lack of concrete definition made the determination of COMI a herculean task for the European Courts to interpret.
The Court of Justice of the European Union in the case of Eurofood IFSC Ltd. was forced to clarify the COMI with regards to the 2000 Regulations where it opted the view that the place where the office of the corporate debtor is situated shall not be ineludibly deduced as COMI, but the day-to-day interests with ascertainment of third parties (creditors) have to be considered as well. Answering the argument that creditors might have a differing point of view while ascertaining COMI of a debtor, the Hon’ble Court opined that the opinion of the creditor with a highest worth claim shall be considered in that scenario.
The viewpoint of the Hon’ble Court that the opinion of the creditor with a highest worth claim shall be given prominence in the case of conflict was a major blow to other creditors as it created an arbitrary class among the same set of people contravening the principles of natural justice.
Another major issue is the determination of the COMI where a corporate debtor is a multinational company, communicating and performing transactions through digital networks or getting run by a group of companies. Such a situation is likely to render the clause – ascertainment by the third parties – problematic. For instance, the case of NIKI Luftfahrt GmbH. NIKI, established in Austria under Austrian law, was a subsidiary company of ‘Air Berlin’, a company incorporated in Germany under German law. The question posed before the insolvency court (Insolvenzgericht) in Berlin Charlottenburg was, “which member state shall have the jurisdiction to open main insolvency proceedings against NIKI?” The case demonstrated a huge controversy in the COMI rules as the place where the debtor conducts the administration of its interests regularly was Germany while the place ascertainable by third parties was Austria. The Hon’ble Court considering the observations of the Court of Justice of the European Union in the cases Eurofood (C-341/04) and Interedil (C-396/09), buttressed the argument that it is possible to rebut the presumption that the corporate debtor’s registered office would be the COMI. The court concluded Germany as the COMI of NIKI. However, the court later allowed a grant leave to appeal to an Austrian creditor in which the decision was reversed by the Regional Court of Berlin observing that at the first instance the court was wrong to assume jurisdiction and the presumption of the corporate debtor’s office was not rebutted by the facts of the case. Thus, the court directed the opening of main insolvency proceedings in Austria.
The observations, arguments, analysis, and conclusions of both the Hon’ble Lower Court and the Regional Court are of a perfectly balanced nature in the case of NIKI that can be further argued from either side to lay stress on which COMI is to be preferred in the future and establish it as a settled matter of law.
Apart from this, COMI migration is debated as another major concern. COMI migration can be succinctly described as the shifting of the corporate debtor’s centre of main interest from one region to another or one country to another where the insolvency laws are more favourable to him. Various countries consider COMI migration a serious abuse of the law, however, it can be merely termed as an unethical act as if any company is facing financial difficulties and it changes its COMI from Germany, which has stringent insolvency laws, to the UK, where insolvency laws are flexible and corporate debtor favouring, there’s nothing in this that can be termed as abuse of law. Furthermore, even after the 2015 amendment in the EU Regulations and introduction of Recast Regulation, the scenario concerning COMI has hardly seen any change in the European Union.
4. CONCLUSION
The Committee which drafted Draft Part Z should be hailed as at the very first instance in Clause 14, it endeavoured to provide a concrete definition of COMI, thereby chalking out the concerns posed by a vague concept backed with an undefined regulation based on mere presumptions. However, the definition of COMI must be more refined or concretized in such a manner that a mere literal interpretation of the clause makes the intention of the Hon’ble Parliament clear. The Draft Part should explicitly mention which office (i.e., registered office or corporate office) shall be taken into consideration while determining COMI or even if it mentions it as the onus of the Hon’ble Tribunals/Courts to determine on a case-to-case basis that which office is to be considered for COMI. In that scenario, at least it shall lay down a few specifications restricting the courts to the interpretation of only those specifications while determining the same. Moreover, the Draft Part also states that the Adjudicating Authority mandatorily assess the ascertainment [of corporate debtor’s office] by third parties as a condition to determine the COMI of the corporate debtor, which is also not good for the Indian Cross-Border Insolvency regime at an initial phase as the more we leave it for the interpretations of learned tribunals/courts, the more diverse challenges we would encounter.
Considering the case of COMI migration, Clause 14 has explicitly mentioned the time limit of three months before the commencement of insolvency proceedings for the presumption of COMI at the place where the corporate debtor has his registered office under the sub-clause 2. However, various committee reports of the states that consider COMI migration as a serious abuse of law have suggested that at least six months are necessary as a minimum period of the new location of the COMI. Thus, the same should also be taken care of to create this upcoming regulation more effective. Further, although the Draft Part Z is hailed time and again, after the implementation of the Draft Part Z, the Central Government has to play a proactive role as it played during and after the enactment of the Insolvency and Bankruptcy regime by constituting an expert committee keenly monitoring the working of the Code.