In the era of globalization, domestic economies have integrated into the international or global economic system. In this context, the significance of cross-border trade experiences a significant surge, fundamentally reshaping the landscape of business. The expansion of transnational trade, a consequence of globalization, results in corporations operating in various jurisdictions worldwide. When a global investor invests in an international corporation, adhering to their domestic laws that govern the rights of creditors and debtors, a scenario may arise where the business fails to meet its debt obligations, leading to insolvency.
Such insolvency events can have far-reaching consequences across borders, creating discrepancies between domestic laws related to liquidation and insolvency. In the event of insolvency, both domestic and foreign investors aim to safeguard the interests and rights of their creditors. It is during these circumstances that the significance of cross-border insolvency laws becomes apparent.
As mentioned by Dr. Rajput in one of his publication that ‘such insolvency law has been termed as a type of meta-law that… swoops in and trumps baseline legal relationships in unusual circumstance of general default.’
The intricacies of cross-border insolvencies present intricate challenges not only for debtors and creditors but also for the jurisdictions implicated. Policymakers express eagerness for its implementation, professionals eagerly anticipate it, foreign investors are in anticipation, and both foreign and domestic resolution experts aspire for its prompt introduction. Indian businesses, with a global presence, have been urging for its implementation, especially considering the interconnectedness in financial markets.
A conjunctive reading of section 234 and 235 of the Insolvency and Bankruptcy Code 2016, portrays a unified framework for addressing the cross border insolvency in India. It doesn’t elaborate on the possibilities which might arise in case of cross border insolvency. However, the ambit of these provisions has been a point of contention while factoring into the applicability of Bilateral Investment Treaties (BITs) as against Section 238, (which is a non obstante clause of the Code), wherein the verbiage of the same furnishes a conflicting procedural pentagon.
The Jet Airways insolvency case was the first instance that shook the Insolvency and Bankruptcy Code, revealing a loophole in the code regarding Cross-Border Insolvency. It presented numerous challenges and raised the question: Will the absence of robust cross-border insolvency legislation impact International Investment?
Firstly , the legitimacy of two proceeding in two different jurisdiction and operation extent of a foreign resolution professional (FRP) were in question in the case . The National Company Law Appellate Tribunal (NCLAT), with the onus of issuing appropriate coordination directions, did not grant the FRP the right to vote in the CoC, but granted impetus to the same to attend meetings, to the extent it prevents any potential overlap of powers
Another case of Vidoecon Industries ltd. raised the similar question of right of foreign creditors under IBC. The case dealt with whether a resolution professional in India could take control of the assets of a foreign subsidiary of a company undergoing CIRP in India. The court reviewed Sections 18(f) and 23(2), pertaining to the authority of the RP, and concluded that the RP is not authorized to assume control over the assets of a foreign subsidiary if those assets are subject to EAR export regulations.
In a similar vein, the National Company Law Tribunal (NCLT) issued an order in the Bhushan Steel Ltd case, directing the freezing of all assets belonging to Bhushan Steel, including those in the United States, during an ongoing Corporate Insolvency Resolution Process (CIRP) in India. When the US government raised objections, citing the applicability of US export control regulations, the NCLT lifted the asset freeze. This case underscored the challenges associated with coordinating cross-border insolvency proceedings and emphasized the significance of considering export control laws when dealing with insolvent companies in India.
On May 10, 2023, the NCLT admitted Go First airline’s voluntary proceedings for the CIRP, marking a pivotal moment where a national carrier voluntarily approached the tribunal instead of a creditor initiating the process. Facing liabilities amounting to 11,463 crore, the airline sought an interim moratorium on its financial obligations and intends to file a lawsuit against Pratt & Whitney (P&W), an American aerospace manufacturing company, in various jurisdictions. The lawsuit alleges deficiencies in the goods (engines) sold, claiming damages amounting to US $1.1 billion.
As the Go First insolvency situation is notably unprecedented, the NCLT holds the authoritative position to address the complexities involving Indian insolvency, export control clauses, employee retention, and debt restructuring. This necessitates the establishment of a well-reasoned litmus test to achieve a fair resolution, considering the Indian precedent and its cross-border implications.
Raveendran, the founder of Byju’s, has attracted capital from some of the biggest investors in the tech world, including Mark Zuckerberg’s Chan Zuckerberg Initiative, Silver Lake Management, and Naspers Ltd., it reflects that international investment will ensure a significant influx of domestic capital, higher production levels, and increased employment opportunities for our developing economy. This marks a major step towards the economic growth of the country. However, at a point where Byju’s has reached a financial crisis (as per the recent report), alpha international lenders have filed for an insolvency petition against the ed-tech company.
The question that concerns us all is , if IBC doesn’t recognise the rights of foreign creditors during the insolvency proceedings will investor take another chance to invest in the country in any other potential high growing business?
There are many different factors that affect where foreign investors decide to make investments like economic conditions, diplomatic connection and simple supply and demand to make investments. While commercial factors tend to be most important, foreign investors are also likely to consider other factors, such as the ease of doing business, available infrastructure, and the legal system of the economy in which the investment is made but development and stability of states insolvency law are often overlooked.
In conclusion, the examination of Cross-Border Insolvency: A Foreign Investor’s Dream Unveiled reveals a nuanced landscape that intertwines opportunities and challenges for global investors. The allure of cross-border insolvency lies in its potential to unlock international markets, capitalize on distressed assets, and foster economic growth in developing countries. The case studies and analyses presented shed light on the dynamic nature of this concept and its significant implications for foreign investors.
However, beneath the surface of this dream, complexities emerge. Legal intricacies, cultural disparities, and the coordination of proceedings across diverse jurisdictions pose substantial hurdles. The importance of robust regulatory frameworks and legal safeguards cannot be overstated in navigating the intricate terrain of cross-border insolvency.
Looking ahead, the NCLT holds a critical role in providing a well-reasoned approach to fair settlements that align with international standards. The recognition of cross-border implications and the establishment of a harmonized framework will be essential for fostering confidence among foreign investors.
While Cross-Border Insolvency stands as a tantalizing prospect for foreign investors, its realization demands a careful navigation of legal complexities and a commitment to international collaboration. The unfolding narrative underscores the need for a cohesive framework that not only facilitates investment opportunities but also ensures the stability and growth of the global economy in an interconnected world.
Regardless of how events unfold, one certainty remains: international investment choices are impacted by the insolvency laws of a given nation. The implementation of a cross-border insolvency regime is anticipated to enhance India’s reputation as the most improved jurisdiction concerning insolvency resolution.
