Recognition of Foreign Proceeding & Relief

ResolutionBazaar

Administrator
Application for recognition
  1. The Model Law empowers foreign representatives to seek recognition of a foreign proceeding from a court in the domestic country, in order to avail appropriate relief in relation to the foreign proceeding. This is embodied in Chapter III of the Model Law which broadly sets out the requirements for recognition, the manner of recognition on satisfaction of these requirements, and the effects of such recognition.69 The provisions dealing with recognition of foreign proceedings have been identified as the core of the Model Law.
  2. Article 15 of the Model Law provides the documents required to be submitted by the foreign representative when making an application for recognition. This includes proof of the existence of the foreign proceeding and of the appointment of the foreign representative in such proceeding, along with details of any pending foreign proceedings against the debtor. The court to which the application for recognition is made may also require these documents to be translated, if necessary.
  3. Further, Articles 16(1) and (2) of the Model Law provide a presumption of authenticity of the documents submitted with the application for recognition and dispense with the requirement of legalisation of documents. “Legalisation” of documents usually refers to special authentication through certification by diplomatic or consular agents. This presumption has been provided in the Model Law to avoid cumbersome and time-consuming procedures for authentication of documents. However, such dispensation of authentication has only been provided as a presumption and the court may order that the documents be authenticated if it thinks fit.
  4. Articles 15 and 16(1) and (2) of the Model Law have been adopted in the respective cross-border insolvency laws of jurisdictions like US and Singapore,
  5. The Committee is of the view that Articles 15 and 16(1) and (2) of the Model Law may be adopted in the present draft Part Z with similar mandate for submission of translations of documents in English. Along with this, the foreign representative may be mandated to specify pending foreign and domestic insolvency proceedings against the corporate debtor that are known to her. This is to ensure that the Adjudicating Authority has complete information about the foreign proceedings along with any proceedings under the Code pending against the corporate debtor.
 

ResolutionBazaar

Administrator
COMI
  1. Clause 2(b) read with Clause 14 of the draft Part Z deals with determination of the COMI of the corporate debtor. In terms of Article 2(b) of the Model Law, recognition as foreign main proceeding is based on the finding of COMI. Thus, determination of the COMI is central to operation of the Model Law as it accords proceedings in the COMI greater deference and, more immediate, automatic relief.
  2. The foreign main proceeding is expected to have the principal responsibility for managing the insolvency of the corporate debtor regardless of the number of countries in which the corporate debtor has assets and creditors, subject to adequate coordination procedures to accommodate local needs. Therefore, essential attributes of the corporate debtor’s COMI correspond to those attributes that will enable those who deal with the corporate debtor (especially creditors) to ascertain the place where an insolvency proceeding concerning the corporate debtor is likely to commence.
Rebuttable presumption in favour of registered office being COMI
  1. The Model Law does not define COMI but provides a rebuttable presumption in Article 16(3). Clause 14 of the draft Part Z follows the Model Law by providing a rebuttable presumption that a corporate debtor’s registered office is its COMI in the absence of proof to the contrary. This presumption ensures speed and convenience of proof in vanilla cases where no controversy on
  2. COMI is involved. However, it was brought to the notice of the Committee that this presumption may in certain cases lead to abuse and forum shopping. The Committee noted that the Model Law does not provide any statutory mechanism to prevent forum shopping and the UNCITRAL Guide to Enactment places the onus on courts to detect such abuse. In this regard the Committee thought it must be highlighted that the UNCITRAL Guide to Enactment, EU Insolvency Regulation (Recast) as well as international case law state that, courts have a duty to determine independently if COMI should be decided against the presumption.
  3. As an added precaution, the EU Insolvency Regulation (Recast) seeks to prevent such forum shopping by making the presumption inapplicable in cases where the corporate debtor has relocated its registered office to another country within the 3-month period prior to the request for opening insolvency proceedings. Given that the Code and its enforcement architecture in India is still evolving, the Committee discussed that in addition to proactive enquiry by Adjudicating Authorities, adoption of a look-back period of 3 months while enforcing of the COMI presumption would be suitable in theIndian context.
Factors to determine COMI
  1. The UNCITRAL Guide to Enactment provides the following two principal factors which may indicate COMI in most cases:
    1. where the central administration of the debtor takes place; and
    2. which is readily ascertainable by creditors.
  2. The Committee recommended that given that the Code and its enforcement architecture in India is still evolving, it may be prudent to include these principal factors in the Code. The intent is to provide objective factors to assist the Adjudicating Authority in cases where the COMI does not coincide with the registered office.
  3. It was brought to the attention of the Committee that there may be cases where the two principal factors alone may not provide a conclusive answer regarding the COMI. In this regard, the Committee thought that since even generally international experience suggests that courts struggle with factors necessary to refute the presumption of COMI, it would be advisable to provide a list of indicative factors in subordinate legislation that may be considered by Adjudicating Authorities while determining COMI.
  4. The Committee noted that there have been a number of court decisions globally that consider the meaning of the phrase “COMI” and identify factors relevant for rebutting the presumption in favour of the place of registered office being the COMI. Further, the UNCITRAL Guide to Enactment provides a list of additional factors for determination of COMI such as the location of the debtor’s books and records; the location where financing was organized or authorized, from where the cash management system was run; the location of employees and so on. The Committee was of the view that these sources may be considered by the Central Government while formulating subordinate legislation. With regards to the weightage or priority to be given to various additional factors by Adjudicating Authorities, the Committee discussed that it must be left for them to decide based on the circumstances of the particular case
Date for benchmarking COMI
  1. When an application for recognition of foreign proceedings is made, generally, the date of commencement of foreign proceeding is used as the benchmark date for determining COMI as this can be applied with certainty to all insolvency proceedings. However, some cases have also relied on the time when the foreign court was first required to decide whether to open the insolvency proceeding or the date on which application for recognition of foreign proceeding was made. The Committee decided that such date need not be spelt out in the Code as the understanding may evolve based on international as well as domestic experience.
COMI of enterprise groups
  1. With respect to determination of COMI of enterprise groups, the Committee discussed that since the Model Law does not envisage treatment of insolvency of enterprise groups as a unit in its present form, there was no scope to provide for determination of COMI of an enterprise group as a whole. It was discussed that if in the future there is international consensus on insolvency of enterprise groups, this matter would be addressed at such time.
 

ResolutionBazaar

Administrator
Decision of recognition
  1. Article 17(1) of Model Law provides that as long as the requirements set out in this provision are met, the court shall recognise the foreign proceeding at the earliest time possible. This reduces discretion given to the court in selecting the proceedings which are to be recognised and lays down an objective criterion for recognition if the application for recognition is made to the appropriate court. This criterion is limited to public policy constraints and the pre-conditions set out in the definitions of “foreign proceeding” and “foreign representative”.
  2. Based on this criterion, a foreign proceeding may be recognised as a foreign main proceeding or a foreign non-main proceeding. As discussed above, this is based on the finding of the COMI in case of recognition as a foreign main proceeding and existence of an establishment in case of recognition as a foreign non-main proceeding. The approach of the Model Law is to provide distinct treatment to foreign main and non-main proceedings with respect to the nature of relief available and the coordination of concurrent proceedings. Any recognition provided under this Article may be modified or terminated if it is established that the grounds on which such recognition was granted do not exist anymore.
  3. The Committee is of the view that Article 17 of the Model Law may be adopted in the draft Part Z without any substantial modifications. However, a timeline of thirty days may be provided to the Adjudicating Authority to decide on the application for recognition. An additional thirty days may be taken by the Adjudicating Authority in case the decision regarding recognition has not been concluded within the initial thirty days
 

ResolutionBazaar

Administrator
Interim relief
  1. The Model Law provides for two kinds of relief - interim relief and relief on recognition. While the former may be provided by the court until an application for recognition of foreign proceedings is decided upon, the latter is to be granted if a foreign proceeding is recognised.
  2. Article 19 of the Model Law provides urgent relief which may be granted, at the discretion of the court, after an application for recognition is filed. The relief mentioned in Article 19 is narrower than the relief which may be provided after recognition of foreign proceedings under the Model Law. Unless extended by the court, the relief in Article 19 shall terminate when the decision with respect to recognition of the foreign proceedings is taken by the
  3. This relief is not exhaustively provided and may include:
    1. staying of the execution of debtor’s assets;
    2. staying transfer and disposal of debtor’s assets;
    3. entrusting of administration of debtor’s assets to the foreign representative or other designated person;
    4. providing for the examination of witnesses and taking of evidence related to the debtor’s property;
    5. any additional relief available to an insolvency professional in the enacting country.
  4. The Code does not empower the Adjudicating Authority to provide any interim relief in CIRP. This may have been to reduce the discretion available with the Adjudicating Authority before any decision for admission is taken. The experience with the Sick Industrial Companies (Special Provisions) Act, 1985 has set a precedent for misuse of interim relief and delay of decision regarding admission of application on availability of interim relief. In view of the above, the Committee recommended that power to grant interim relief may not be provided in the draft Part Z.
 

ResolutionBazaar

Administrator
Relief on recognition
  1. The relief available on recognition of a foreign proceeding may be of two kinds: (i) mandatory relief on recognition as a foreign main proceeding, and (ii) discretionary relief on recognition as either foreign main proceeding or foreign non-main proceeding. The former applies automatically when a foreign main proceeding is recognised while the latter may be provided by the court on recognition of either foreign main or foreign non-main proceeding.
Mandatory relief
  1. Article 20 of the Model Law provides that an automatic moratorium shall apply on recognition of foreign main proceedings. This moratorium is to be similar in scope as the moratorium available under the domestic insolvency law of the enacting country. This moratorium in the Model Law does not interfere with the right to commence any domestic insolvency proceedings or with the right to file claims in such a domestic proceeding.98 This is in line with the general approach of the Model Law which gives prominence to the domestic insolvency proceedings of the enacting country over foreign proceedings.
  2. Various jurisdictions have made modifications to the automatic moratorium under Article 20 while adopting the Model Law to maintain uniformity with the moratorium in their domestic insolvency law. For example, in UK secured creditors are permitted to enforce their security despite the moratorium.The Committee is of the view that a moratorium similar in scope as section 14 of the Code may be inserted in the draft Part Z and such moratorium shall be made applicable automatically on recognition of a foreign main proceeding. The exceptions and limitations applicable to the moratorium in section 14 of the Code may be made applicable to the moratorium on recognition of a foreign main proceeding.
  3. The Committee also discussed that the power to modify or terminate the relief discussed above, as provided in Article 20 of the Model Law, may not be desirable as it may provide excessive discretion to the Adjudicating Authority to modify or terminate the moratorium in each case. Additionally, since the Code currently does not empower the Adjudicating Authority to modify the moratorium in section 14 of the Code, no such provision may be inserted in the draft Part Z.
  4. Further, Article 20(3) of the Model Law provides that the moratorium discussed above does not affect the right to commence individual actions or proceedings to the extent necessary to preserve claims against the debtor. This is because the Model Law does not cover the question of the effect of the moratorium on the limitation period for filing of claims. Section 60(6) of the Code provides that moratorium in section 14 of the Code has the effect of ceasing of the running of limitation period for the duration of the moratorium. This results in exclusion of the moratorium period from the limitation period for a claim to be filed in any suit or proceeding against the corporate debtor.
  5. However, the UNCITRAL Guide to Enactment discusses that providing the exclusion given in Article 20(3) may be essential even in countries which have a provision similar to section 60(6) of the Code.100 This is because the question of cessation of running of the limitation period will be subject to conflict of law rules and may be adjudged by another country. The Committee is therefore of the view that a provision similar to Article 20(3) of the Model Law may be inserted in the draft Part Z to ensure that the automatic moratorium does not affect the right to commence individual actions or proceedings against the corporate debtor to the extent necessary to preserve claims against the corporate debtor.
  6. Similarly, Article 20(4) of the Model Law provides that the moratorium in Article 20(1) does not affect the right to commence domestic insolvency proceedings or the right to file claims in such proceeding. The Committee discussed that this provision may be adopted in the draft Part Z.
Discretionary relief
  1. Article 21 of the Model Law provides relief that may be granted in respect of foreign main or non-main proceedings and provision of such relief is left to the discretion of the court. The list of relief provided in Article 21(1) is broad and encompasses various kinds of relief provided in various jurisdictions in insolvency processes. However, this list is meant to be inclusive and is not exhaustive.
  2. The relief provided in Article 21(1) of the Model Law is not limited in scope as it is assumed that courts will utilise their discretion to define the scope of the relief while providing it. In relation to relief available under Article 21(1)(a)-(c) of the Model Law, the intent of the Model Law is that the Adjudicating Authority while granting relief shall consider the scope of the moratorium under domestic law of the enacting country.Therefore, the Adjudicating Authority shall consider the scope of the moratorium under section 14 of the Code, including limitations and exceptions to it, while providing discretionary relief under clause 18 of the draft Part Z which incorporates Article 21 of the Model Law.
  3. Article 21(1)(d) provides relief relating to examination of witnesses and collecting information and evidence regarding the debtor and her affairs. The Committee felt that providing examination of witnesses may not be suitable as a relief for a foreign representative. Additionally, the power to collect evidence and information regarding the debtor may be provided through Article 21(g) (adopted in clause 18(1)(f) of draft Part Z) as it is a power that is available to an insolvency professional under the Code.Therefore, the Committee felt that relief mentioned in Article 21(1)(d) may not beincluded in draft Part Z.
  4. Article 21(2) provides a broad power to the court to enable the foreign representative or any other designated person to distribute all or part of the debtor’s assets located in the enacting country. This provision also envisages a safeguard for domestic creditors by subjecting entrustment of distribution of assets of the corporate debtor to the foreign representative on satisfaction of the court that interests of domestic creditors are adequately protected. Additionally, safeguards have been provided in the Model Law to clarify that interests of creditors and other interested persons be adequately protected.
  5. Further, the relief provided as interim relief (Article 19) or as discretionary relief on recognition (Article 21) in the Model Law is subject to satisfaction of the court that the interests of parties, such as the creditors and the debtor, are protected. This may help in achieving a balance between the relief provided by the court and the interests of various stakeholders. Additionally, Article 22 of the Model Law provides courts with the flexibility to impose conditions on the relief given under Articles 19 and 21 or to modify or terminate such relief.
  6. The Committee therefore concluded that the relief in Articles 21(1) and (2) be adopted with appropriate modifications to ensure consistency with the Code, including the modification mentioned in paragraph 14.10 above. It may be noted that the power in Article 21(2) may be sparingly exercised in cases where the need for such relief is clearly established and the interests of domestic creditors are protected. To ensure protection of interested parties at all times, Article 22 should be inserted as has been provided in the Model Law. It may also be noted that references to “interim relief” in Articles 21(1)(f) and 22 may be deleted as such relief is not adopted in the draft Part Z.
  7. A general principle of the Model Law is that relief given to foreign non-main proceedings should not be too expansive and such relief should not interfere with the administration of other insolvency proceedings against the debtor, especially foreign main proceedings. This has been captured in Article 21(3) which provides that any relief given in respect of foreign non-main proceedings should be restricted to the assets that are to be administered in such non-main proceeding, according to domestic law of the enacting country. The hierarchy of relief available to foreign main and non-main proceedings, as captured in Article 21(3), has been accepted as a general principle of the Model Law and has been adopted by leading jurisdictions like UK, US and Singapore. Therefore, the Committee did not deem any deviation necessary in this regard.
  8. It was also noted by the Committee that in the final months of its work, the UNCITRAL adopted the Model Law on Recognition and Enforcement of Insolvency-Related Judgments (“MLREIJ”). The MLREIJ is broader in scope than the Model Law and covers treatment of judgments on insolvency- related matters in other countries. The MLREIJ also recommends a clarification in relation to the interpretation of Article 21 of the Model Law regarding discretionary relief available to foreign proceedings. It clarifies that the language of Article 21 of the Model Law is broad enough to allow for providing recognition and enforcement of judgments. This clarification was issued as some jurisdictions had previously interpreted that the Model Law only includes recognition of proceedings and not enforcement of judgments.108 However, such an interpretation has been criticised109 since it may render the Model Law toothless. This position of the Model Law permitting enforcement of a judgment has also been agreed to by cases in other jurisdictions like US.The Committee agreed with the clarification provided in the MLREIJ that Article 21 of the Model Law may include enforcement of judgments as a relief, if deemed fit by the Adjudicating Authority. However, since the MLREIJ has been adopted by the UNCITRAL very recently and international consensus is still evolving in this regard, the Committee discussed that legislative change pertaining to this may be contemplated at a later stage.
 

ResolutionBazaar

Administrator
Avoidance actions
  1. Insolvency laws across various jurisdictions provide insolvency professionals with the power to commence an avoidance action to collect assets that the debtor fraudulently transferred out of its estate, often to place them beyond the reach of the debtor’s creditors. Article 23 of the Model Law provides that a foreign representative may apply to the court, upon recognition of a foreign proceeding, to set aside such antecedent transactions of the debtor which are detrimental to her creditors.
  2. This has been provided as an additional remedy on recognition of foreign proceedings, apart from Articles 20 and 21 of the Model Law. Reports of the UNCITRAL Working Group discuss that avoidance actions were excluded from the general provision governing the effects of recognition under the Model Law because of their sensitive nature and instead should be dealt with by a separate provision.
  3. The UNCITRAL Guide to Enactment discusses that the text of Article 23(1) does not provide any substantive rights in relation to such antecedent transactions and does not elaborate on the solution to issues involving conflict of laws. This has been left to the domestic policy and conflict of law rules of each enacting country. Therefore, the effect of Article 23(1) is to only provide standing to foreign representatives to initiate avoidance actions on recognition of foreign proceedings.
  4. Additionally, Article 23(2) reiterates that the relief given with respect to foreign non-main proceedings should relate to assets that are to be administered in such proceeding, according to the law of the enacting country. The Committee concluded that Article 23 may be adopted as it has been provided in the Model Law. It also discussed that like all the other powers given to the foreign representative under the draft Part Z, exercise of power pursuant to Article 23 of the Model Law will be subject to the manner of access of the foreign representative discussed in paragraph 5.4 above.
  5. However, Singapore and UK have clarified, in their respective cross-border insolvency laws, that the date of commencement of insolvency for the purposes of interpretation of avoidance provisions shall be the date of opening of the foreign proceeding. This may be of importance since the Model Law does not prescribe the law applicable in this regard and leaves it to the enacting country to apply its rules regarding conflict of laws. The Committee discussed that such a provision may be included in Clause 20 of the draft Part Z.
 

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