Government sources said it would be premature to infer that the recommendations of the joint committee would be sufficient to effectively deal with cross border aspects of default cases such as that of the Kingfisher Airlines.
Even as the joint committee on Bankruptcy Code suggested inserting two new clauses in the draft legislation to deal with cross-border insolvency, a full-fledged framework incorporating elements of international insolvency would evolve over time. Government sources said it would be premature to infer that the recommendations of the joint committee would be sufficient to effectively deal with cross border aspects of default cases such as that of the Kingfisher Airlines.
In its report on Insolvency and Bankruptcy Code, 2015, the committee suggested addition of two provisions to the draft law: One, the Central government may enter into an agreement with a foreign country for enforcing provisions of the Code. Two, a letter of request to a country outside India seeking information.
“The Vishwanathan committee had said that they want to dwell on this cross-border insolvency issue at a later stage. But the joint committee thought this issue should be part of the draft, at least a beginning should be made and later the cross-border insolvency issue can be developed further,” BJD MP Bhartruhari Mahtab, said.
Former law secretary TK Vishwanathan, who headed the Bankruptcy Law Reforms Committee that drafted the initial bankruptcy code, did not touch upon the cross-border insolvency issue. Initially, the government agencies need a mechanism to seek information on this aspect from other countries, which can later be incorporated into a comprehensive framework, Mahtab said, who was a member of the joint committee.
Australia, the UK and the US have such arrangements of seeking information in cases of cross-border insolvency, he said. While the committee suggested incorporating cross-border insolvency aspects as a beginning, deposing before the panel, the finance ministry officials suggested that as the issue is complicated, the government would evolve a detailed framework in due course.
The committee said: “… Given that many corporate transactions and businesses today involve the cross-border element, the implications of cross-border insolvency cannot be ignored for too long if India is to have a comprehensive and long lasting insolvency law.”
While the Committee attempted to incorporated the international insolvency aspect, experts said its impact will be limited in resolving such cases unless foreign countries are willing to share information. And for information sharing, the government will first have to sign treaties or amend existing pacts.
“The application of this Code on the ongoing matters such as Kingfisher Airlines may be difficult due to prospective application of the statute. So while this is a welcome recommendation in the right direction, one would need to wait and watch to evaluate how these regulations are successfully put to force in real life situations,” said Rakesh Nangia, managing partner at Nangia & Co.
The effectiveness of the Code would depend on the strength and comprehensiveness of the reciprocal agreements with foreign countries, and the extent to which the authorities in India could extract/ investigate the relevant information through the mode of letter of request and if required, enforce the Indian laws on foreign assets of the debtor to take necessary action, he said.
The UNCITRAL (United Nations Commission on International Trade Laws) and other international conventions are debating that India should become a party to cross-border insolvency, Viswanathan said while deposing before the joint committee. “We have not so far formalised our views because first we want to put this Bill and the court into action and then explore how best we should handle that,” he said.
Revival vs liquidation
The government should also draw upon the reorganisation aspects of bankruptcy law as specified in UNCITRAL while finalising the Indian code, said VV Anand, a former senior public sector banker. “The UNCITRAL Model Law envisages “a balance between liquidation and reorganisation. While striking this balance, adequate avenues should exist for reorganisation or revival which in Indian context, is vital to preserve jobs as well as organisational capital,” he said.
In the US, under Chapter 11 procedures, the Court, with expert assistance, evaluates what the secured creditors will get in a liquidation. If the Court finds that a reorganisation will fetch even the secured creditors better net present value than a liquidation, then even majority secured creditors who clamour for a quick exit can be judicially overruled and the revival can rollout, he said.