Chasing COMI: India’s Cross-Border Insolvency Puzzle

Introduction

Recently, the case of SBI v Jet Airways has opened the doors for questions related to the Centre of Main Interest in Cross-Border Insolvency Proceedings. The pertinent question is whether the current legal framework is enough to effectively deal with cross-border insolvency cases or requires amendments. With the growing trend wherein companies are entering into transactions beyond domestic markets in foreign jurisdictions due to an increase in ease of doing business, cross-border transactions have become a norm in today’s world as well as a touchstone of globalization and economic growth. This necessitates a unified and robust framework for addressing cross-border insolvency. India has also attempted to codify laws related to cross-border insolvency. However, no legislation has yet been notified in this regard. Further, the core aspect of cross-border insolvency law is the determination of the corporate debtor’s Centre of Main Interest (“COMI”), which is not free from judicial inconsistencies and loopholes. This blog seeks to analyse the attempts made by the central government in establishing the Cross-Border Insolvency Rules/Regulation Committee (“CBIRC”) to remove uncertainties regarding the determination of COMI and the extent of its success in comparison with other jurisdictions.

Untangling the Web of Cross-Border Insolvency: India’s Efforts

Indian insolvency laws are not well-equipped to deal with the complexities surrounding cross-border insolvency. The Insolvency and Bankruptcy Code, 2016 (“IBC”) has incorporated provisions like sections 234 and 235, but it has a very limited ambit and has not been explored much. To address this insufficiency of provisions relating to cross-border insolvency, the central government constituted the Insolvency Law Committee in 2018. The Committee submitted its report with recommendations of enacting a robust cross-border insolvency legislation along with a draft law, “Part Z” to be incorporated as a separate chapter in the IBC based on the principles of the UNCITRAL Model Law on Cross-Border Insolvency. However, Part Z lacked clarification on various aspects, one of the crucial aspects being the determinants of the corporate debtor’s COMI. When a foreign representative applies for recognition of insolvency proceedings, the first step for the Adjudicating Authority is to determine the corporate debtor’s COMI. The determination of COMI further decides the nature of relief a corporate debtor is entitled to based on classification between main and non-main proceedings. But no factors apart from these are mentioned in Part Z, even the UNCITRAL Model Law on Cross-Border Insolvency does not provide a satisfactory answer to this conflict. Thus, to make Part Z a comprehensive law, the Cross-Border Insolvency Rules/Regulation Committee (“CBIRC”) was formed, which submitted its report in June 2020 with draft rules, Insolvency and Bankruptcy (Cross-Border Insolvency) Rules, 2020. The issue of determining factors for COMI was addressed by the CBIRC in its report, and it provided several factors other than the registered office of the corporate debtor being its COMI. The CBIRC recommended that the place of central administration or registered office of the company should not be solely relied upon. The implicit hierarchy that is created in Part Z, wherein other factors would only be considered if the place of central administration could not be ascertained, should be done away with. Moreover, other factors should be codified in the law itself so that the ambiguities due to the broad interpretation and uncertainties surrounding the process of recognition are done away with.

Rule 7 of the Insolvency and Bankruptcy (Cross Border Insolvency) Rules, 2020, read with Section 14 of Part Z provides other relevant factors to be considered being the location of the corporate debtor’s assets, books of accounts, and primary bank account and the location of directors, senior management, and creditors of the corporate debtor. Along with this, the effective date for determining the debtor’s COMI will be the date of initiation of foreign proceedings as per the domestic laws of that jurisdiction. Thus, the inclusion of these additional factors provides a more holistic approach in determining COMI while reducing loopholes and ambiguities.

Cross-Border Insolvency Model: Still a Work in Progress

At the domestic level, including several factors for determining COMI in the report is a comprehensive one. However, at the international level, when laws of different jurisdictions are involved, there could be issues in determining the COMI because not all these factors are recognised by every country. Unless there are universally accepted factors for determining COMI, there could be issues of parallel proceedings related to cross-border insolvency cases. Moreover, the corporate debtor may take advantage of these factors by locating its books of account with a nominal director in one country and central management in a country that has favourable insolvency laws, which is commonly known as ‘Forum Shopping’. This practice may lead to inconsistent outcomes in judicial decisions in determining COMI and the relief available to the debtor.

Since India has not yet codified the proposed draft laws on cross-border insolvency, judicial precedents are relied upon to deal with cross-border insolvency cases. A precedent for determining a corporate debtor’s COMI has been laid down in the case of SBI v Jet Airways by the National Company Law Appellate Tribunal (“NCLAT”), New Delhi. A contention was raised in the National Company Law Tribunal (“NCLT”), Mumbai, that insolvency proceedings against the corporate debtor have already been initiated in the Netherlands, so parallel insolvency proceedings in India could be detrimental to the interests of creditors and other stakeholders. The Tribunal rejected this contention on the grounds that foreign insolvency proceedings cannot be enforced in India because the registered office of the company is in India, and the sole jurisdiction to initiate such proceedings lies only with India. Moreover, there are no such provisions in the IBC that recognise foreign insolvency proceedings; hence, such proceedings are null and void in the eyes of the law. It was allowed by the Tribunal to start insolvency proceedings against the debtor by the creditors in India. However, in appeal, the NCLAT partly set aside the NCLT Mumbai order, which refused to recognise the jurisdiction of the Dutch court regarding the insolvency proceedings and ordered the joint Corporate Insolvency Resolution Proceedings as per the IBC. This case illustrates that the lack of laws to deal with cross-border insolvency and provisions to determine COMI is leading to inconsistency in judicial precedents. Hence, a comprehensive law on this subject could lead to better judicial outcomes.

Comparative analysis of factors for determining COMI in different jurisdictions

There exists a variation in how different jurisdictions approach cross-border insolvency, particularly in determining the effective date for identifying the COMI, the hierarchy of factors for determining COMI, and the conditions under which cooperation with foreign representatives may occur. The United States uses the date on which the application for recognition is filed as the effective date. Australia considers the date of the hearing or decision of the recognition application, whereas the United Kingdom focuses on the date of the commencement of the foreign insolvency proceedings. The lack of clarity in the Indian legal regime in this aspect could lead to uncertainty in judicial rulings. A fixed approach for determining the effective date, subject to judicial discretion in certain exceptional cases, would be a balance between legal certainty and practical flexibility.

The CBIRC noted that in practice, these so-called “secondary” factors are often used to establish the central administration in the first place. Courts in the United States, the United Kingdom, and Singapore adopt a holistic, fact-based approach that does not prioritize one set of factors over another. By relying on a hierarchical model, India risks adopting an artificial standard that may not align with commercial realities. A more integrated approach would better serve both efficiency and the expectations of stakeholders.

The issue of whether cooperation with foreign representatives is dependent upon the recognition of foreign proceedings is another grey area in the Indian legal regime. Part Z does not clarify whether a foreign representative may apply for cooperation without having filed or secured recognition of a foreign proceeding. The CBIRC recognised this ambiguity, especially in situations where either no application for recognition has been made or where recognition has been denied. According to the Guide to Enactment and Interpretation of the UNCITRAL Model Law, cooperation is not necessarily dependent on recognition and may take place even at early stages. However, different countries have diverged on this issue. While Canada and the United States make recognition a precondition for cooperation, the United Kingdom and Singapore permit cooperation even before recognition is granted. India’s silence on this issue may create procedural hurdles, particularly in cases requiring urgent cross-border cooperation. Introduction of a provision that allows for limited cooperation before recognition, especially in bona fide and time-sensitive cases, would significantly improve the flexibility and responsiveness of the system.

Conclusion:

The comparative analysis highlights the lack of universality in cross-border insolvency laws across jurisdictions, which is a hurdle in achieving ease of doing business and lacks a robust law in this regard. Even though India has put steps forward in adopting a comprehensive law regarding cross-border insolvency by drafting part Z and later on setting up a CBIRC but considerable time has passed since and these recommendations has not yet been implemented.  The need of the hour is to effectively adopt a law to tackle such cases and bring parity in judicial decisions and remove inconsistencies in the rulings of the NCLT and NCLAT. The failure of the Central Government in adopting a comprehensive law at present not only undermines Ease of Doing Business but also hampers Foreign Direct Investment in India.