SunEdison bankruptcy - India urgently needs a cross border insolvency law

1. Filing of chapter 11 proceedings by SunEdison has again highlighted the need for a cross border insolvency law in India. The company has sizeable investment in the country’s solar capacity. The company faces about two dozen legal claims, mainly by shareholders who accuse the company of misleading them about its financial position. Its publicly traded subsidiaries are also embroiled in lawsuits. In the event the snooze around the company and its subsidiaries tightens, the creditors and investors of Indian projects will have to prepare for a long struggle to deal with company’s assets in India in the absence of a law to deal with cross border insolvency.
2. The rapid growth of international trade, commerce, investment and industries has led to widespread growth of multinationals, operating through several organs such as branches, agencies, franchises, subsidiaries and other forms of collaboration in more than one country. Many global companies have investments in India through subsidiaries or branches based in the country. In renewable energy, seventy four percent FDI is allowed automatically, and hundred percent by approval. Many foreign companies, which have access to low cost funds, are setting up subsidiaries in India to develop solar power projects. Foreign banks and creditors have financed Indian assets. Similarly, Indian companies have set up businesses entities overseas and Indians banks have exposures in them.
3. Expansion in international trade has brought with it increasing possibilities of cross border insolvency proceedings. Companies are usually connected to more than one jurisdiction by foreign creditors that may have interest in their assets located in different countries. Decrees may be passed in different legal jurisdictions resulting in further complexities in enforcement and recognition. A cross border insolvency law helps in providing an effective mechanisms for dealing with cases of cross-border insolvency by promoting cooperation between the courts and other competent authorities of different countries; greater legal certainty for trade and investment; fair and efficient administration of cross-border insolvencies that protects the interests of all stakeholders; protection and maximization of the value of the debtor’s assets; and facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.
4. Many countries have adopted UNCITRAL Model Law of Cross Border Insolvency. Others have provided for a similar framework to efficiently deal with cross border insolvencies. But, there is no effective mechanism for cooperation by Indian courts with courts of other countries, or for administration of cross-border insolvencies and treatment of stakeholders, in the event insolvency proceedings start in any foreign jurisdiction involving assets or creditors in India. The Indian common law regime is ill equipped to deal with the cases of cross border insolvency. In case of recognition of foreign judgments and proceedings, Sections 13 and 44A of the Code of Civil Procedure provide for the treatment of foreign judgments in reciprocating countries as conclusive barring certain exceptions, such as fraud, judgment not based on merits of the case, no competent jurisdiction, etc. Many tests have to be satisfied for obtaining recognition and enforcing orders passed by foreign courts. Judicial involvement and devotion in regulating economic aspects is nothing but a natural corollary to its economic development. In the absence of statutory framework for cross border insolvency, courts in India will always struggle to deal with the insolvency issues. In the above pretext, the absence of a cross border insolvency law poses a serious challenge to India making the country incomparable to the standard set in international legal requirements.
5. The Insolvency and Bankruptcy Code passed by the Indian Parliament recently does not provide a framework to deal with issues involving cross border insolvency. Many previous committees on insolvency law reform have recommended that an effective mechanism for dealing with cases of cross-border insolvency should be provided. The position of the government, as I understand is, cross border cooperation will be achieved by signing bilateral agreements with sovereign countries. This will not only be time consuming but also run the risk of different and at times, conflicting rules being framed for different jurisdictions. Absence of cross border framework is likely to be of considerable concern to the global entities seeking to do business with India. This does not align well with the Make in India pitch.
6. A law is urgently needed to facilitate greater co-operation between courts of various states, fair and efficient administration of cross-border insolvencies that protects the interests of creditors as well as the debtor, and other objectives. Enactment of a law for cross border insolvency will enable India to meet the demands of the globalization of economy and to deal with international insolvency on the world forum. This will radically change the orientation of Indian Law in the present scenario of insolvency cases and make it suitable for dealing with the challenges arising from globalization and increasing integration of Indian economy with the world economy.

(This article was first published in Live Mint on 5 June 2016)