Cross-border insolvency: Indian perspective

By Vinay Ranjan,

5^th Year, Symbiosis Law School, Pune.

Insolvency is a condition when a person/corporation is apparently, unable to meet entirely the liability from the realisation of entire asset. This is therefore, is known as ‘asset test’. Bankruptcy and Insolvency is specified in the entry 9 of the List III – (Concurrent List) of the Seventh Schedule of the Constitution of India.

In the case of a company, the system included is winding up and dissolution. If it is proved to the court that the company is unable to pay its debts, an order for the winding up of a company may be made. It has been held that for obtaining an order for winding up on this ground it should be shown that the company is, "plainly and commercially insolvent, that is to say that its assets and existing liabilities are much as to make the court fully satisfied that the existing and probable assets would be insufficient to meet the existing liabilities.

There are other modes of winding up which are voluntary and subject to the supervision of the court. Voluntary winding up of a company may be made as under:

(1) Members' voluntary winding up - A company may go for voluntary winding up by passing a special resolution, submitting a statement of solvency and appointing one or more liquidators for such purpose. The liquidator shall forthwith summon a meeting and prepare a statement of assets and liabilities of the company in order to proceed with the task of winding up proceedings.

(2) Creditors' voluntary winding up – If the members of the company resolving to go for voluntary winding up cannot submit a certificate of solvency, the voluntary winding up procedure is regulated by the creditors with the help of a liquidator or liquidators appointed by the creditors. Both Members' voluntary winding up and creditors’ voluntary winding up are cost and time efficient modes of liquidation.

The growth of multinationals, operating through several organs such as branches, agencies, franchises, subsidiaries and other forms of collaboration in more than one country, leads to formulation of laws dealing with insolvency for the operation of their branches, divisions, subsidiaries or agencies situated within a country’s territory.

Indian Insolvency laws- The Presidency Towns Insolvency Act, 1909 and The Provincial Insolvency Act, 1920 do not have any reference to cross border insolvency. The Companies Act also does not have any provision for similar type of corporate insolvency. However The Indian Companies Act prescribes that a foreign company incorporated outside India, but carrying business in India, may be wound up as an unregistered company, notwithstanding that the body corporate has been dissolved or otherwise ceased to exist as such under or by virtue of the laws of the country under which it was incorporated. Also, Indian companies having foreign creditors are not distinguished against Indian creditors. In that context Indian law is based on one principal forum. As such there is duality in the Indian Law on corporate insolvency.

In Raja of Vizianagaram v. Official Receiver, Supreme Court observed that:

“The Courts of a country dealing with the winding-up of a company can ordinarily deal with the assets within their jurisdiction It is, therefore, necessary that if a company carries on business in countries other than the country in which it is incorporated, the courts of those countries too should be able to conduct winding-up proceedings of its business in their respective countries. Such winding-up of the business in a country other than the country in which the company was incorporated is really an ancillary winding-up of the main company whose winding-up may have already been taken up in that country or may be taken up at the proper time.... ordinarily the winding-up of the company will be proceeded simultaneously in the various countries where it carried on business whenever the business of the company has ceased to be profitable and the company is reduced to a position in which it is not expected to make good its liabilities. It is the company incorporated outside India which is really wound up as an unregistered company in this country. In fact, there is no separate unregistered company which is being wound up here”.

The question before the Supreme Court of India was whether in a winding-up proceeding initiated in India in respect of the business of a foreign company in India, the foreign creditors of that company could prove their claim. After examining various precedents under English Law, SC held that under the provisions of the Indian Companies Act and the general principles, foreign creditors can prove their claims in the winding-up of unregistered companies in India.

For insolvency of banking companies separate provisions are provided in the Banking (Regulation) Act, 1949.

At global level UNCITRAL Model Law on Cross-Border Insolvency provides guidelines to different countries to deal with matters of cross-border insolvency.

A High Level Committee on Law relating to Insolvency of Companies under Shri Justice V. Balakrishna Eradi, was appointed by ministry of Company affairs which submitted its recommendation to amend Part VII of the Companies Act, 1956 to correspond to provisions for Model Law as reproduced below for cross-border insolvency:

(a) The case of an in bound request for recognition of foreign proceedings.

(b) An outward-bound request from a court or administrator in the enacting state.

(c) Coordination proceedings in two or more States and

(d) Participation of foreign creditors in insolvency proceedings taking place in enacting States.

It was also of the view that the Articles contained in the Model Law may be referred to in a substantive provision and provisions themselves may be reproduced as a Schedule to the Companies Act, 1956. The Tribunal should be empowered to strike a equitable balance between rights of Indian and foreign creditors, particularly in the matter of proof and priorities of their respective claims.

The Companies Act, 1956 should also adopt the necessary principles enunciated under the heading "Legal Framework" , "Orderly and Effective Insolvency Procedures – Key issues" on page 9 of the publication of the Legal Department of International Monetary Fund (Annexed as B..) to bring the provisions of the Companies Act, 1956 in line with international practices.