This inclusive approach was cemented by the Supreme Court in Macquarie Bank v Shilpi Cable Technologies (2018), after both the National Company Law Tribunal (NCLT) and National Company Law Appellate Tribunal (NCLAT) rejected the application of a petitioner with a registered office in Singapore, citing non-compliance with a provision of the code requiring the petitioner to obtain a certificate from a financial institution confirming the existence of an unpaid operational debt.

However, the Supreme Court set aside this requirement in an instructional interpretation holding that the provision was merely directory in nature, and not mandatory. The court further opined that mere procedural hurdles shall not impede the rights of foreign creditors under the code, thus defeating its objective of promoting the ease of doing business.

In another significant case, Stanbic Bank Ghana v Rajkumar Impex Private Limited (2018), the NCLT allowed a foreign creditor to initiate a CIRP against an Indian company in respect of a guarantee that the enterprise had extended to its subsidiary in Ghana.

CIRP participation

Once the CIRP is underway, foreign creditors have the right to participate actively in the Committee of Creditors, which crucially plays a pivotal role in making decisions on resolving a stressed entity while aligning the interests of all stakeholders.

Similarly, during liquidation, foreign creditors enjoy parity with domestic creditors regarding claim priority, subject to the waterfall mechanism provided under section 53 of the code.

Thus, the code advances a mechanism where foreign creditors not only have a seat and opportunity to weigh in on decision making during the CIRP or liquidation, but also ensures that their debts are paid at parity.

Court hearings

The Indian judiciary has collectively embraced virtual hearings as a part of conducting court procedures. Both the NCLT and NCLAT now robustly conduct virtual hearings, allowing foreign creditors to engage better in the ongoing judicial process, while being represented through Indian advocates.

This was underlined by the case of Netherlands bankruptcy administrators, represented by Indian counsel, effectively participating in the judicial proceedings of Jet Airways (India), demonstrating the Indian judicial system’s willingness to accommodate foreign creditors while providing tangible means for better advocacy.

Comparing laws

Compared to other Indian recovery mechanisms, the code stands out for its inclusive and expedited approach. For example, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993, provides a recovery mechanism only for specific creditors such as banks and financial institutions, narrowing the scope of beneficiaries. Additionally, it suffers from delays due to procedural bottlenecks.

In contrast, the code offers a time-bound resolution for a broader range of creditors, including foreign creditors. Similarly, recovery suits under the Civil Procedure Code, 1908, are known to be lengthy and cumbersome owing to being rooted in a prolonged trial format. Initiating a CIRP under the code is a more efficient option as it offers resolution in a time-bound manner.

Key takeaway

The Insolvency and Bankruptcy Code offers an overall inclusive and equitable framework that empowers foreign creditors to participate on par with domestic creditors and seek resolution of their debts in a time-bound manner. Even so, constant efforts are further being made at the legislative, executive and judicial levels to streamline the insolvency regime. This is evident from numerous amendments by the legislature and regulatory body to update, rationalise and simplify the process in accordance with its broad concept and intention.

This article was originally published in Asia Business Law Journal on 5 September 2024 Co-written by: Vaijayant Paliwal, Partner; Kirti Gupta, Associate. Click here for original article

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