Deepanjali Jain & Prateek Khandelwal*

Introduction

Insolvency across borders usually includes multiple parties, which tends to complicate matters to the extent that which authority is the most relevant to rule often becomes the matter of biggest contention among the parties. This is usually due to a lack of authoritative national and international rule. Majorly there are two ideologies a procedure follows, i.e., Universalism and Territorialism. Universalism is a basic premise that asserts that one jurisdiction, one law, and one process apply globally and include debtors, assets, and creditors regardless of where they are located. On the other hand, the territorialism model proposes that insolvency jurisdiction and related laws are defined by the law of the area where the assets are located. As a result, national insolvency laws should not have an extraterritorial application to individuals and property in other countries.

Modified universalism is said to be a common ground between these two extreme mechanisms. A method endorsed by the UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation and countries like India, USA, etc., as it takes into account realistic measures, unlike Universalism and Territorialism.

However, Modified Universalism also has its fair share of issues. Given the popular stance of this mechanism, it is crucial to understand the shortcomings of cross-border Insolvency, notably altered to this approach. In this article, the author shall speculate on cross-border Insolvency issues concerning its modified universalism ideology.

Modified Universalism

Pure universalism’s core concepts are embraced by modified universalism, but it admits that “a country may only independently control its territory and laws.” As a result, it acknowledges that a debtor’s cross-border Insolvency must be handled by the laws and courts of the debtor’s home country. Nonetheless, a local court other than the home country court retains the option to assess the home country insolvency proceeding’s conformity with specific conditions before allowing it to take effect on its territory.

A close examination of the Model Law’s articles indicates that it is based on modified universalism principles. The articles that govern the relief provided to a foreign main proceeding are based on the universalism concept. The recognition of the foreign main proceeding, according to Article 20, results in an automatic stay of individual creditors’ actions against the debtor and a suspension of the debtor’s right to dispose of its assets; and, according to Article 21, the foreign representative appointed in the foreign main proceeding may receive additional relief concerning any of the debtor’s assets or affairs located in the recognising court’s territory.

Predicament of Modified Universalism

At this juncture, when one delves deep into the above-analysed concept, there arises an unanswered contention that though Modified Universalism is a favoured position of many countries, including India, and is the position stated by the UNCITRAL model, there are still many issues with this ideology.

Under modified universalism, once the matter has been concluded in the main proceedings and the matter comes to the non-main proceedings, let us say enforcement of the agreed upon assets and structure in the main proceedings, the agreed upon principle is that this country only has the power to consider the assets under their jurisdiction. Therefore, non-main proceedings do not have access to the remaining assets considered under the main proceedings but are only limited to rules on the assets in that particular country. This situation gives rise to an issue as this limit the powers of the particular countries to successfully rule on the matter or enforce the decision. For instance, they might feel that the creditor could have been accommodated in a better manner and therefore, the ability to enforce or alter such a decision while only considering the assets of a debtor in that particular country may not serve the purpose of rightfully accommodating that creditor.

Further, moving ahead to another contention which is technically related to the previous issue that one must ponder upon is the ramification of where the jurisdiction would fall if, in a case, during the non-main proceedings, the court disagrees with the decision of the main proceeding. Will they have the jurisdiction to proceed and rule on the matter on their own, presuming primary jurisdiction, or will the matter be refused back to the country with the main proceeding status, and they will be required to rule on the matter all over again. The former instance would then continue to be unfair to the other member participants who have agreed to the arrangement under the main proceedings. However, if not taken appropriately steps, the parties in the non-main proceedings, who disagree with the ruling of main proceedings, face injustice before the judicial authority of their country.

This leads us to the next contention about who or what will have the final authority over such a matter. If we consider, under the principle of centre of primary interests, that the country holding the main proceedings shall have the final authority on the matter, the ultimate step for other countries to hold non-main proceedings to ensure the due process and enforcement of the decision would seem redundant and pointless as they could easily decide not to enforce the decision and go with some other alternative.

Another contention is the protection of small-scale or local creditors. Under Modified Universalism, the debtor’s home country is usually assigned to conduct the main proceedings, which could lead to bias on their part to protect the creditors or debtor of the same country and, in the process, neglect the needs of small-scale foreign creditors. While this mechanism does provide their home country to have a say in the matter, this would potentially lead to a disagreement eventually, complicating an already complex matter further.

Lastly, this mechanism can foster the principle of abuse of process. Every country has beliefs regarding public policy or unjust results for its citizens. One country’s right, and maybe another country’s wrong. Thus, the countries conducting non-main proceedings could end up holding up the procedure if they find the result against their citizens.

Conclusion

The author would like to finish by stating that cross-border insolvency is a highly complex process to deal with, and the lack of effective legislation on a national and international level makes it even more difficult. However, although other nations promote Modified Universalism, the author believes that it is a mechanism that may function more successfully if governments properly regulate it. While there are several issues with its execution, the basic premise is sound. As a result, the system has the potential to serve debtors and creditors well in the long run, thanks to bilateral treaties and international cooperation.

*Deepanjali Jain is a fifth-year student at Jindal Global Law University, Sonipat, and Prateek Khandelwal is a fifth-year student at Chanakya National Law University, Patna