View: An urgent need for a cross-border insolvency framework

Covid-19 may create stress on External Commercial Borrowings (ECB) and guarantees issued for overseas borrowings of Indian corporates. The consequences will not only be bitter for the corporates but also for the larger fraternity of creditors in India, in case a cross border insolvency framework is not implemented at the earliest.
In 1996, a prominent Indonesian business family, through their holding company, PT Bakrie Investindo (Defendant), gave a guarantee for Notes issued by its Dutch arm, Bakrie Indonesia BV. The Notes, governed by English Law, were maturing in 1999 and traded electronically. The guarantee was to whoever was the holder of notes and coupons at different points in time. The Defendant could not honour the Notes due to 1998 Asian Financial Crisis. In 2002 the Defendant went through reorganisation plan which was ratified by the Indonesian courts.

Seven years after the fact, in November 2009, a savvy investor, Global Distressed Alpha Fund 1 Ltd. Partnership (Plaintiff) purchased Notes of $2M from a prior holder. The Plaintiff relying on “Rule of Gibbs” under the English Law contested that the guarantee has not been settled under the English law despite the Indonesian reorganisation plan. [Global Distressed Alpha Fund 1 Ltd. Partnership v. PT Bakrie Investindo [2011] EWCA (Comm) 256 [2] (Eng.).] The court held that Defendant had to discharge the debt.

The “Rule of Gibbs” was a result of the judgement delivered on 26th June 1890 in the case of Antony Gibbs Sons v. La Société Industrielle et Commerciale des Métaux [1890] 25 Q.B.D. 399 (Eng.). In that case contract for purchase of copper was executed under the rules of London Metal Exchange. The copper was to be delivered in Liverpool, England and the payment was to be made in England. The plaintiff was England based and defendant France based. The French company went into liquidation. There were two legs of the transaction; copper to be delivered till the date of liquidation and copper to be delivered after the liquidation date. The plaintiffs submitted their claim reserving all their rights under the English law. The liquidator accepted the claims till the date of liquidation and asked the plaintiffs not to deliver any copper post the liquidation date. Under the French law the defendant was discharged from the liability to honour the contract post the liquidation date and no liability for damages existed.

The English judge decided otherwise; “It is clear that these were English contracts according to two rules of law; first, because they were made in England; secondly, because they were to be performed in England. The general rule as to the law which governs a contract is that the law of the country, either where the contract is made, or where it is to be so performed that it must be considered to be a contract of that country, is the law which governs such contract; not merely with regard to its construction, but also with regard to all the conditions applicable to it as a contract.” Thus, the French law was neither relevant nor applicable.

The “Rule of Gibbs” continues to remain valid as was seen in a 2018 case of International Bank of Azerbaijan v. Sberbank of Russia. The issue becomes more pertinent today, as the corporates may lull themselves into a false sense of security, on account of either suspension of insolvency filing which came into effect from 25th March 2020 or the restructuring under the Reserve Bank of India Resolution Framework for Covid19 Stress (RBI Framework). The aforesaid suspension/restructuring will not be recognized in a foreign country and thus the “Rule of Gibbs” is especially relevant for corporates, who have overseas assets, have raised finance overseas or given guarantees governed by English law, and may default on such overseas borrowing.

City of London has been a longstanding financial hub and as per data of Bank for International Settlements, The City has been a leader for international debt issuance. In addition, Indian corporate houses historically have had an affinity towards Britain. Thus, it is highly likely that a significant percentage of overseas financing will be subject to English law.

The quantum of External Commercial Borrowing (ECB) for five years, is depicted in Table 1. The ECB numbers do not capture borrowings by subsidiaries of Indian companies situated abroad. These “structured-subsidiaries” in-turn would have invested loan funds in the operating step-down subsidiaries.

The ear-marked end use of ECB’s for overseas acquisitions, in the last 5 years, is USD 4.06Bn. However, a better metric of potential exposure to assets abroad, would be the quantum of overseas foreign direct investment detailed in Table 2, especially the guarantees issued.
Guarantees issued are usually for the loans raised by subsidiaries where the company availing the loan does not meet the requisite financial parameters. Thus, the assets situated abroad would have counter guarantee in India. The guaranteeing company may or may not have the funds to honour the guarantee and in case of a liquidity crunch will encounter a potential insolvency. A random sample of some of the large value guarantees, over USD 100Mn, issued between April 2018 and September 2020 is given in Table 3.
Covid-19 has necessitated emergency insolvency measures across the globe. United Kingdom too has temporarily suspended winding-up petitions till 31st December 2020. However, once the emergency measures are lifted, the only route for a corporate, to mitigate effect of any near-future potential ECB default, is to negotiate with the ECB holders well before time.

Another option, though untested, for corporates subject to corporate insolvency resolution process (CIRP), post-lifting of the suspension of insolvency filings in India, is to get recognition of proceedings in the English Courts under The Corporate Insolvency and Governance Act 2020 (CIGA). CIGA has been adopted by United Kingdom in June 20 and has a provision for cross-class creditor cramdown; 75% by value, and no numerosity requirements. The court can approve the plan if it is satisfied that if the plan were to be approved, none of the members of the dissenting class would be any worse off than they would be in the event of the relevant alternative and the plan is approved by 75% in a class who have genuine economic interest in the company. Thus, a cram down of ECB holders, holding out in anticipation of Rule of Gibbs, may be possible.

However, opening a proceeding in the United Kingdom for recognition would be expensive especially when India does not have a cross-border insolvency framework. Section 234 of Insolvency Bankruptcy Code (IBC) gives Central Government the power to enter into an agreement with the Government of any country outside India for enforcing the provisions of IBC though no agreements have been entered yet.

Though, addressing the idiosyncrasies of English law is the primary requisite given the likely preponderance of loan/guarantee agreements subject to that law, similar action is possible in any jurisdiction. This was demonstrated in the case of Jet Airways Limited where an aircraft was impounded in Netherlands and a Bankruptcy Trustee appointed in that country. Also, even a corporate, undergoing insolvency in India, and the insolvency professional can be sued by a creditor abroad despite a moratorium in India. A possible exception to the aforesaid may be the case where the foreign creditor has submitted himself to the jurisdiction of NCLT.

In view of the incipient corporate stress it would be ideal if India adopts a cross-border framework at the earliest, so that the foreign creditors do not appropriate foreign-assets of Indian companies and India based creditors get an equitable deal in recoveries.


The contributor is a Registered Insolvency Professional & Restructuring Advisor.