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“Exclusive Jurisdiction Clause” – A De Riguer Step Ameliorating Cross Border Insolvency

The authors are Mujeeb (a Legal Practitioner) and Shruti Somya (a student at SLS Noida).

In the usual course of trade, where one party is from England and the other from India, there exists a contractual term whose Dispute Resolution Clause specifically states that “in case of any dispute the courts of England shall have the exclusive jurisdiction.” Thereafter, one party commits default. Here two scenarios are likely to build up, in the first case, the party seeks remedy by filing an insolvency petition before the courts of England; whereas in the other, the petition is being filed before the Indian courts. Here arises the dilemma, as the former country recognises the Exclusive Jurisdiction Clause (“EJC”) whereas the latter disregards. Considering the Indian jurisprudence, if the former situation occurs, the judgement/order arising out of such proceedings shall not be a conclusive judgment that can be enforced in India. The reason being such a proceeding shall be against Indian Law and thereby will be failing the test enumerated u/s 13 of Civil Procedure Code, 1908 (“CPC”). This can occur not only with parties from England, but also with Hong Kong or European Union, etc.

In this article, the author argues for recognizing the EJC in India and how India missed its opportunity to recognize the same, thereby highlighting its evolution in other major jurisdiction.

Contracting Parties’ perspective towards incorporating Exclusive Jurisdiction Clause

Usually, the act of forum selection is based on two parameters, first is such jurisdiction which allows the parties to maximise their benefits whilst the explicit cost and procedural hassle remains bare minimum, second, the jurisdictions which are based on parties’ convenience.

The Report on the Rules and Regulation for Cross-Border Insolvency Resolution (2020) states that under following circumstances parties usually opt for foreign jurisdiction against domestic jurisdiction: -

a) Corporate Debtor having assets and liabilities in foreign jurisdiction,

b) The insolvency regulations in such jurisdictions are efficient in terms of time, costs, outcome and

c) Certain categories of debtors are given preference under their existing principles of priority.

To make the outcome of Insolvency Proceeding commercially more viable, especially while dealing with assets and liabilities in different jurisdictions, the adjudicating authorities should provide room to such intentions of the parties while determining the jurisdiction.

Excel Metal Processors judgement – An incomplete and fact-specific judgement

In the case of Excel Metal Processors Limited, India came across its first case of EJC in Insolvency Proceedings. The judgment is primarily based on two premises: -

Firstly, the contract enumerated the phrase, “any suit or case is maintainable only in the Court at Germany” to which the tribunal held that Insolvency Proceeding is not a ‘suit’ or a ‘litigation’ or a ‘money claim’ for any litigation; and therefore, this clause shall not be enforceable. The judgement confined itself solely to the ambit of the term ‘Suit’, and the tribunal didn’t go on to explore the ambit of the term ‘case’ (which should have been liberally explored). As such, this judgement remains a fact-specific judgement as the tribunal held its judgment solely on the definition of a suit and failed to observe situations where draftsmen use terms like ‘dispute’ or ‘legal proceeding’ in the jurisdiction clause. The said judgement can comfortably be circumvented by using the term ‘legal proceeding’ as against the term ‘suit’, and in such a scenario this judgement cannot be operated as precedent. As per Black’s Law Dictionary, the term Legal Proceeding includes, “all proceedings authorized or sanctioned by law and brought or instituted in a court of justice or legal tribunal, for the acquiring of a right or the enforcement of a remedy.” In India, proceedings before the National Company Law Tribunal (“NCLT”) are sanctioned by Insolvency & Bankruptcy Code 2016 and are therefore legal proceedings. Even the Indian High Court has observed that the term ‘Legal Proceeding’ includes Insolvency Proceedings.

Secondly, the tribunal held that, as per section 60(1) of the Insolvency Bankruptcy Code 2016 (“IBC”), the presence of a registered office in Mumbai is sufficient to confer jurisdiction on NCLT Mumbai. The tribunal failed to explore the possibility of the existence of Corporate Debtor’s (“CD”) assets in foreign jurisdiction, especially in Germany.

Giving the increasing prominence of Cross-Border Insolvency Proceeding in major jurisdictions and the involvement of foreign creditors, the tribunal ought to have explored this aspect.

Extent of acceptability of “Exclusive Jurisdiction Clause” in other major jurisdictions

Recently, Hong Kong has recognised the relevance of EJC, besides this, English courts and the European Union has given due recognition to EJC, subject to certain conditions.

Hong Kong court held that in the absence of any strong countervailing factors such as the risk of insolvency affecting third parties and a dispute that borders on the frivolous or abuse of process, the court ought to respect and recognise the EJC. The court’s discretion to decline such a clause shall be largely based on the involvement of public policy as against the private contract. The court, besides all these grounds, also held that in case of forum non-conveniens the court ought not to hear the insolvency petition despite having proper jurisdiction to do so.

Article 6(1) of the Recast European Insolvency Regulation (“REIR”), under Article 6(1), rooting its rationale from the “Closely Connected” and “Deriving Directly” test, provides that jurisdiction shall be conferred on those who have the closest link with the insolvency proceeding; pursuant to this, the English court has held that if the EJC is in line with this provision then such clause shall be given due recognition. However, not to deny, REIR’s positioning with regards to conferring jurisdiction still revolves around the CD’s place of registered office. Having said that, REIR, under Article 3(2), also recognises a situation where if the assets of CD are sufficient in foreign jurisdiction then the creditor can successfully initiate proceeding before such jurisdiction, provided assets available in said jurisdiction suffices creditors demand. Also, such proceedings shall strictly be restricted to the assets of CD available in that jurisdiction.

Need for legislative amendment

IBC governs the insolvency and bankruptcy proceedings in India. Despite efforts to streamline insolvency in the India, a notable absence remains in the Code for initiating proceedings where the debtor has sufficient assets to realise debt. During the initial stages, the Code did not address the intricacies of cross-border insolvency. Pursuant to the recommendations of the Bankruptcy Law Reforms Committee (BLRC), a framework for cross-border insolvency was implemented in the code. The code introduces two new provisions: Section 234 and Section 235. Where section 234 empowers the Central Government to enter into an agreement with foreign countries for enforcing the code, Section 235 empowers the Adjudicating Authority to issue a letter of request to the court of that country with which the Government has entered into the agreement. However, these provisions are yet to be notified, rendering them inoperative. Consequently, the concept of a functional cross-border insolvency regime remains unresolved.

It becomes imperative to note that Section 234 and 235 limits the scope to the countries with which reciprocal arrangements have been made.

Section 60(1) of IBC provides for a territorial jurisdiction to file an application for insolvency. The section stipulates that the Adjudicating Authority would be the NCLT where the registered office of the corporate debtor is located. The primary objective of IBC was to effectuate timebound resolution and optimise asset value. In instances where the properties of the corporate debtor are at a place outside India, then directly filing an application to the jurisdiction of that place would uphold both the objective of IBC. Section 234 and 235 of IBC, provides for the provision of cross-border insolvency, albeit with an additional step mandating establishment of a bilateral agreement with a country and then issuance of a letter of request to the concerned authority of such country. Notwithstanding this framework, a potential avenue for achieving the purpose could be by way of amendment in Section 60(1).

Way Forward

EJC is one of the crucial aspects of Cross Border Insolvency Proceedings, and giving recognition to the same will bring us one inch closer towards its implementation. In today’s era, all the major jurisdictions, with whom Indians have been commercially active, have started giving due recognition to EJC. Whereas, India is still mulling over this, and the tribunal is declining to honour EJC. The IBC was enforced in 2016, providing proper provision for the flourishing of Cross Border Insolvency Proceedings. Despite the same, even after 7 years, the legislation and the judicial authorities have failed to bring them into service. NCLAT had an opportunity in the Excel Metal Processors’ case to at least initiate discussions on EJC, if not giving due recognition to EJC at the present stage; but unfortunately, the tribunal miserably failed to do so. The tribunal kept its approach restrictive and adjudicated the matter without considering the issue and facts in a wholesome manner. Further, a legislative amendment under section 60 of the IBC is mandatorily required to uphold the recognition of Cross Border Insolvency Resolution, and acceptability of EJC is one of the steps amongst them.

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