Leiden Law Blog

The effects in the Netherlands of an order issued in Indian insolvency proceedings

Posted on by Bob Wessels in Private Law
The effects in the Netherlands of an order issued in Indian insolvency proceedings

Cross-border insolvency matters between the Netherlands and India? A rather unique occasion, but one that indeed recently occurred in the Netherlands when the District Court of Midden-Nederland on 30 March 2016, ECLI:NL:RBMNE:2016:1452, had to decide on such a case. A main actor in the case at hand is the insolvency practitioner (faillissementscurator) of an insolvent Dutch company which holds several interests in (pharmaceutical) companies in the UK, the USA and Brazil. The defendant is the Dutch company’s Indian parent company which operates in India and has some 700 employees. The Dutch insolvency practitioner had summoned the Indian company as a result of fraudulent transfers made in connection with a share transaction with respect to another non-bankrupt Dutch subsidiary. The Indian parent company itself, however, is subject to an Indian proceeding arising from the applicability of the Indian Sick Industrial Companies Act 1985 (SICA).

The Indian parent company alleges that the Dutch insolvency court has no jurisdiction since the company has its centre of main interest outside of the EU. Secondly, it also asks the Dutch court to suspend the proceedings in the Netherlands because the Indian Board for Industrial & Financial Reconstruction (BIFR) in a decision dated 15 October 2014 had already banned the Dutch insolvency practitioner from initiating any coercive action ‘… against the investment of the company, for recovery of their dues …’ relating to the Dutch company, i.e. the shares the Indian parent company had acquired in the Dutch subsidiary.

The Dutch court assumes implicitly that the proceedings resulting from the SICA Act can be characterised as insolvency proceedings. It starts off with the correct submission that no treaty covers this matter. In the Netherlands it is generally accepted that in the absence of such a treaty the rule then is to apply Netherlands international private law, to which the court adds: ‘including’ the European Insolvency Regulation on whether it has jurisdiction to hear the dispute. The District Court then referred to the case of the Court of Justice of the EU 14 January 2014 (Case C-328/12) (Schmid v Hertel) in which the European Court in relation to a pending insolvency proceeding had given the respective German court jurisdiction to decide on an action to set a transaction aside that was brought against a person whose registered office or domicile was not in the EU (in this case Switzerland). The German court was therefore authorised to take a decision. Based on this, the Dutch court rejected the defence regarding its jurisdictional incompetence.

The question whether the statement of the Indian BIFR has effect in the Netherlands is assessed by the District Court on the basis of the so-called territoriality principle as explained by the Dutch Supreme Court in the Yukos appeal, see 'Netherlands applies principle of universality in international insolvency cases'. If the BIFR order would have effect in the Netherlands, it may not result in jeopardising the claims of the Dutch insolvency practitioner with respect to the shares to be nullified. Other consequences of the BIFR order, such as a temporary stay of the proceedings in the Dutch insolvency proceedings, are not contrary to the principle of territoriality according to the court. The court recognises the BIFR order therefore, provided that the position of the insolvency practitioner cannot be nullified. The court furthermore ruled that the BIFR order is rather similar to the cooling-off period of Article 63a Netherlands Bankruptcy Act and that the BIFR order aligns with the existing system of open cross-claims within Dutch procedural law. Before deciding whether the court stays the proceedings relating to the BIFR order, the court gives the Indian parent company the opportunity to provide information so that it can better understand the importance of a suspension in the context of the application of the BIFR regime.

As far as I am aware, this is the first cross-border insolvency case in the Netherlands involving India. Since May 2016 India has changed its bankruptcy laws rather radically, see here, and for a short overview.  The present case, however, dates from before the new law. As an aside, Sections 234 and 235 of the new Act provide some poor rules for cross-border cases, with a method of entering into a bilateral, reciprocal recognition agreement with the other country involved. It is clear that India has not embraced the UNCITRAL Model Law (thanks to Mr Morshed Mannan, PhD researcher Leiden Law School). The present Dutch system is no better. Notwithstanding adequate proposals for improved legislation, its basis is largely case law. The District Court applies this case law and uses the legal term ‘recognition’ (of the BIFR order) but in the Yukos case the word recognition has not been used. Case law merely allows for a foreign insolvency measure to have effect (be it that the territoriality principle does not allow that effect to be invoked in the Netherlands in so far as it might result in unsatisfied creditors no longer being able to take recourse – either during bankruptcy or after the bankruptcy – against the assets of the (former) bankrupt debtor that are situated in the Netherlands). The applicable law is also not set in stone. The District Court refers to applicable Netherlands international private law, ‘including’ the European Insolvency Regulation. That would seem to me to be a broad interpretation, as the Regulation imposes its own system, including a system of conflict-of-laws, on any Member State. However, all things considered, the Court’s approach can be supported.

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