Update on Indian Insolvency Proceedings

Over two years ago I posted here on proposed changes to Indian insolvency law. Given the gridlock that accompanies India's current fragmented coalition government, I'm not surprised that nothing has come of the proposals. What is a bit surprising, however, is that an Indian company subject to the appropriately named Sick Industrial Companies Act of 1985 (SICA) has gained judicial recognition in the U.S.

SICA is a purely administrative regime and has never been noted for successful rehabilitations of "sick" companies. Judicial safeguards are scanty as is anything generally like due process. In fact, the Indian Parliament has voted to repeal a significant part of SICA but its action to repeal has not been implemented. These systemic weakness, however, were not enough to dissuade the United States Bankruptcy Court and, on appeal, the United States District Court for the Southern District of New York from refusing to recognize the Indian insolvency proceeding for Ashapura Minechem Ltd.

Ashapura is based in the Indian State of Gujarat and has suffered from two substantial arbital losses arising out of contracts for the sale of bauxite. (Ashapura had defended these claims on the ground that Gujarat had made performance of the contracts at issue impossible. For anyone interested in impossibility under the Indian Contract Act of 1871, check my article here.) The prevailing parties reduced their arbital awards to judgment and were seeking to enforce them in New York.

Chapter 15 of the United States Bankruptcy Code permits a U.S. Bankruptcy Court to recognize a qualifying "foreign proceeding" as the equivalent of a U.S. bankruptcy filing with the accompanying automatic stay of all collection activities.

Over the strenuous objections of the parties who had prevailed at the arbitration hearings, the American courts recognized the Indian SICA proceeding and stayed collection of the judgments. If you have access to Westlaw you can find the opinion of the bankruptcy court at 2011 WL 5855475. I read the opinion of the District Court on Bloomberg but I'm confident it will be published more broadly soon.

Chapter 15 is a powerful tool for foreign companies to reap the advantages of the extraordinarily pro-debtor bankruptcy laws of the United States. It is regularly invoked and, with the decision in Ashapura, should continue to provide a side-door into the benefits of American law.