Bankruptcy tourism is a phenomenon that involves MNCs moving to another favourable jurisdiction and filing bankruptcy there by proving the COMI. This also facilitates forum shopping. COMI was first used in the UNCITRAL Model Law on Cross Border Insolvency. When MNCs  opt for forum shopping in a foreign country, there is great amount of economic harm caused to the home country as it results not only in a  different interpretation of their  bankruptcy law but also opens access to various new set of rights and remedies to the corporate debtor. This harm can be prevented by internationally recognizing one definite uniform bankruptcy law and a single court with universal jurisdiction to deal with multinational company’s bankruptcy cases , also termed as “universalism”. However, that is not so easy as insolvency professionals around the world are seeking to do away with the recognition requirement. Moreover, when forum shopping takes places the competing courts ie., one domestic and the other foreign court, tend to give more reasoned decision but, the economic harm to domestic trade and commerce is constant. The aforementioned believers of “universalism” believed home country standard was sufficient to prevent forum shopping however it suffered from a number of defects. However in late 1990s, UNCITRAL promulgated the Model Law on Cross-Border Insolvency,EU’s Regulation on Insolvency and American Law Institute recognized the home country standard. It can be safely concluded that the COMI tests suffers from ambiguity and that the universalist approach is melting down rapidly.

United States and  European Union has always been the primary hub of indian foreign investments as indian companies religiously target developed western markets. The bankruptcy law in US enables even someone with a mere bank account in US to have “property” in US and hence can file for insolvency apart from home jurisdiction. Chapter 11 of the American Bankruptcy Code provides optimum and distinctive solutions to transnationals corporate entities in distress as compared to bankruptcy code of any other jurisdiction making it well regarded as an ideal one.

One of the basic reasons behind economic step back of India is that most domestic investors are tempted to invest outside the country due to better investment climate which adversely affects businesses within the country though giving some impetus to multinational companies.There existed strict and restrictive industrial regime during the License Raj era in India which made companies escape such regimes and pushed towards internationalization.Such internationalization of indian companies happened with the primary motive of gaining financial leverage.However when Global financial crisis in 2009 hit,the companies which had purchased foreign assets from developed markets in high premium incurred lot of debt.These companies resorted to taking foreign credit and simultaneously the value of rupee started to fall significantly.This spirit of internationalism can also be felt in comprehending the effect of bankrupty  tourism on MNCs.

In the last 5 years, the indian insolvency law regime revolution has brought about remarkable changes.The three basic contradiction of saperate legal entity,group company to be considered single entity and parent company status were very well settled by courts in various judgements like Videocon Industries and Jet Airways cases. In India, there are predominantly two forms of multinational enterprise, one whose ownership and control structure forms a pyramid known as “integrated groups” and another is contractual based groups which are generally linked to one another by contractual or operational arrangements.In case of MNCs, it is a goal to achieve such a universally acknowledged set of laws that ensures fair dealing, honours public policy , enhances market transactions smoothly and assures appropriate remedies to corporate debtor and equally satisfies all stakeholders.This is quite an utopian approach apart from being a universalist approach as already mentioned above.Judiciary across globe has trodden a rough path while determining appropriate jurisdiction for a distressed MNC to file for bankruptcy. Prior to COMI test, concept of place of incorporation and asset bassed or activity based test was considered widely by courts.While propagating universalism , many scholars are of the view that it would be an ideal lex situs for MNCs if it is one with closest connection or nexus to that particular MNC so that maximum creditor’s interest has be addressed to as a single forum and unified code prevents ambiguity.

Why MNCs prefer bankruptcy tourism?

The reason we see a number of foreign nationals coming to the UK to declare bankruptcy is because their countries have much stricter bankruptcy procedures. If they decide to move to the UK to take advantage of our more favorable treatment, then of course they shop on the forum. This is perfectly legal and, in the opinion of the majority, ethically reasonable. It includes an insolvent entity (be it an individual or a legal entity) actually relocating to another jurisdiction because it gives them access to restructuring or other flexible English legal procedures that give them the best chance of retaining the value of their asset.Similar concept should be applied to personal insolvency.

A lot of litigation takes place involving a number of economic migrants in the process of moving to the UK to avoid the historic business obligations in their country of origin.Economically viable. productive people who want to do useful work in the UK who, over time, contribute to their debts. Often their families are unwilling or unable to move with them, so over time they can return to their homeland periodically or after all their debts have been paid off. This does not mean that they are at the same time less economically active in the UK. According to European and English law, these people have every right to do this, and they should not be overly stigmatized by the superficial idea that somehow all bankrupt tourists are necessarily doing something wrong.We should sympathize with creditors of individuals who move in this way, but there is every reason to be sure that their interests are fully protected. Quite apart from the inherent checks and balances inherent in the judicial system to prevent abuse, creditors can and will pursue appropriate annulment application against anyone that has slipped through the network.In addition, bankruptcy professionals in England and Wales are now experienced in dealing with these issues during or prior to their appointment and work effectively with foreign creditors. If these lenders have trouble hiring an English bankruptcy professional, they can take effective local advice to make their voices heard.

It should be noted that the European institutions are currently considering amendments to European law which would potentially make relocation and automatic recognition of UK out of court insolvency procedures more difficult, that Irish insolvency law remains in a state of transition, and that proposals are currently being considered in the UK to extend the current one year bankruptcy discharge period back to three years. Whilst it is to be hoped that the UK will remain the forum of choice for insolvency reorganisations injecting money to UK, it may be that the UK bankruptcy tourist trade will soon have had its day.

Aishwarya Says:

I have always been against Glorifying Over Work and therefore, in the year 2021, I have decided to launch this campaign “Balancing Life”and talk about this wrong practice, that we have been following since last few years. I will be talking to and interviewing around 1 lakh people in the coming 2021 and publish their interview regarding their opinion on glamourising Over Work.

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