Vol 18 (2021) - Issue 1

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Bankruptcy Remoteness in India: Turning a Blind Eye?

Synopsis
The practice of establishing special purpose vehicles ('SPV') and insulating them from the financial and operational risks of the sponsor (i.e the person or entity establishing such insulated vehicle) is common place in several commercial transactions. These vehicles are referred to as bankruptcy remote. In theory, bankruptcy of a sponsor should not engulf its bankruptcy remote special purpose vehicle in its blanket. However, in practice, bankruptcy remote vehicles have often been at the forefront of several litigations waged by the desperate creditors of the sponsor. While, the mature insolvency jurisdictions have acknowledged and appreciated the commercial substance of bankruptcy remote vehicles, these transaction structures are relatively novel for India. Recently, an order of the National Company Law Appellate Tribunal ('NCLAT') concerning the resolution of Infrastructure Leasing & Financial Services Ltd ('IL&FS') consolidated bankruptcy remote entities into the resolution of the IL&FS. This order has rattled the Indian infrastructure sector and has led to concerns regarding enforceability of bankruptcy remote arrangements. In this piece, the authors dissect the law and practice pertaining to bankruptcy remoteness in India and engage in a cross-jurisdictional analysis of the treatment of such transaction structures by the judiciary. The authors also analyse the efficacy of several parameters which have been established by credit rating agencies to categorise SPVs as bankruptcy remote. Finally, drawing inspiration from the celebrated case of Re Polly Peck, the authors deliberate upon the road ahead for bankruptcy remoteness in India and the laissez-faire approach which needs to be adopted.