Insolvency Regime to Strengthen Insolvency Laws in IndiaSeptember 22, 2021
Over the years, the number of conglomerates, amalgamations, related-party transactions, amongst others, have exponentially risen in India, due to which the interconnectedness between different corporate bodies has increased. This has led to significant challenges in situations wherein the holding company of such group lands into indebtedness and is on the verge of being insolvent, thereby impacting all its subsidiary companies, or the vice-versa. Upon formation of such group company, the entire group as a single economic unit turns out to be more valuable as compared to the individual companies which make up the group. Applying this concept to the insolvency of individual companies which make up the group is called as group insolvency. It essentially means the entire process of clubbing together the assets and liabilities of individual companies, and undergoing the insolvency proceedings as one substantive consolidation of the holding company, its associates and its subsidiaries, if any.
Group insolvency seeks to balance the doctrine of separate legal entity as laid down in Solomon v. A Solomon & Co. Ltd  A.C. 22 on one hand and on another, it recognises that despite this distinct personality, a consolidated insolvency process is advantageous for all stakeholders, as their resolutions can be consolidated before one court of law and its combined assets can be utilized to the greatest advantage for the entire group particularly, the corporate debtor.
Group Insolvencies in India
With the advent of Insolvency and Bankruptcy Code, 2016 (IBC), there has been a transformative turnaround in the corporate insolvency resolution framework in India. However, the IBC does not accommodate and provide for specific arrangements or contains any provision for group insolvency as the legislation itself is still evolving and is designed for a single economic entity. IBC envisages a framework to deal with the insolvency and liquidation of corporates on a standalone basis. Nonetheless, with the growing demand for the process considering the ease of undergoing it and many benefits which come with it, for the prejudiced party and the ability to prevent fraud, the Courts have started taking cognizance of the same to fill in the lacunae.
In this regard, it is pertinent to highlight the landmark case of State Bank of India & Anr. v. Videocon Industries Ltd. & Ors., 2019 SCC OnLine NCLT 745, wherein a consortium of banks led by State Bank of India, being the common creditor, filed an application before the NCLT, Mumbai Bench seeking substantive consolidation of 15 Videocon companies into single proceedings for the purpose of CIRP to form the common debtor. The NCLT recognized this doctrine and allowed substantive consolidation of thirteen amongst the fifteen Videocon companies on the grounds of common control, common directors, common assets and liabilities, amongst others. The decision was arrived at by referring to several US and UK case laws where it was held that bankruptcy courts may order for consolidation while exercising its equitable powers. This ruling, in essence, laid the building blocks for the introduction of the single economic entity principle in the IBC, and for initiation of group insolvency regime in India, although at a very nascent stage. Very recently, NCLT has admitted the resolution plan of Twin Star Technologies Ltd. in the matter of Videocon Industries Ltd.
Another development in this field is that group insolvency has also been initiated to give relief to homebuyers. For instance, in the case of Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Pvt. Ltd. & Ors. Company Appeal (AT) (Insolvency) No. 377 of 2019, the NCLAT ordered for a simultaneous CIRP to be initiated against a group of five companies through a common RP, to develop a residential real estate project and complete it in one go by initiating a consolidated resolution plan for total development. Similarly, in the matter of Chitra Sharma v. Union of India 2018 18 SCC 575, SC directed the parent company, Jaypee group to deposit a heavy amount for the insolvency proceedings initiated against its group companies. However, in Bikram Chatterji & Ors. v. Union of India Writ Petition (C) No 940 of 2017, SC came to the aid of the aggrieved homebuyers by ordering attachment of properties of all forty group companies in the Amrapali group and freezing of bank accounts of all companies and their directors.
In another instance, while dealing with the insolvency process in the case of Axis Bank Limited and others v. Lavasa Corporation Limited MA 3664/2019 in C.P.(IB)-1765, 1757 & 574/MB/2018, the NCLT consolidated the Lavasa group insolvencies in order to avoid potential losses likely to be caused by fractured insolvencies while noting that the insolvency of the subsidiaries largely depended on the outcome of their parent’s insolvency. Further, the recent downfall of IL&FS group comprising of 348 companies also brought the need to regulate the group insolvency framework under IBC.
Report of the Working Group on Group Insolvency
Recognising the growing need for a holistic framework on group insolvency, the Insolvency and Bankruptcy Board of India (IBBI) constituted a Working Group which submitted its recommendations for the framework of procedure of group companies as ‘Report of the Working Group on Group Insolvency’ on September 23, 2019. The report primarily considered three elements i.e., procedural coordination mechanisms, substantive consolidation mechanisms and rules for perverse action behaviour of companies in a corporate group, governing the intricacies of the insolvency of companies in a group.
The Working Group addressed the concerns as to identification of a group, the extent of grouping and the mechanics involved. Among several recommendations, it recommended the implementation of the framework in a phased manner, as follows: –
- The first phase being that the framework should initially be applied only to companies in a domestic group with adoption of procedural co-ordination mechanisms as a trial mechanism. Procedural co-ordination mechanisms are rules which coordinate the different insolvency processes of various group companies, without disturbing the division of assets and substantive claims of creditors of each of the group companies. This mechanism lowers costs and reduces the time associated with different insolvency processes. It consists of the following elements: –
- Joint application process for insolvency of multiple companies,
- Communication, cooperation and information sharing between different insolvency professionals, NCLTs and CoCs under IBC,
- Single Adjudicating Authority to administer insolvency proceedings,
- Single insolvency professional for companies in a corporate group,
- Creation of a group creditors’ committee,
- Enabling of group coordination proceedings, and
- Extension of overall time frame for conclusion of CIRP of group entities to 420 days.
- The second phase should introduce mechanisms of group insolvency in the cross-border group insolvency and substantial consolidation, depending upon the implementation of first phase of framework. The concept of substantive consolidation seeks to consolidate the assets and liabilities of group companies so that they are considered as a single economic unit for the insolvency process.
In drafting the framework, the Working Group has taken into consideration the UNCITRAL Legislative Guide on Insolvency Law on ‘Treatment of enterprise groups in insolvency’, the ‘World Bank Principles for Effective Insolvency and Creditor/Debtor Regimes, 2016’ and has extensively drawn references from western legislation in European countries and United States, with the aim of designing a comprehensive and practical framework to facilitate insolvency resolution and liquidation of companies in a group.
However, upon analysing the recommendations of the Working Group, there are a few grappling questions or concerns that arise in the framework which need to be addressed and are as follows: –
- The definition of the term ‘corporate group’ provided by the Working Group for the purpose of this framework so as to include holding, subsidiary and associate companies, is vague and fails to be inclusive.
- Jurisdictional issues arising due to the recommendation of a single Adjudicating Authority to mandatorily monitor the group insolvency process, on one hand and on the other hand, the stakeholders are provided with certain liberty to have different Adjudicating Authorities during the process of transfer of their applications.
- Applicability of cross-border insolvency provisions with relation to group insolvency since the development of provisions related to cross-border insolvency is itself at a nascent stage and there is a dire need to revamp it.
- The report does not settle the application of the principle of extension of liability as far as the Indian jurisprudence related to group insolvency proceedings is concerned.
- The report has not delved into issues relating to provisions for dealing with multiple tax jurisdictions, the concept of group moratorium, the procedure to move out from group insolvency proceedings in case of settlement between creditors and corporate debtors, the feasibility of insolvency proceedings of a corporate debtor having cross investments and backward or forward linkages with other group entities without consolidation, alignment of management of multiple group companies by single RP.
IBC has established its jurisprudence in a short span of time; however, it requires reforms in order to keep up with the insolvency regime across the globe and to help the Indian economy overcome territorial boundaries. One such reform is that of the introduction of group insolvency law in India, which will not only make the resolution process expeditious and cost-effective for the group companies, but also will allow the Adjudicating Authority to pierce the corporate veil and hold these group companies working as a single-economic unit, accountable for the manoeuvre of its subsidiaries and associate companies. While the IBC is silent about it, positive steps are being taken by the courts to fill in the lacunae through judicial pronouncements. Given the large number of benefits offered by the concept of group insolvency, it is imperative in the long run for the Parliament to give legislative recognition to it, by way of introducing the necessary provisions under the IBC, being mindful of the inherent challenges and issues that arise from the Working Group’s report.
It is pertinent to note that as early as March 2018, the Insolvency Law Committee in its report observed that the introduction of group insolvency regime in India may not be needed in near future, not realising the fact that most of the companies in our country are part of a group, as a result which they are also interconnected and structurally, financially, and operationally interdependent. It necessitates an integrated view of their business while aiming to achieve value maximisation in the process of restructuring and revival or liquidation. In the present business day context, the suspension of IBC proceedings has given an opportunity to the law makers to discuss and debate for an efficacious framework for group insolvency since the onset of Covid-19 pandemic has posed survival threats to many group companies and conglomerates and has pushed some of them to proceedings under the IBC. It is inevitable to address the procedural as well as substantive aspects by taking a consolidated view of group entities, for the legal framework on group insolvency to be effective. Interestingly, the recent amendments to IBC in the year of 2021 have not dealt with group insolvency, and therefore it will be noteworthy to see how the Parliament implements these suggestions, hopefully in the near future. The time seems right to further strengthen the IBC by adding a chapter on group insolvency.