The increasing mergers and acquisitions in India’s corporate sector have led to a rise in ‘group insolvency’ cases, where the financial troubles of a parent company

The increasing mergers and acquisitions in India’s corporate sector have led to a rise in ‘group insolvency’ cases, where the financial troubles of a parent company or its subsidiaries spread across the entire group. Group insolvency is the combined handling of assets and liabilities of related companies during insolvency proceedings.

Originally, India’s Insolvency and Bankruptcy Code, 2016 (IBC), was designed to address the insolvency of individual companies, not groups. This was due to the lack of a legal framework to manage complex group insolvencies.

However, given that companies often operate through interconnected entities, it’s important for insolvency laws to reflect the realities of modern business structures. An insolvency framework that only recognizes individual companies may fall short in preserving value and ensuring a fair distribution of assets among stakeholders. Therefore, it’s crucial to adapt the insolvency laws to effectively handle group insolvencies and protect the interests of all involved parties.

Why is there a need for a comprehensive framework?

The absence of a standard framework for the insolvency of group companies has been a major concern, particularly in cases where different group entities become insolvent. This can lead to difficulties in determining assets and liabilities, as there is often an inextricable link between them. The courts have stepped in to assist group CIRP consolidation and resolution, but a legislative framework is necessary to provide a clear and consistent approach.

Streamlining Corporate Restructuring: A Glimpse into IBBI’s Proposed Group Insolvency Framework

Recognizing the need for a group insolvency framework, the Insolvency and Bankruptcy Board of India (IBBI) formed a Working Group, which put forth recommendations on September 23, 2019. The group suggested a phased implementation, focusing on procedural coordination, substantive consolidation, and addressing corporate misbehavior within the group.

Phase 1 involves testing procedural coordination mechanisms for domestic corporate groups. This includes joint insolvency applications, shared communication among insolvency professionals and authorities, a single adjudicating authority, a shared insolvency professional, a group creditors’ committee, group coordination proceedings, and extending the insolvency resolution timeline to 420 days.

Phase 2 plans to extend the framework to cross-border insolvencies and substantive consolidation based on Phase 1 outcomes. Substantive consolidation treats group assets and liabilities as a single entity for insolvency purposes. The recommendations aim to streamline insolvency proceedings for interconnected companies, ultimately making the process more efficient and cost-effective.

Challenges and Concerns

Implementing a group insolvency framework has various challenges. The term “commercial understanding” in the definition of group company is vague and may lead to an incongruous interpretation, potentially delaying proceedings and clogging judicial infrastructure. The adjudicating authority has expressed concerns that group insolvency may lead to conflicts of interest or interfere with any company operating in the group. Additionally, the report recommends the constitution of a group CoC, the composition of which is to be decided by the CoC of each group company, which may lead to issues of coordination and conflict.

Consolidation for Resolution: How Indian Courts Are Addressing Group Insolvency

Despite the Insolvency and Bankruptcy Code, 2016 (IBC) not specifically addressing group insolvency, Indian courts are pioneering this area. The landmark case was the consolidation of 13 Videocon Group companies, initiated by the National Company Law Tribunal, Mumbai, on August 8, 2019. This consolidation was based on the group functioning as a single economic entity with interlinked assets and liabilities and the understanding that lenders regarded the group as jointly responsible for debts.

The court recognized that consolidation could result in better resolution plans, as individual companies, especially trading ones with fewer assets, might not attract bids and be forced into liquidation. This would undermine the IBC’s objective to save and maintain companies as going concerns.

The Calcutta High Court further refined the approach, drawing from UK and USA legal principles, and introduced the concept of ‘equity and fairness’ as reasons to lift the corporate veil. It established criteria for when consolidation is appropriate, focusing on factors like common control and intertwined liabilities.

The court categorized groups into those that benefit from a combined resolution, potentially raising asset value, and those that can manage separate insolvency processes. The first category is considered suitable for consolidation.

Thus, through judicial innovation, group insolvency is being integrated into Indian insolvency jurisprudence, paving the way for more effective resolution strategies and fair value realization for all entities within a corporate group.

Conclusion:

In India, the interconnection and reliance within corporate groups necessitate a collective approach to restructuring, revival, or liquidation to maximize value. The introduction of group insolvency laws would streamline the resolution process, cut costs, and enable the adjudicating authority to hold economically unified groups accountable. While the current Insolvency and Bankruptcy Code (IBC) does not address this, the judiciary is taking steps to bridge this gap. Recognizing the benefits of group insolvency, it is crucial for Parliament to legislate these provisions, considering the complexities highlighted in the Working Group’s report. Although the 2021 IBC amendments have not yet included group insolvency, it will be important to monitor how Parliament addresses this issue going forward.

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