This article is written by Anaya Jain, a student of BA.LLB(Hons) from NMIMS school of law, Bangalore. This is an exhaustive article which explains what is group insolvency, its framework in India and presents the critical analysis on the same.
In 2016, The Insolvency and Bankruptcy Code (“the Code”) was presented in India. In such a limited span of time, the Code has built up and established its jurisprudence. However, the code is expected to be changed and updated according to the bankruptcy system over the globe and enable the Indian economy to conquer territorial boundaries. In January 2019, the centre set up an 11-member working group to investigate the working of the Code and the changes it accordingly needs; ‘Group Insolvency’ being one of them. In March, the Insolvency Law Committee headed by Injeti Srinivas was reconstituted to investigate the structure of Group Insolvency alongside different changes recommended.
The working group analysed definitions of “group company” in different Indian and global enactments or legislations like, Foreign Direct Investment Policy, Competition Act, SEBI Regulations, Companies Act, 2013, EU Regulations on Insolvency Proceedings and UNCITRAL Guide on Insolvency. In such a manner, the working group saw that rules of ‘control and ownership’ are common over every one of these enactments. It was suggested that the meaning of Corporate Group ought to incorporate associate, holding and subsidiary organizations and if an organization isn’t covered within the said definition and yet is characteristically connected to frame some portion of a group in a “commercial understanding”, at that point the Adjudicating Authority may include such company for the group of companies.
What is Group insolvency?
For corporate groups to succeed internationally in their operations, explicit necessities and needs of various markets must be thought of and considered. Different difficulties and challenges are put forward by foreign business and their laws in this regard. The most ideal approach to manage and deal with such distinctive markets is to incorporate a subsidiary company in that foreign nation where the business is to be established under the company law of the national parent company it is set up in. This business strategy prompted the ascent of corporate groups everywhere throughout the world. From a monetary point of view, these corporate groups are ‘one organism.’ However, from a lawful viewpoint, the standard set out by Salmon v. Salmon of a separate legitimate entity is still followed. In this way, for activity against every entity/subsidiary, a different Corporate Insolvency Resolution Process (“CIRP”) must be started against them independently by their creditors despite the fact that every one of them generally has a place with the same group.
This standard of separate legitimate or legal entity is used by the corporate groups in covering their assets. These group companies have several subsidiaries in various jurisdictions with a holding organization or company dealing with every one of them. The creators of the corporate structure are sufficiently shrewd to get the assets of the group away from such holding organizations through several layers; here and there even in different jurisdictions to totally protect and insulate their assets from insolvency processes.
The treatment of corporate indebted individuals as separate legitimate entities is highlighted by the court’s reluctance in penetrating the corporate veil. Insolvency laws in India, consequently, neglect and fail to deal with the CIRPs filed independently in different jurisdictions against the bankrupt entities of the equivalent multinational corporate enterprise all together as a single proceeding. Group Insolvency is a framework where if multiple entities of a solitary group go wiped out and insolvent, their resolution can be united in one court so that firstly, the group can be rebuilt all in all and secondly, its combined assets can be used to the greatest advantage of both the group corporate and the debtor. This structure permits substantive consolidation which empowers clubbing of assets and liabilities of the group members such that they can be treated as a solitary financial organism.
It naturally follows that for this concept to work, one jurisdiction must be picked to manage all the resolutions against different entities of a corporate group paying little mind to their location. The jurisdiction, so picked, is prevalently known as the Center of Main Interest (COMI).The issues emerge in the choice and selection of COMI. The factors like, the laws of which nation would be generally most beneficial for the resolution procedure and whether the ultimate result will be perceived by the other state involved are frequently thought about and taken into consideration. The UNCITRAL Model Law on Cross Border Insolvency gives a structure to coordinative methodology between jurisdictions where a foreign representative will be appointed by each state involved to “administer the rearrangement or liquidation of the account holder’s or debtor’s assets.” Chapter V of the EU Insolvency Regulations additionally contains different principles for incorporating the bankruptcy procedures concerning group companies.
Since, the standard and norm is that the creditors can practice their right only against the organization with which they have gone into an agreement, there is no concept of general group liability. Thus, for a group liability to exist, a legal position and statutory authority must be given to the organizations in their respective jurisdictions. Henceforth, for group insolvency to be successful, an ever-increasing number of jurisdictions must consolidate the structure of cross-border indebtedness with the goal that when a jurisdiction is picked as COMI, the legal arrangements or statutory provisions don’t present any obstacle to the resolution procedure.
Why is it needed?
With group structures holding prominence in the business scene of India, there has been a need to outline and frame a comprehensive group insolvency framework. There are situations where the stakeholders may expand their interests and the chance of revival of organizations might be higher if organizations in a group are settled and resolved together. However, the Insolvency and Bankruptcy Code, 2016 (‘IBC’) doesn’t conceive a structure to either synchronize indebtedness procedures of various organizations in a group or to resolve their insolvencies together. As of late, the need was acknowledged in the insolvency resolution of some corporate debtors like Videocon, Era Infrastructure, Lanco, Educomp, Amtek, Adel, Jaypee and Aircel, where uncommon issues emerged from their interconnection with other group organizations. In a portion of these cases, the Adjudicating Authority under the Code just as the Supreme Court, have passed orders to partially enhance such issues. This featured the need to look at the desirability, attainability and feasibility of having a group insolvency structure.
Group insolvency in India
While the Code is silent about group insolvency, the courts are attempting to fill in this lacuna through legal professions. At the point when the Videocon Group went insolvent, fifteen distinctive resolution applications were filed against its fifteen diverse group companies. On 8th August 2019, the National Company Law Tribunal, Mumbai Bench allowed meaningful consolidation of 13 organizations or companies of the Videocon Group in the case of State Bank of India v. Videocon Industries Ltd. giving an exemplary case of group insolvency carried by the courts in India.
The contention given in favour of consolidation, which turned into the premise of the judgment, was that the group worked as a solitary monetary unit. The organizations had deliberately framed an obligor/co-obligor structure through contractual agreements which pooled their assets and liabilities. All the lending had been done on the premise that the corporate debtors would be ‘jointly and severally’ at risk and liable for the obligation leaving their assets and business functions ‘unpredictably intertwined’.
The other contention was that the consolidation would prompt a superior liability framework for the bidder, clearing route for better resolution plans. Numerous corporate debtors, similar to the exchanging organizations or trading companies, would not have numerous assets when contrasted with a manufacturing organization which would have lands and industrial facilities or factories as its significant assets. Subsequently, the likes of trading companies would get substantially less or most likely no resolution plans making them eventually dive into liquidation and the object of the Code which is to spare corporate entities and keep them as a going concern may get defeated.
The High court of Calcutta analyzed the need of consolidation with the assistance of standards and principles set somewhere around by UK/USA courts and concluded that ‘equity and fairness’ can be the basis for lifting the corporate veil.It likewise demonstratively listed twelve ingredients one can search for before activating consolidation, some of them being, common control, basic assets, basic liabilities, between binding of account, multifaceted connection subsidiaries, looping the debts, and so on.
The court divided the group enterprises into two categories. The primary category is of the groups, which when united for the resolution procedure shows signs of improved asset value and independently gets plunged into liquidation. The second category has a place with the organizations which can endure and survive regardless of whether their CIRP are managed independently. The court said that the former case ought to be the one granted with consolidation.
This case has set out an intricate and elaborate jurisprudence for Group Insolvency wherein it brought in promising proposals to the bidders for better resolution plans for the group, along these lines getting each corporate debtor its best worth. and value. Consequently, Group Insolvency has discovered its way in India through courts and now, discovering its way into the legal books.
Gist of the Report of the working group: Proposed framework and recommendations
Identification of ‘Group’
The identification is proposed to be based on triple-criteria:
- Inter-se relation among the organizations or companies, that is, regardless of whether the company is a holding, subsidiary or associate companies according to the Companies Act, 2013;
- Fulfilment of commencement standard by the organization, i.e., regardless of whether the organization has committed a ‘default’ as defined under section 3(12) of the code meaning along these lines that only insolvent organizations are taken into consideration with the end goal of group insolvency; and
- Regardless of whether the organization is a domestic organization, that is, until further notice, the Working group has favoured excluding overseas ventures of the group. This despite everything stays an issue as in the period of globalization; organizations have properties, transactions everywhere throughout the world. However, the inclusion of off-shore entities should be supported by a viable and effective cross-border insolvency framework.
The Working group has recommended that “corporate group” ought to have two essential ingredients as Ownership and Control. In addition to that, the Working group suggests that even organizations which are not covered under the definition however are characteristically connected will form some part of a ‘group’ in commercial understanding. Here, the principal factor in deciding whether the organization will be incorporated or not will rely on the value addition to be the other organization in the indebtedness without destroying the value of the organization being incorporated. Another critical view is that the framework has been made regarding the organizations; along these lines, other corporate structures like limited liability partnerships or other body corporate have not been incorporated.
Extent of ‘Grouping’
Working group has referred to and talked about three standards or rules which guide the group insolvency system. These incorporate:
- Procedural coordination mechanism (PCM) which refers to a set of rules that are focused at coordinating the ‘procedures’ of insolvency while keeping the assets of each group organization separate,
- Substantive Consolidation Mechanism (SCM) which contains combination or consolidation of assets and liabilities of different group organizations as they are treated as a part of a solitary insolvency estate with the end goal of reorganisation or distribution in liquidation, and
- Rules managing or dealing with unreasonable conduct of organizations in corporate groups empower the formation of mechanisms to recapture assets subject to biased transactions between group members and impose liability on group companies for one another’s debts, as suitable.
As the framework is issued in a phased manner, the Working group has prescribed the only PCM to be included in the primary stage meaning that SCM will not be included. Also, the structure ought to be empowering or enabling as opposed to compulsory. This depends on the method of reasoning that as the organizations are of various nature and situated in various jurisdictions, a satisfactory institutional infrastructure is important to deal with instances of group insolvency successfully to the degree such framework creates collaboration or synergy.
However, the Working group has noticed that substantive consolidation has already been permitted by the Adjudicating Authority in State Bank of India and Anr. v. Videocon Industries Ltd. and Ors where it requested that 13 out of 15 organizations of the Videocon group be consolidated. As indicated by para 82 of the order the Adjudicating Authority held that “business operations are so dove-followed that their administration, deployment of staff, creation of merchandise, dissemination framework, arrangement of funds, loan facilities and so on are so unpredictably interlinked that segregation may bring about an unviable arrangement. Far beyond, most significant is that if segregated, the chance of restructuring the option of augmentation of value of assets turns out to be so depressing which will overweigh the union or consolidation”.
However, the Report has adopted the regime for procedural coordination with a structure to bring different organizations into indebtedness together and has excluded substantive consolidation in its first stage. In addition to that, the PCM is permitted at the phase of indebtedness resolution and liquidation. Further, the Working group suggests that in situations where PCM started at the resolution stage doesn’t proceed to the phase of liquidation, new applications for coordination might be permitted at the liquidation stage.
The suggestions appear to be in a state of harmony with the understanding that substantive consolidation is the rarest of the rare remedy which must be utilized in extraordinary conditions. We have talked about the equivalent in the article Entity versus Enterprise: Dealing with the Insolvency of Corporate Groups.
Mechanics of grouping
The Working group suggests that procedural coordination mechanisms (other than co-operation, coordination and data sharing) ought to on a fundamental level be empowered by law, anyway adaptability ought to be allowed to not decide on or apply these mechanisms in those situations where they don’t help expand the value of assets or lower expenses of procedures. Further, Working group suggests that insolvency professionals, CoCs (committees of creditors) and Adjudicating Authorities ought to be ordered to coordinate, communicate and share data with one another, since this is probably going to decrease the time taken in procedures, lower costs by de-copying efforts to gather data and promote data balance.
In this manner, a grouping of insolvency proceedings will include the following:
A solitary application can be made by financial creditors, operational creditors or the group organizations themselves to initiate the CIRP(corporate insolvency resolution process) for numerous group organizations that have committed a default as required under Section 7, 8 and 9 of IBC (‘Joint Application’) in this way decreasing the expenses of making various applications. The Application may incorporate a proposal for the appointment of solitary insolvency proficient. Such a joint application procedure ought to be in addition to the mechanism to start the CIRP procedure against each group organization independently. At the point when the joint application is acknowledged by the Adjudicating Authority, it might order for a single public announcement to be made for all organizations.
Common adjudicating authority
As the fundamental target of these proposals is bringing down of litigation cost, decrease of judicial effort and time, the Working group has suggested the following:
- Single Adjudicating Authority will oversee indebtedness procedures of group organizations.
- In addition to that, the Working group opined that the Adjudicating Authority might be the one which initially admits the application to initiate the CIRP of any organization in a group.
- In any case, there can be circumstances where the stakeholders of the various organizations may not need Adjudicating Authorities to transfer applications, here the Working group suggests that adaptability and flexibility ought to be permitted insofar as Adjudicating Authorities share data, coordinate and communicate with one another. However, the Working group has opined that the Adjudicating Authority ought to be ordered to transfer the indebtedness procedures where a Committee of Creditors (CoC) when formed applies to have the procedures directed by the first Adjudicating Authority.
- CoCs of various organizations will, by required majority, choose based on their comfort, a solitary Adjudicating Authority to oversee their indebtedness resolution procedures and seek transfer of every pending application to it.
Common insolvency professional
The Working group suggests that solitary adjudicating authority ought to appoint a solitary indebtedness proficient for the insolvency procedures of the group organizations. However, in circumstances where the appointment of a solitary indebtedness professional can prompt possible conflict of interest or the same insolvency proficient have no adequate resources to complete her obligations in regard to various appointments, the Working group suggests that extraordinary or numerous insolvency professionals might be appointed for various organizations. However, in such circumstances, these insolvency professionals ought to be ordered to communicate, collaborate and share data with one another. Further, these indebtedness professionals can make a solitary public announcement with the prior permission of the Adjudicating Authority, share data and collaborate for the check of claims, appoint the same values, and so forth.
The decision to appoint the same insolvency professional may also be taken at the phase of liquidation.
Group committee of creditors
With the view that arrangement of the group creditors’ committee will bring about coordinated negotiation, say, with the resolution applicant, the Working group suggests that it might be permitted at the discretion of CoCs of each group organization. However, the composition, constitution and expenses of the group creditors’ committee might be decided by an understanding between CoCs of organizations in a corporate group or by a Framework Agreement (as talked about beneath). Along these lines, the essential goal of the group CoC is to empower synchronized resolution of the insolvency of group organizations. It has been referenced that group CoC can’t take any decision without the consent of CoCs of the organizations. However, the degree of coordination and sharing of data is left at their discretion.
With the view to empower synchronized resolution of group insolvency, the Working group suggests for group coordination proceeding relying on a vote of the majority of the CoC of each company. Here, CoC has been given the responsibility to survey whether this group coordination is proper to encourage effective administration of the insolvency procedures relating with the diverse group organizations; and ensure that the advantages of the group coordination are not exceeded by the evaluated costs.
Working group suggests that the group co-ordination procedures ought to be represented by a Framework Agreement that is affirmed by the CoC of each organization who takes an interest in these procedures. A Framework Agreement would incorporate techniques or strategies pertinent to particular organizations alongside the arrangement of quit from the group coordination procedures at this stage. Moreover, the Framework Agreement ought to likewise accommodate the mechanism by which an organization may select into group coordination procedures at a later stage.
Remarkable highlights of or incorporations in the Framework Agreement will be:
A group Coordinator is appointed under the Framework Agreement to propose group methodology. Only an insolvency professional ought to be appointed as a group coordinator, since an indebtedness proficient has the imperative information and mastery according to the procedures under the Code. The group coordinator may propose a mix of activities including valuation of the assets of the group along with an anticipated share of each different organization, the arrangement of typical data update, the invitation of a typical statement of Interest for a few or all group organizations, the establishment of a group creditors to negotiate with lenders and so forth.
Quit or Opt-out option
It is significant that the CoC of each organization favours or approves the Framework Agreement procedure pertinent to their respective organization. Consequently, an option to quit the group procedures is given at this stage. So as to exercise the option of quitting, the vote of the larger part of CoC ought to be taken into consideration. After this stage, no quit option is accessible to the CoC.
Common resolution plan
At the point when a Common Resolution plan presented by the candidate is acknowledged by not many organizations in a group, the organizations that have dismissed the plan may not be given any further an ideal opportunity to attempt a resolution, except if adequate time in their CIRP period remains for them to attempt an independent resolution.
When the group procedures are opened, all the cases ought to be transferred to the Adjudicating Authority decided under the Framework Agreement and this Adjudicating Authority may settle disputes in regards to the use of the Framework Agreement and guarantee that activities taken as per the group coordination plan are consistent with the law.
In the case of liquidation
The Working group suggests that the liquidators appointed ought to apply to the adjudicating authority consented to between them to initiate group coordination procedures. However, they ought to consult the stakeholders’ consultation committee before applying. These coordination procedures may empower assignment of a solitary NCLT(national company law tribunal) as the Adjudicating Authority, the filing of consolidated reports and a consolidated sale of assets. It is applicable to note here that group coordination procedures at the phase of resolution would not be carried forward at the phase of liquidation.
Timespan or time frame
The general time span for resolution will not surpass 420 days including the extra expansion of period as long as 90 days and time taken in litigation.
Unreasonable behaviour of companies in a corporate group
Generally, there are four standards or rules against unreasonable conduct by group entities. These are as per the following:
- First, the subordination of claims which necessitates that the claims of related parties of the debtor or of the other group entities be treated subordinate to the claims of the irrelevant creditors, in the insolvency resolution of any one group organization.
- Second, augmentation or extension of liabilities where the liabilities caused by an entity which is experiencing indebtedness can be stretched out to other entities which are related to it or are a part of the same group.
- Third, Contribution Orders for example order made by a court directing a solvent group organization to contribute certain funds to another group organization which is experiencing indebtedness.
- Fourth, avoidance of defenceless transactions like preferential, underestimated, deceitful or extortionate and so forth.
Subordination of claims to be allowed in constrained instances of fraud, and so on.
The Working group suggests that subordination of claims ought to be an exemption other than the standard. The frequent subordination of rules can stop the parent organization in assisting its subsidiaries. Along these lines, as an alert, power has been given to the Adjudicating Authorities to subordinate the claims of different organizations in a group in exceptional circumstances of fraud, diversion of funds. However, in such cases, solid proof of wrongdoing must be submitted to the adjudicating authorities.
Provisions on avoidance of specific transactions might be adequate
As the IBC provides adequate provisions for an extended look-back period for related parties to set aside fraudulent, preferential and undervalued transactions including group members of the corporate debtor, subsequently, the Working group suggests that no further provision is required for putting aside transactions between organizations that are a part of the same corporate group.
Expansion/Extension of liability or commitment orders
The key motivation behind extending liability on parent organizations or its personnel is to stop unreasonable conduct of such organizations ex risk. Working group has not prescribed any provision to be made to stretch out liability to parent organizations or issue commitment orders as IBC(insolvency and bankruptcy code) itself has sufficient provision to discourage such unreasonable conduct.
Challenges in its way
This new advancement of Group Insolvency accompanies its own set of challenges and issues which should be remembered and kept in mind while it is drafted. Issues must be settled in regards to organizations with a gigantic turnover, which is monetarily independent and self-sufficient in running their organization as a going concern but is being dragged in the insolvency because of the group members. For instance, KAIL was one of the fifteen Videocon group entities which were requested to be consolidated. The court chose to keep it out of the union or consolidation since KAIL was an independent and self-sufficient organization with an immense turnover and was autonomously equipped with keeping up itself as a going concern.
Whenever merged with different entities, KAIL’s asset value would have diminished which would have harmed its creditors’ enthusiasm and interest leaving them uncertain about their share in the combined asset of the Group. On the off chance that creditors are left insecure, at that point that would reflect in either their eagerness to give credit or their raise in the amount of intrigue or interest. In the case of operational creditors, on the off chance that the assets are consolidated, at that point their chances to hold 10% of the aggregate due sum diminishes. Henceforth, their opportunity to be a part of Committee of Creditors goes down and on the off chance that operational creditors are overlooked or ignored, at that point, no one would give merchandise and services on credit. There would be a demand for advance payment which would be terrible for the Indian economy.
Individual Insolvency procedures against different organizations of the same group in the different jurisdictions over the world result in an undue delay to the innocent creditors. In such a situation, the union of the subject matter would act in the advantage of creditors and the resolution procedure of such group insolvency would be quick and in an ideal way.
The group insolvency system is required to address different developing worries, as was apparent from recent indebtedness cases. However, as the Code develops from the idea of ‘entity’ to ‘enterprise’, the stakeholders, including the administrators and the legal executive, will contribute as well as gain from the experience it brings to the table. Further, the usage of the group framework is in a phased manner which will prompt the improvement of law and development of jurisprudence alongside the cases. Along these lines, the input obtained from the execution of the gathering structure will assist the administrators with devising fundamental revisions in the equivalent.
In India, however, the Code doesn’t accommodate and provide for specific arrangements or provisions identified with group insolvency, the courts, through its capacity of legal translation or judicial interpretation, have acted as the hero to rescue and settle a few cases accordingly. In any case, specific provisions identified with this concept should be incorporated in the code so as to get sureness and consistency in the law. Investors shall accordingly plan their investment; otherwise, pointless deferral or delay in courts and different complexities would make India a less alluring investment destination.
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