Challenges of Group Insolvency in India

In 2016, the Insolvency and Bankruptcy Code (“the Code”) was enacted in India. The Code has formed its jurisprudence in such a short period of time. The Code, however, required reforms to keep up with the global insolvency regime and to assist the Indian economy in overcoming territorial barriers. In January 2019, the Centre convened an 11-member working group to examine the Code’s operation and the revisions that are required, one of which is “Group Insolvency”. This article will examine the concerns and challenges associated with the adoption of Group Insolvency in India, based on the Working Group’s recommendations.

What is Group Insolvency?

The number of conglomerates, amalgamations, and related-party transactions, among other things, has increased tremendously in India over the years, increasing the interconnection between different corporate bodies. This has created substantial issues in circumstances where a group’s holding company becomes indebted and is on the verge of insolvency, affecting all of the group’s subsidiary companies, or vice versa. When a group firm is formed, the entire group as a single economic unit becomes more valuable than the individual enterprises that make up the group. Group insolvency is the application of this notion to the insolvency of individual enterprises that make up the group. It essentially refers to the complete process of pooling individual companies’ assets and liabilities and undergoing bankruptcy procedures as a single substantive consolidation of the holding company, its associates, and subsidiaries, if any.

Group insolvency aims to balance the doctrine of a separate legal entity established in Solomon v. A Solomon & Co. Ltd on the one hand and on another, it acknowledges that, despite this distinct personality, a consolidated insolvency process is beneficial for all stakeholders, as their resolutions can be consolidated before one court of law and their combined assets can be used to the greatest benefit for the entire group, particularly the corporate debtor.

Group Insolvencies in India

While the Code is silent on group insolvency, the courts are attempting to fill in the gaps via judicial decisions.

Recently in State Bank of India & Anr V. Videocon Industries Ltd & Ors, the common creditor, a consortium of banks led by State Bank of India, filed an application with the National Company Law Tribunal (NCLT), Mumbai Bench, requesting the substantive consolidation of fifteen Videocon businesses into a single action for the purpose of CIRP to form a common debtor. The NCLT granted thirteen of the fifteen Videocon firms substantive consolidation on the basis of common control, common directors, common assets and liabilities, and other factors. The decision was reached after analyzing a number of US and UK case laws that held that bankruptcy courts can mandate consolidation while using their equitable powers. This decision provided the basis for the IBC’s implementation of the single economic entity principle and the start of India’s group insolvency system.

Similarly, in the case of the Jaypee group[1] and the Amrapali group[2], the Supreme Court ordered the parent firm in the former to deposit money, while the properties of the latter group were attached and  bank accounts frozen, notwithstanding the companies’ independent identities.

In another instance, in the case of Axis Bank Limited and others v. Lavasa Corporation Limited, the NCLT consolidated the Lavasa group insolvencies to avoid potential losses caused by fractured insolvencies, while recognising that the subsidiaries’ insolvency was primarily dependent on the resolution of their parent’s insolvency. Further to the above, the recent collapse of the IL&FS group, which consists of 348 firms, has highlighted the necessity to govern the group insolvency structure under the IBC.

Group Insolvency framework in India

The WG has proposed introducing the group insolvency framework in two stages.

First Stage

The first phase should be limited to companies within a domestic group, with procedural co-ordination mechanisms being used as a trial mechanism. Procedural co-ordination mechanisms are rules that coordinate  various insolvency processes of several group entities without interfering with the division of assets and substantive claims of creditors. This approach reduces the costs and time involved with various insolvency processes.

Second Stage

Depending on how well the first phase of the framework is implemented, the second phase will incorporate mechanisms for cross-border group insolvency and substantial consolidation. The notion of substantive consolidation aims to bring group firms’ assets and liabilities together so that they can be treated as a single economic unit during the insolvency process.

Issues and challenges

The introduction of the concept of Group Insolvency comes with its own set of challenges and issues that should be acknowledged and kept in mind while it is being drafted. They are as follows:

  1. The lack of lender homogeneity (i.e., various loan profiles and security interests) causes stress in the resolution and distribution mechanism. In such cases, procedural consolidation is preferable because it focuses on a coordinated CIRP without merging the group assets or liabilities;
  2. Mutually owed liabilities may make up a reasonable portion of the overall group debt, which is taken into account in the liquidation or fair value calculations of each company. In such instances, the common practice of ignoring related party debts may not be possible due to the competing interests of different lenders.
  3. The scope or volume of business in a diverse group may necessitate the appointment of extra professionals to assist the resolution professional, which may increase the cost of the procedure. Such additional expenditures, however, would almost definitely be less than the total costs of administering the separate CIRPs.
  4. There may be coordination issues with foreign representatives in the case of multinational conglomerates, and gaining custody or control of foreign assets would be challenging in the absence of a cross-border insolvency framework. The claims of guarantees issued to creditors of overseas companies were admitted in the Videocon case, but their assets could not be consolidated, resulting in a significant mismatch between the group’s assets and obligations.

Conclusion

The introduction of group insolvency in IBC would not only make the resolution process for group companies more efficient and cost-effective, but it will also allow the Adjudicating Authority to pierce the corporate veil and hold these group companies accountable as a single economic unit. While the IBC is quiet on the subject, the courts are taking proactive steps to fill up the gaps through judicial pronouncements. Given the numerous advantages afforded by the idea of group insolvency, it is critical in the long run for Parliament to recognise this by enacting the required provisions under the IBC, while keeping in mind the inherent challenges and issues raised from the Working Group’s report. Since the latest  amendments to the IBC in 2021  did not address group insolvency at all, it will be interesting to observe how the Parliament implements these recommendations in the future.

[1] Chitra Sharma & Ors. v. Union of India & Ors.

[2] Bikram Chatterji & Ors. v. Union of India & Ors.

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