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Monday, May 25, 2020

Experts explain: Is India ready for the group insolvency?

It is a well-settled legal principle that subsidiaries are a separate legal entity and holding company does not own assets of its subsidiary.

By: Explained Desk | Updated: March 30, 2020 12:18:34 pm
Group Coordination Proceedings: Insolvency regimes around the world postulate appointment of group coordinator to supervise the effective implementation of group insolvency proceedings.

Written by Dheeraj Nair & Angad Baxi

Group companies are a set of entities related by shared control or economic dependencies. At present, the Insolvency & Bankruptcy Code does not envisage a framework to harmonise corporate insolvency resolution process and liquidation proceedings of group companies. However, in CIRP of various corporate debtors, the need of group insolvency arose due to interconnections within associated companies leading to IBBI constituting a working group to recommend facilitation of group insolvency and liquidation process. The group released its report on September 23, 2019 recommending implementation of a framework in a phased manner, starting with domestic group companies. As per the report, group company insolvency shall lead to information symmetry amongst stakeholders and cost effectiveness of insolvency proceedings. This article analyses the recommendations by the working group in the report.

Definition of Corporate Group

The working group recommended an amendment to the Code to add a definition of “Corporate Group”. The working group analysed definitions of “group company” in various Indian and international legislations such as Foreign Direct Investment Policy, Competition Act, SEBI Regulations, Companies Act, 2013, EU Regulations on Insolvency Proceedings and UNCITRAL Guide on Insolvency. In this regard, the working group observed that criteria of ‘control and ownership’ are common across all these legislations. It was recommended that the definition of Corporate Group should include associate, holding and subsidiary companies and if a company is not covered within the said definition and yet is intrinsically linked to form part of a group in a “commercial understanding”, then the Adjudicating Authority may include such company in the group of companies.

Procedural coordination and substantive consolidation

It is a well-settled legal principle that subsidiaries are a separate legal entity and holding company does not own assets of its subsidiary. In this regard, the Working Group has recommended the following mechanisms:

Information Sharing: EU and UNCITRAL insolvency regimes mandate insolvency professionals to communicate information and restructuring plans for companies. The working group has also recommended that IPs, committee of creditors and adjudicating authorities should be mandated to communicate insolvency proceeding(s) information to reduce duplicating efforts. However, the working group has failed to device a mechanism for information sharing. One way is to upload the necessary information on information utilitiesto assess whether there is a need for initiating group insolvency proceedings for a particular company.

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Group Coordination Proceedings: Insolvency regimes around the world postulate appointment of group coordinator to supervise the effective implementation of group insolvency proceedings. The working group has also suggested for appointment of a group coordinator to supervise valuation of total assets, common information memorandum, expression of interest, group CoC and resolution plan. However, the CoC of a group company, by a majority vote, may opt out of the insolvency proceeding, after assailing a reason for the same. Pertinently, the legislature ought to put a condition that no company shall be allowed to opt out after a certain stage, otherwise, it would derail the insolvency proceedings. Given that group company insolvency involves various complexities, the working group has suggested extending the time limit of CIRP to 420 days from 330 days by amending section 12 of the Code.

Single Professional, Group CoC and Joint Applications: Taking note of provisions of the EU, UNCITRAL and German insolvency regimes, the working group has recommended a joint application to commence CIRP for group companies provided all companies have committed a default as per the code. Further, it has also recommended administering insolvency proceedings of group companies by a single adjudicating authority. The report recommends vesting jurisdiction to the first adjudicating authority, where CIRP application has been filed by amending Section 60(1) of the Code, which at present vests jurisdiction upon the adjudicating authority where the corporate debtor has its registered office.

The working committee has recommended appointment of a single IP for group companies, unless, adjudicating authority is of the view that it may lead to conflict of interest or it may interfere with any company operating as a going concern. Furthermore, the report recommends the constitution of group a CoC, the composition of which is to be decided by the CoC of each group company.

In the Indian context, there have already been cases, where courts have felt the need of group insolvency for maximisation of asset value of companies and have thereby used their inherent powers to initiate group insolvency of such companies. In the case of Venugopal Dhoot v. SBI, there was a consolidation of insolvency proceedings of multiple Videocon companies. Further, in the case of Edelweiss Asset Reconstruction Co. Ltd. v. Sachet Infrastructure, NCLAT ordered a single insolvency professional to be appointed and a consolidated resolution plan for restructuring five companies working as a consortium. Therefore, there is a crucial need for a legislative framework within the Code for Group Company insolvency. However, despite the report being submitted on September 23, 2019, IBBI has failed to implement the working group’s recommendations till date.

Further, implementing a group insolvency framework has various challenges. The term “commercial understanding” in the definition of Group Company, as recommended by the report, is vague and may lead to an incongruous interpretation leading to flood gates of frivolous applications before the adjudicating authority, thereby delaying proceedings and clogging of judicial infrastructure. Therefore, to avoid any hurdle, IBBI should frame a holistic definition of group company, to include all companies that are intrinsically linked either by horizontal integration (cross-ownership) or by vertical integration (layers of parent and subsidiary companies).

The adjudicating authority, before initiating group insolvency proceedings, will have to satisfy itself of the inter-linkage between associate companies, otherwise if each company’s CIRP can be dealt in segregation, then it would result in reduction in the value of assets. This is in derogation of the principles of maximisation of assets envisaged in the preamble of the code. Nonetheless, the time seems right to further fortify the code by adding provisions to aid group insolvency of companies.

Dheeraj Nair is Partner and Angad Baxi, Associate at J. Sagar Associate

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