Group insolvency in Indian insolvency regime
Published: Jun 16, 2023
By Yogendra Aldak, Partner, Pranav Mundra, Senior Associate and Bhavya Shukla, Associate, Lakshmikumaran and Sridharan, Attorneys
THE law on corporate insolvency resolution process ('CIRP') in India, is majorly focused on the resolution of single entity rather than a group of entities. The Insolvency and Bankruptcy Code ('Code') provides for initiation of CIRP by creditors when the debt of an entity reaches the threshold. Even if the entities are interconnected, there is no provision in the Code to consolidate the CIRP of all of them. Where group entities are significantly interlinked, it could be value destructive to not recognize such interlinkage. Where the business of different entities is dependent on each other, or various entities have common assets, or where there are common liabilities and related party transactions among entities, carrying of CIRP for each distinct entity in isolation may raise distinct problems, which may not exist otherwise.
To bridge this gap, the company tribunals have attempted to resolve debts of entities that are inextricably linked or are part of a group and where it is necessary for a few or all of them to go through CIRP. In the case of State Bank of India v. Videocon Industries Limited 1, CIRP was initiated by the Bank against 15 companies of Videocon group across various National Company Law Tribunal ('NCLT'). The NCLT Mumbai Bench ordered for consolidation of 13 CIRPs, thereby introducing the concept of group insolvency in India. While considering the law on group insolvency as developed in UK and US, the Mumbai Bench prescribed certain yardstick to ascertain consolidation - Common control, Common directors, Common assets, Common liabilities, Inter-dependence, Inter lacing of finance, Pooling of resources, Co-existence for survival, intricate link of subsidiaries, inter-twined of accounts, inter-looping of debts, singleness of economics of units, cross shareholding, Inter dependence due to intertwined consolidated accounts, Common pooling of resources, etc. The bench clarified that the list was not exhaustive but only prima-facie governing factors to activate the process of 'consolidation'.
The need for a holistic framework for group insolvency was recognized by the Insolvency and Bankruptcy Board of India ('IBBI') which constituted a Working Group to consider the elements coordination and consolidation in a corporate group. The Working Group addressed key aspects of identification of a group, extent of grouping and mechanism involved. It recommended implementation of group insolvency in two phases – first phase to apply only to domestic companies and second phase to introduce the group insolvency mechanism in cross-border entities. The first phase provided for adoption of rules to coordinate different CIRPs of group entities without disturbing the division of assets and substantive claims of creditors of each of the group entities. The mechanism aimed at lowering costs and reducing time associated with different CIRPs. It consists of elements such as joint application, information sharing between insolvency resolution professionals /NCLTs /Committee of Creditors, consolidation of CIRPs before a single NCLT, creation of group creditor's committees etc. Depending on the implementation of the first phase, the second phase was suggested to be introduced. The second phase provided for mechanism of group insolvency in cross-border CIRPs with substantial consolidation, that is, consolidating the assets and liabilities of group companies so that they are considered to be a single economic unit.
The report of the Working Group has also been considered by the Cross-Border Insolvency Rules/Regulations Committee ('CBIRC') which was constituted by the Ministry of Corporate Affairs ('MCA') to provide recommendations on group insolvency based on a review of recommendations of UNCITRAL Model Law on Enterprise Group Insolvency ('MLEGI') and the Code. The CBIRC in its report inter-alia recommended that MLEGI may not be adopted in India till the time the law on single entity cross-border insolvency is enacted. However, it emphasized on the need for the Code to provide for the manner of undertaking CIRP of group entities that is distinct from the current single-entity approach.
IBBI and MCA as well, who have constituted committees seeking recommendations for implementation of group insolvency framework in India. With the recommendations being affirmative, the time is ripe for the Parliament to consider the recommendations and put in place a statutory framework for group insolvency in India. This would not only ensure a timely and effective resolution of insolvency among group entities, but also maximize the value of their assets and balance the interest of all stakeholders of each of the group entities.
(The views expressed are strictly personal.)
12019 SCC OnLine NCLT 745.
2Order dated February 26, 2020 in MA 3664/2019 in C.P.(IB)-1765, 1757 & 574/MB/2018
3Order dated March 26, 2021 in CA(AT) (INS) No. 919/2020 .
