Group Insolvency in India: Call For A Fair & Square Law

INTRODUCTION

In India, companies generally expand their business (vertically or horizontally) either by incorporating their associates companies or subsidiary companies within national or international territories. This outcomes in prevalence of a business group or a conglomerate of which multiple companies are a part and accordingly their assets and liabilities are spread across different jurisdictions. Such business model yields synergies from economic, social and financial point of view. However significant challenges emerge in the situations when holding company of such group lands into indebtedness thereby impacting all its layered companies or where few companies of the group are on the verge of getting insolvent that may impact the group as a whole or situation where destiny of one company is linked to that of another company on account of its performance.

In the context of aforementioned scenarios, India at present has no instrument on board to restructure a particular group as a whole that has a potential of becoming insolvent or a group of which few companies have gone insolvent or where a group voluntarily wants to distress it stressed assets. Such circumstances raise more worry as in case of group companies, stakeholders involvement is at large, number of creditor’s finance is at stake and protection of the assets of the economy and preservation of their value is of utmost concern. The term group or group insolvency has not been defined anywhere in the law. The Insolvency and Bankruptcy Code, 2016 (“Code”) envisage a framework to deal with the insolvency and liquidation of corporates on a standalone basis, however structure to deal with the insolvency or liquidation of a business group or a process to put in sync the insolvencies of different companies of a single group needs to be codified at the earliest after the advent of famous groups like Videocon, Amtek, Jaypee, Amrapali, Aircel etc. into the insolvency web.

In general parlance, group insolvency is a situation where the holding unit or multiple entities of a single group becomes insolvent which calls for substantive restructuring of the entire group. Such a scenario involves working out a consolidated resolution strategy and optimal utilisation of the combined assets of the group in the best interest of  corporate debtor as well as creditors.

CHALLENGES DUE TO ABSENTEEISM OF LAW

The need to have a comprehensive framework on the subject of group insolvency framework in India was acknowledged when cases such as Videocon, Amtek, Educomp, Era Infrastructure, Lanco, Jaypee, Aircel etc. landed in this web where extraordinary issues emerged from their interconnection with the group companies and when their exist no set of law, rules and regulations under the Code to deal with such situation. Though Hon’ble Supreme Court of India and Adjudicating Authority on their wisdom have passed few orders to partially redress the emerging issues yet following challenges are still being faced while dealing with the subject.

1)   Identification of Centre of Main Interest (COMI): The assets and liabilities of a group are spread across various jurisdictions which may be integrally and inextricably linked. Such a state of affairs calls for identification of one common jurisdiction in order to achieve procedural coordination where all the proceedings will take place in order to ease out the restructuring process. Parallel running of proceedings in different jurisdictions leads to a process getting cumbersome and possibility of conflicting orders with burden on judicial bandwidth.

2)   Choosing Criteria for Consolidation: There exists various parameters on account of which entities of a group are interconnected. It may be common control, common directors, common creditors or debtors, common financing, common resources etc. To carry out consolidated insolvency or liquidation process of a group, existence of such common parameters need to be demonstrated.

3)   Appointment of Resolution Professional: The size of a group may vary in every case. Videocon Group which witnessed the consolidation of 13 group companies on same hand IL&FS required grouping of more than 150 entities. Unlike present day situation, it is not possible for a single resolution professional to manage the entire process on its own considering the complexities involved, no matter whatever degree of support services is being provided to the resolution professional.

4)   Timeline for the Process: Where a time frame for completion of corporate insolvency resolution process for a standalone corporate is 330 days, resolution of an entire group within same time frame is a difficult task considering the intensity of operations involved, amount of claims being received and verified, keeping the group as a going concern (wherever applicable) and ongoing litigations which is generally part and parcel in the case of group insolvency.

5)  Joint Application(s): Since a group is being dealt in a federated manner, it is not clear whether an individual application has to be filed or joint application has to be filed in the events such as non-cooperation, existence of preferential, undervalued, fraudulent or extortionate transaction, in the event where any direction has to be sought from the Adjudicating Authority etc.

LEARNINGS FROM THE ONGOING CASES

In the matter of group insolvency of Videocon Group, Mr. Venugopal Dhoot filed an application before Adjudicating Authority to consolidate all the separate proceedings of the group companies and same to be treated as a single corporate insolvency resolution process. Also in the said matter, Adjudicating Authority ordered that the assets and liabilities of 13 Videocon group companies to be substantively consolidated on grounds of common control, common directors, common assets, common liabilities, interdependence, interlacing of finance, co-existence for survival, pooling of resources, intertwined accounts, interloping of debts, singleness of economics of units, common financial creditors and common group of corporate debtors.

While dealing with the insolvency of big real estate sector players for instance the Jaypee Group, Hon’ble Supreme Court of India directed parent company to deposit the money in the Court (which was not subject to the insolvency proceedings at that time ).However in the matter of Amrapali Group, Hon’ble Supreme Court of India ordered the properties of all forty group companies to be attached and the bank accounts of all companies and their directors be frozen.

In another instance, while dealing with the insolvency process of Sachet Industries Pvt. Ltd., NCLT held that the all the matters regarding the insolvency resolution process of different companies be dealt with by the same NCLT Bench o for the purpose of avoiding conflicting orders and in same matter NCLAT ordered consolidation of the insolvency process of five group companies to continue under the guidance of the same resolution professional. Similar ruling was also given by NCLAT in the case of Adel Group.

PROPOSED FRAMEWORK

The present time calls for a robust mechanism with fair and square law to deal with the matters pertaining to the group insolvency in India with extreme focus on maximisation of the interest of the group companies and its stakeholders, value maximisation of the assets of the group entities, avoidance of multiple insolvency proceedings and synchronisation and standardisation of the dealing process. The framework on the subject is expected to come in two phases i.e one dealing with the group insolvency of the entities having assets, liabilities ,debtors and creditors in domestic territory whereas other part of the framework dealing with the amalgamation of the provisions of group insolvency with the provisions of cross border insolvency.

In January 2019, the Insolvency and Bankruptcy Board of India (IBBI) constituted a Working Group on Group Insolvency to design the broad structure for dealing with the group insolvency in India. Following stakeholders consultations, the Working Group submitted its “ Report on Group Insolvency” in September 2019.  For the purpose of the framework, Report provides for a ‘corporate group’ to include holding, subsidiary and associate companies as defined under the Companies Act, 2013. Also, an application may be made to the Adjudicating Authority to include companies that are so intrinsically linked as to form part of a ‘group’ in commercial understanding, but are not covered by the definition of corporate group above, as well.

Pursuant to Section 239 of the Code, only Central Government is eligible to make rules pertaining to the form and manner of filing of application with regard to the insolvency process. Similarly, the powers conferred under Section 240 of the Code makes IBBI the competent authority to draft regulations pertaining to any process. Amidst this in the absence of rules and regulations on group insolvency, Adjudicating Authority (different NCLT Benches) laying down adhoc procedures to deal with the group insolvency have no statutory recognition and will result in laying down of multiple sets of procedures to deal with such cases.

Considering the journey of group insolvency cases in India till now, it is recommended that law making authorities apart from the challenges mentioned above will also put a light on the various other areas while laying down the statutory foundation of the maiden group insolvency law in India viz provisions for dealing with multiple tax jurisdictions, procedural coordination of the mechanism, concept of group committee of creditors, parameters for identifying a common jurisdiction, defined timeline of the process, procedure to move out from group insolvency proceedings in case of settlement between creditors and corporate debtors, symmetric information flow system, concept of group moratorium etc.

Gaining from the past experiences of India while working in the insolvency landscape and drawing learnings from the worldwide locales on the subject will help in evolving of a standardised and a reasonable law on the group insolvency in India. In spite of the fact that there is consistently an opportunity to get better on any enactment in power.