Proposed changes in IBC with regard to group insolvency
A significant percentage of enterprises in India are structured in a way that they are intrinsically linked with other entities forming a group entity that operates as a single economic unit. Although these structures retain a separate legal identity, their operational and financial structure makes it challenging for the Adjudicating Authority (“AA”) to asses the assets and the liabilities when individual group entities become insolvent. This problem was recently highlighted on various accounts especially in the Videocon casei where nineteen (19) subsidiary entities under the group defaulted collectively and in the Edelweiss Asset Reconstruction Company caseii where a group of five companies worked as a joint consortium to develop a residential plotted colony.
Why we need group insolvency
The Insolvency and Bankruptcy Code, 2016 (“IBC”) until now does not have any mechanism to substantially and compressively look into the insolvency of corporate debtors that belong to the same corporate group. Recently, recognizing the need of a definite framework, the Insolvency and Bankruptcy Board of India (“IBBI”) released a report (“Report”)iii made by Working Group on Group Insolvency (“WG”) that suggested a regulatory framework for corporate group insolvency (“Framework”). Based on the report, India’s bankruptcy regulator is now seeking to amend IBC to incorporate the group insolvency framework.
The Framework aims in value maximization of the group entities, avoids multiple insolvency proceedings, promotes information symmetry, reducing the time and costs of insolvency proceedings, and increases certainty for stakeholders in the insolvency of the group. Also, the framework is designed in a way to avoid potential unfair capture of value by some stakeholders.
Important aspects of the Report
The Report suggests that a precise definition should be added for the word ‘corporate group’. The definition may include holding, subsidiary and associate companies defined under the Companies Act, 2013. The Report further suggests that where the aforesaid definition is not able to incorporate cases where recourse to a group insolvency framework may be beneficial, an application may be made to the AA to include companies that are so intrinsically linked as to form part of a ‘group’ in commercial understanding.
With regard to the Framework, the Report provides that it will operate in two phases. The first phase may facilitate the introduction of procedural coordination of only domestic companies in groups and rules against perverse behavior. Cross-border group insolvency and substantive consolidation could be considered at a later stage, depending on the experience of implementing the earlier phases of the framework, and the felt need at the relevant time.
Phase I - procedural coordination mechanism
During this phase, a joint application may be made against all corporate debtors who have committed default and who form part of a group. It would involve voluntary communication, cooperation and information sharing among insolvency professionals, the committee of creditors (“CoC”) and AA. A single insolvency professional and a single AA shall be appointed except where there are issues such as conflict of interest, lack of sufficient resources or where stakeholders would get adversely affected.
It is also suggested that at the option of the CoCs of participating companies, enable the creation of a group creditors’ committee to support individual CoCs, however, the group of creditors will not replace the CoCs. The group creditors’ committee may also appoint a group coordinator to propose the actions of the committee. The group of creditors may formulate a Framework agreement that will enable group co-ordination proceedings.
Phase II - substantial consolidation mechanism
This phase will consolidate the assets and liabilities of different group companies so that they are treated as a part of single insolvency estate for the purpose of reorganization or distribution in liquidation. This will help in eliminating intercompany claims, subsidiary equity ownership interests, multiple and duplicative creditor claims, joint and several liability claims, and guarantees. Substantive consolidation may be opted for or ordered by courts. In addition, also substantive consolidation may be allowed both in the corporate insolvency resolution process (“CIRP”) and liquidation to enable the maximization of the value of the assets of the debtors.
Other aspects of the Report
The Framework also includes certain rules against perverse behavior. Apart from the already existing provisions enabling the avoidance of certain transactions and imposition of liability for wrongful and fraudulent trading, the Report recommends that the IBC may need to be amended to provide for the subordination of claims of other companies in a group and the circumstances in which the claims may be subordinated in favor of external creditors.
A comprehensive framework for the group insolvency resolution process is the need of the hour. The Framework proposed in the Report is in consonance with the international standards and UNICITRAL’s recommendation. The Report also recommended the extension of time-framework for the group insolvency process.
The group insolvency process may also face challenges, as bringing the entire group under the CIRP will discourage investments and may require the banks to classify even the standard accounts as non-performing assets (“NPA”). Nonetheless, the proper application of the Framework will help in affective tackling the problem faced due to interlinked entities going under the insolvency process.
(i) State Bank of India & Anr. v. Videocon Industries Ltd. & Ors, CIVIL APPEAL NO. 4553 of 2018
(ii) Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Pvt. Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 377 of 2019
(iii) Working Group on Group Insolvency, Report of the Working Group on Group Insolvency, submitted to IBBI on September 23, 2019.
This update is by Urvisha Kesharwani, who is interning with the firm under the guidance of Mr. Rohitaashv Sinha, Advocate & Associate Partner at Agarwal Jetley & Co., Advocates & Solicitors. Contact: Email: firstname.lastname@example.org or Mob: (+91) – 9999 5653 93