IBC yet to address resolution for insolvencies of group companies

Group insolvency remains an ill-defined area in the IBC. Here's why it needs a clear framework

The Insolvency and Bankruptcy Code (IBC) has been around for nearly seven years, and in these seven years, it has been amended six times. However, it is yet to address a significant concern: group insolvencies.

While the IBC lags in accommodating the consolidation of resolution processes for group companies, courts have frequently intervened to take up group insolvency matters.
 

The absence of a dedicated provision for group insolvency within the IBC has led to notable cases of judicial consolidation. Among these are the consolidation of 13 Videocon group companies, Lavasa corporation and its subsidiaries, and the procedural consolidation of Srei Equipment Finance and Srei Infra Finance Ltd.
 

There was also the case where, to benefit homebuyers, the National Company Law Appellate Tribunal merged the insolvencies of five Edelweiss Asset Reconstruction Company Ltd entities developing a common township.
 

“In commercial matters, the law serves as a roadmap for transactions,” says M S Sahoo, distinguished professor at the National Law University Delhi. “The corporate insolvency resolution process, initially outlined by the IBC, is one such route.” Another avenue, pre-packaged insolvency resolution, was introduced through an amendment to the IBC, he explains. “Group insolvency resolution,” Sahoo adds, “represents yet another guided pathway that requires legal provision. Courts, however, lack the capacity to lay such a path.”
 

Anoop Rawat, partner at the law firm Shardul Amarchand Mangaldas & Co, adds that consolidation has so far arisen through judicial orders, without explicit provisions within the Code. “While group insolvency is a critical requirement in many cases, mandating substantive consolidation under the Code might not be prudent due to varying ownership structures and financing across each company within a group,” he explains.
 

Interlinked, interdependent
 

On January 8, 2019, the National Company Law Tribunal (NCLT) Mumbai had, for the first time, recognised the principle of “consolidation”, drawing from legal precedents in the UK and USA, to consolidate 13 out of 15 corporate insolvency resolution processes of Videocon Industries Ltd group companies.
 

“The NCLT recognised the interlinked operations and financial interdependencies within corporate groups,” says Sonam Chandwani, managing partner, KS Legal and Associates. This approach, she adds, enabled a holistic and efficient resolution process, considering the interconnected assets and liabilities, leading to potentially higher recoveries and more viable resolution plans.
 

The logic behind group insolvency lies in situations where the operations and supply chains among group members are interconnected. In such scenarios, enabling resolution applicants to bid for multiple group companies in a single offering could maximise the overall value.
 

Prashanth Shivadass, partner, Shivadass & Shivadass Law Chambers, stresses the need for group insolvency. “Given the extraordinary number of cases filed in different NCLTs against the same group, the pooling of resources of this nature will be a welcome move, both for the authority and the applicants,” he says.
 

Recognising the need for a framework addressing group insolvency, the Insolvency and Bankruptcy Board of India (IBBI) had set up a working committee that gave recommendations on this crucial aspect of insolvency proceedings.
 

In two reports, the IBBI proposed a phased implementation of a group insolvency regime in India, recommending a voluntary and flexible process to be incorporated into the Code.
 

The question is: Why has the IBC been unable to introduce the code for group insolvency yet?
 

Government sources say there are various complexities surrounding group insolvency that require attention. For instance, companies initially involved in the formal group insolvency process might belong to a domestic group, but this could later evolve into a cross-border group insolvency scenario.
 

The Ministry of Corporate Affairs has been in discussions to shape the contours of the group insolvency law framework and is expected to provide clarity on the law soon.
 

Some weeks ago, IBBI Whole Time Member Sudhaker Shukla indicated that India may simultaneously introduce group insolvency and cross-border insolvency frameworks.
 

Collective interests vs individual rights
 

Experts point to a challenge in group insolvency: balancing the collective interests of the group against the individual rights of the entities involved. According to IBC experts, implementing a group insolvency law might complicate the individual rights of companies within a group, potentially sparking conflicts of interest and fairness concerns. Furthermore, there’s a risk of heightened legal complexity, as the law would need to navigate the intricate web of inter-company relationships and liabilities.
 

“Balancing these competing interests is crucial for any group insolvency framework to be effective,” Chandwani says. The need for such a law arises from the increasing complexity of corporate structures and the need for an efficient resolution mechanism that aligns with global insolvency practices, she adds.
 

How about drawing from frameworks existing globally? There is, for instance, the UNCITRAL Model Law on Enterprise Group Insolvency. A committee on cross-border insolvency resolution for group insolvency, headed by retired bureaucrat K P Krishnan, suggested that India refrains from adopting the UNCITRAL model due to its focus on cross-border aspects. Instead, a flexible domestic group insolvency framework was proposed to be introduced in phases.

Among the various recommendations it made, the committee’s report suggested that the group insolvency framework under the IBC should only apply to corporate debtors currently facing a corporate insolvency resolution process or liquidation process.
 

It was suggested that a broad and inclusive definition of ‘group’ should be formulated, based on significant ownership, so as to include a large number of corporate debtors within the framework.
 

“There is a need to provide a framework within the Code itself to deal with group entities together for better value maximisation, higher probability of revival, procedural and coordination convenience, and cost and time effectiveness,” says Abdullah Qureshi, associate partner, IndiaLaw LLP.
 

Experts feel that without a legal framework in place, challenges will persist — such as conflicts of jurisdiction, defining the parameters of a group, ensuring the solvency of group companies, aligning insolvency proceedings among the group, and determining the approach towards managing foreign subsidiaries, among others.

To address these gaps and ensure fair valuation of stressed assets within group companies, clearly defined laws are essential, says Piyush Agrawal, associate partner at law firm AQUILAW.

Case for group insolvency law

 

• Better value maximisation and recoveries
• Reduced burden on NCLTs
• Procedural and coordination convenience
• Working group recommends phased introduction
• Need to balance collective, individual rights of entities involved