Group Insolvency Framework – An eagerly awaited amendment to the Insolvency and Bankruptcy Code (IBC).

August 12, 2024 admin 0 Comments amendment, Bankruptcy Code, Group Insolvency Framework, Insolvency

Abstract:

Insolvency and Bankruptcy code (IBC) was introduced in 2016 to provide for a robust and efficient insolvency eco-system in India. At present, the insolvency regime takes up insolvency proceedings on individual entity basis i.e. each corporate debtor is treated as an individual entity and resolution is done accordingly. However, there are a growing number of cases wherein companies which are a part of same corporate group come for insolvency resolutions. These cases are dealt with in isolation in the absence of a framework to have a common resolution for them. Issues related to interconnectedness of group companies have taken center stage in several insolvency proceedings. Thus, a demand for a “Group Insolvency Resolution Framework” has been voiced by the stakeholders of the IBC ecosystem.

Against this backdrop, this article attempts to through some light on the various facets of the Group Insolvency Mechanism, the likely benefits of such a framework and the global legislations and cross border practices in this regard. The article also highlights the various measures taken by the government and the Insolvency and Bankruptcy Board of India (IBBI) for evolving the Group Insolvency norms.

Insolvency and Bankruptcy code (IBC) was introduced in 2016 to provide for a robust and efficient insolvency eco-system in India. Over the years, IBC has gained prominence in terms of loan recovery. Among all modes of recovery, IBC has accounted for 43.0 per cent in the total amount recovered in 2022-23 (Trend & Progress of Banking in India, RBI, December 2023).However, IBC is not merely to be seen as a loan recovery instrument; it mustbe construed as an instrument for preservation of economic value of assets through effective resolution in a unified and time bound manner. Hence, it is imperative that modern weapons are added to the IBC armoryin order tostrengthen its capacity for speedy resolutions. At present, the insolvency regime takes up insolvency proceedings on individual entity basis i.e. each corporate debtor is treated as an individual entity and resolution is done accordingly. However, there are a growing number of cases wherein companies which are a part of same corporate group come for insolvency resolutions. These cases are dealt with in isolation in the absence of a framework to have a common resolution for them. Issues related to interconnectedness of group companies havetaken center stage in several insolvency proceedings. Thus, a demand for a “Group Insolvency Resolution Framework” has been voiced by the stakeholders of the IBC ecosystem. The government, on its part, has already done its homework on the issue and if media reports are to be believed, the government plans to introduce group insolvency norms through amendments to the Insolvency and Bankruptcy Code (IBC) in the near future.

What constitutes Group Insolvency?

Consider a situation wherein 3 companies say Company A, Company B and company C having their registered offices at Kolkata, New Delhi and Mumbai respectively are involved in their independent line of business. These units are separate legal entities but are interconnected in the sense that these are associate companies of a common group. As they are associate concerns, there are chances that there is a certain level of interconnectedness. (Maybe they are having related party transaction or combined assets etc.). Nowsay companies A, B and C becomes insolvent and is dragged into insolvency court. In the present IBC regime (not having Group insolvency mechanism), the insolvency proceedings of companies A, B and C will be carried out separately in NCLT Kolkata, New Delhi and Mumbai respectively. Entire procedure from filing of Application, appointment of Resolution Professional etc will be dealt with separately. However, post introduction of Group Insolvency mechanism, the insolvency proceeding can happen in any 1 NCLT. There is a scope of a common application being filed and one resolution professional handling the insolvency proceedings of all 3 companies under 1 adjudicating authority. Thus, the process becomes more synchronized.

Drawing inspiration from the situation mentioned above we can define Group Insolvency as a framework wherein if 2 or more business entities belonging to the same corporate group becomes insolvent, their insolvency resolution can be dealt with in one court in a manner such that several steps involved in the insolvency proceeding may be clubbed to bring in procedural simplification. The process may also involve clubbing of the assets of the group companies and utilizing them in the best interest of the group corporate or its debtors.

However, it is worth mentioning that clubbing of assets of the individual companies is not always mandatory under group insolvency mechanism and the same depends on the type of groupinsolvency regime that a country has chosen. This leads us to the discussion of various facets of the Group Insolvency mechanism.

Facets of Group Insolvency Mechanism

A quick scan of the global practices reveals that there are two differentmodels that may be adopted in cases of insolvency of Groupcompanies. They are Substantive Consolidation and Procedural Coordination. Let’slook into the features of these approaches:

1. Substantive Consolidation –In this approach, the assets and liabilities of the multiple entities within the corporate group are pooled together and consolidated in order to create a single insolvency estate. The proceeds thereof are then utilized for the purpose of reorganization or distribution in cases of liquidation. However, this approach is often criticized for disregarding the 2 basic tenets of modern-day corporate law viz. Limited Liability and Separate Legal entity status. Hence, it is mostly used when the adjudicating authority is of the opinion that the assets of the group members are intermingled in such a fashion that identification of the individual owner is very difficult and any attempt to do so might result in disproportionate expense or delay. Besides, the court may also resort to this method, if it is of the opinion that certain fraudulent activities or transactions have been done by the group entities and substantive consolidation is the only means to rectify those activities/ transactions.

Substantial Consolidation, though considered as a radical remedy, is permitted in insolvency laws of certain countries like Australia and New Zealand. Specific provisions have been enacted in these jurisdictions to guide courts in this regard. In other countries such as US, substantive consolidation has evolved out of practice.

2. Procedural Coordination –This approach of group insolvency is more geared towards synchronization of the procedural aspects of the insolvency proceedings as opposed to mingling of group companies per se. This approach necessitates creation of an enabling framework (by means of legislations, rules or practice) for coordinating insolvency proceedings of group entities. Rules may to be set for various procedural aspects like joint application for insolvency initiation, Appointment of Common Resolution Professional, common group Committee of Creditors (COC) etc. in order to synchronize the insolvency proceeding(s). The applicable rules may be chosen by the stakeholders as per the operating compulsions of each proceeding which may vary on a case to case basis.

The obvious benefit of this approach includes reduction of administrative cost and time for conducting insolvency proceedings. Besides, it also results in avoiding duplication of work and enables better co-ordination between creditors. The benefits of procedural co-ordination will vary on case-to-case basis depending on the level of inter linkages among the group entities.

Global Instruments related to Group Insolvency Mechanism

UNCITRAL Legislative Guide to Insolvency Law, Part 3 – United Nations Commission on International Trade Law (UNCITRAL) has done a lot of work with regard to Insolvency legislation. Their publications serve as a reference tool for national authorities and legislative bodies during framing and modification of insolvency laws for their respective jurisdiction. Till date five (part 1 to 5) parts have been published by UNCITRAL. Part 3 was adopted on 1^st July 2010 and deals exclusively on the topic of: Treatment of Enterprise Groups in Insolvency.

UNCITRAL Model Law on Enterprise Group Insolvency (MLEGI) – Colloquially referred to as the “Model Law”, this was adopted on 15^th July 2019. The model law is a complementary document to the above referred legislative guide Part 3. The focus of the Legislative guide is on domestic group insolvency. On the other hand, the model law concentrates on resolution of insolvencies involving multinational enterprise groups.

EU regulation 2015/848 on Insolvency Proceedings –Also referred to as the “recast regulation”, this piece of legislation deals with enforcement of insolvency proceedings in the European Union. It came into force in June 2017.

Why India needs a Group Insolvency Framework?

Corporate group structure is a prevalent mode of business ownership in India. Many Indian businesses operate in groups. As per the OECD-SEBI study titled “Company-Groups-In-India 2022”;“On average Indian listed companies have more than tripled the number of subsidiaries in last 15 years and as of March 2020, listed companies in the NIFTY 50 index have an average number of approximately 50 subsidiaries/step down subsidiaries”. Complex group structures result in opacity of transactions and inter group dealings. Related party transactions are also widely prevalent. There lies a possibility of the misuse of related party transactions for the purpose of diverting funds from one group entity to the other entity of the group. Moreover, in a group structure setting, there may be instances where the credit secured by an entity may be channelized to other group members for some temporary accommodation or other business imperatives. This level of interconnectedness poses serious challenges during the insolvency process. In absence of defined group solvency mechanism, the group entities are dealt with in isolation by the insolvency courts. In such a scenario, there are high chances that the creditors are unable to realize the full value from the insolvent entity.

Marching towards Group Insolvency Framework in India –Work In Progress.

The need for the Group Insolvency framework has been well recognized by the regulators and the government. The government as well as the Insolvency and Bankruptcy board of India (IBBI), on their part, has already taken initiatives for the development of a structured framework in this regard. The work done by the various committees/study groups are mentioned below:

a) Working Group on Group Insolvency (2019) – IBBI constituted a working group under the chairmanship of Mr. U.K.Sinha. The working group submitted its report titled “Report of the Working Group on Group Insolvency” on 23^rd September 2019. It contained comprehensive recommendations for creation of an enabling environment for phase wise implementation of Group insolvency in India.

b) Cross Border Insolvency Rules/Regulations Committee (CBIRC-II)- The IBBI Working group submitted its report around the same time as the MLEGI (Model Law) was adopted by UNCITRAL. Hence, the guidance of the model law could not be incorporated in the recommendation of the working group. Therefore, the ministry of Corporate Affairs entrusted the committee (CBIRC) under the chairmanship of Dr K.P. Krishnan to review the recommendation of MLEGI and provide recommendations for implementation of Group Insolvency framework in India. Accordingly, CBIRC submitted its report in December 2021(Report of CBIRC-II on Group Insolvency) along with its recommendations and a draft framework for Group Insolvency in India.

Likely Group Insolvency Framework in India.

Basis the recommendations of the CBIRC-II report, the government is expected to introduce the Group Insolvency Framework in phases. The likely key features, as gathered from the recommendations of the CBIRC are as below:

Voluntary, Flexible and Enabling – The group insolvency frameworkto be introduced is likely tobe voluntary, flexible and enabling in nature. It is expected to strike a fine balance between the separate legal personality concept (of solvent group entities) and value maximization from insolvent entities of the group.
Broad Definition of Group – The definition of “Group” is likely to be broad so as tocover a large number of corporate debtors within the scope of the framework. “Control” (in terms of section 2 of Companies Act, 2013) and “Significant Ownership” (as defined under Section 5 of Competition Act 2002) may be used for defining the concept of Group.
Applicability-The Group Insolvency framework may be made applicable only to corporate debtors against whom insolvency proceeding or liquidation process is going on. Other members of the group who are solvent may be kept outside the ambit of the framework. However, solvent members of a group may voluntarily join the group proceedings if they deem fit.
Approach- Provisions regarding “Substantive Consolidation” are not likely to be part of the proposed Group Insolvency framework in the initial phase. The framework is likely to deal primarily on “Procedural Coordination” approach in the initial phase.
Components of Procedural Coordination – As recommended by the CBIRC, directives related to thefollowing coordinationmechanisms may be part of the framework:

Joint Application for filing of corporate insolvency resolution process against two or more entities belonging to the same group by their creditors (both financial and operational) or the entities themselves.
Conducting proceedings in a singleNCLT (common for all the group entities) having territorial jurisdiction over any one of the corporate debtors.
Formation of Group Committee of Creditors (Group COC). Participation of individual COC’s in the group COC will be on a voluntary basis. Group CoC will be responsible to device strategies for undertaking combined valuation, negotiating resolution plans etc. Such group COC’s to give procedural assistance only and will not take any substantive decisions.
Decision regarding appointment of a single resolution professional for the entire group to be taken by CoCs of the respective corporate debtors if they deem it necessary.
Mandatory provisions for promoting co-operation, facilitating communication and information sharing among the participants of the group insolvency proceedings.
Provisions regarding enabling “Group Co-ordination Proceedings”. Such proceedings may be initiated either during the CIRP process or during liquidation.
Provision for appointment of “Group Coordinator”. Primary responsibility of the coordinator is todevelop a “Group Strategy”. Besides, it is also to be entrusted to come up with recommendations for the coordinated conduct of insolvency proceedings of the participating group members.
A broad definition of “Group Strategy” that permitsseveral combinations of measures aimed at synchronization of the CIRP or liquidation proceedings of participatinggroup entities under resolution.

Conclusion: –

The Insolvency and Bankruptcy Code in India is just 8 years old and is bound to evolve with maturity. Even during this brief period, there have been instances (Videocon Industries Ltd. vs State Bank of India and others,Edelweiss Asset Reconstruction Co Ltd v. Sachet Infrastructure Pvt. Ltd & Others. to name a few)wherein complications aroseduring insolvency proceedings due to the presence of group linkages. In the absence of a defined Group Insolvency framework in India, our courts have taken their own course and have applied the principals of group insolvency in their verdicts. The judgmentsrelied on precedentsfrom jurisdictions like USA and UK where there are formal regulations surrounding Group Insolvency. Hence, it can be said that group insolvency is evolving in India out of practice. However, a major limitation of this approach is the lack of uniformity. Individual courts, based on their wisdom, may interpret situations in an independent manner. Non-Uniform verdicts in similar cases are likely to result in confusion among stakeholders. Hence, it is imperative that legislation on Group Insolvency be introduced at an early date. It is highly likely that the legislature will come up with a group insolvency framework that is facilitative and helps in development of a unified resolution plan involving multiple entities belonging to the same group on a consensual manner. The framework should help in reduction of administrative costs and efforts of disentangling the complexities arising out of inter-linkages involved in a group setting.