[By Ravleen Chhabra]
The author is a final year student of Institute of Law, Nirma University and can be reached at firstname.lastname@example.org.
The Insolvency and Bankruptcy Code (“IBC” or “the Code”) has been probably one of the greatest developments in the Indian Legal System in a bid to reform India’s irresistible Non-Performing Assets conundrum. The Insolvency and Bankruptcy Board of India (“IBBI”), is the body that regulates the working of the IBC, has been actively involved in disseminating understanding and regulating the space [i]. In the wake of recent developments, the IBC had various hits and misses during its execution and is expected to mature in the coming future with better results. Despite having covered a plethora of aspects, there still exist certain issues with no provisions to govern. The current framework of this striving piece of economic legislation provides for a variety of plans for the resolution of individual stressed companies. However, owing to the lack of regulatory framework providing for consolidating the connected companies in group insolvency proceedings, lenders were finding it difficult to proceed for group insolvency proceedings. The dearth of a provision dealing with group insolvency is adversely impacting the resolution process in numerous cases where group companies are lugged to the National Company Law Tribunal (“NCLT”) by the lenders themselves, requesting for a group insolvency approach. However, in the absence of a legal provision allowing the same, the NCLT is unable to help them in any possible manner [ii].
Anchoring the First Step: Formation of the Working Group
The first step in the direction of understanding the concept of group insolvency and proposing a legal framework was taken by the Central Government in January 2019 by establishing a working group under the leadership of Mr. UK Sinha, former SEBI Chief [iii]. Two months later, a committee known as the Insolvency Law Committee was reconstituted by the Government to analyse the implementation of the IBC, and craft suggestions to deal with the issues [iv]. One of the largely debated topics during the discussions was to suggest legal provisions in the IBC for allowing group insolvency. These developments seem to suggest that soon, a highly efficient and standardized framework shall be incorporated within the IBC for the resolution of an entire stressed group company having various entities in different NCLT jurisdictions.
Global Regulations: How India can benefit?
While examining the chapter on “Insolvency Proceedings of Members of a Group of Companies” integrated in the revised European Union (“EU”) Insolvency Regulation, 2017 (“EU Regulation”), a lot of inspiration can be taken from the impeccable manner in which the EU aims at inculcating coordination and cooperation regarding groups of companies, thereby resulting in a win-win situation for both the creditors and the debtors [v]. Article 72 (3) of the EU Regulation, in fact, signifies the importance of coordination, and not consolidation. In conjunction with the same, the recent synchronized scheme of group insolvency law in the Indian IBC shall aim to keep a group of stressed companies concomitantly to either reorganize the group as a whole or liquidate the total asset of the group in the paramount interest of all parties involved. The ideology behind the same is to formulate a restructuring mechanism that permits the initiation of insolvency proceedings of companies within a corporate group adjudicated by the single independent court/tribunal [vi].This approach shall be helpful, keeping in mind that the groups of debtors or creditors can ask for joint proceedings, thereby reducing the likelihood of spending a huge amount of time and money.
The recent amendments to the German Insolvency Act also provide for having only one administrator, while dealing with the insolvency of particular companies of a group, to improve their cooperation and coordination [vii]. Though the legislation does not provide for explicit consolidation of individual proceedings into one, they offer an opportunity to begin working in that direction. In India, it is noticed particularly in case of the infrastructure sector, that the holding company is subjected to insolvency without subjecting the subsidiary company and in most of these cases; it is tougher to put the individual company through insolvency resolution, resulting into its liquidation eventually. If India, under all odds circumstances, is able to incorporate some of these provisions as located out in European or the German Insolvency regime, then India can scotch the burgeoning cases like this and help in pumping up the value for lenders as well. For assistance on the effective mechanism of cooperation, reference can also be made to the UNCITRAL‘s Legislative Guide on Insolvency Law, Part three: Treatment of enterprise groups in insolvency.
The process of group insolvency in India can reap beneficial results in situations wherein there exists a provision allowing the debtors or creditors to seek joint proceedings against the same debtors in the same group in cases where more than one application is pending in the same court against debtors in the same group. This viewpoint can be useful in those cases where those stressed companies who are part of same group barge into the vestibule into corporate guarantees for availing and doing borrowing of either of group members or a debtor may shift his assets to those group companies to deceive creditors, in instantly recognizable situations, in such case, creditors should be able to pierce the corporate veil and initiate the insolvency proceedings within the said corporate group. Such a scenario is possible only if the group companies are bound to coordinate and cooperate, throughout the process. Further, if any of the members fail to fulfil the obligation, the other members would not suffer the consequences.
Although the inevitable need for group restructuring of companies has been recognised, the crucial task remains of the methodology or technique of forming such groups, keeping in mind that the interests of no company should be preferred over the other. Such an objective can be achieved probably by forming groups of companies involving some form of the economic relationship, resulting in a mutual or reciprocated environment in terms of their financial growth [viii]. Another key point is to ensure that the groups are formed voluntarily to have the members accede to their corresponding rights and duties. There might be situations when the groups would have to be formed as per a decision of the Court, however, some sort of consensus amongst the group members is utmost for smooth functioning and quick resolution. Further, this would reduce the enormous burden of the creditors who would otherwise be required to approach the NCLT separately for the parent company and its subsidiaries. While determining the criterion for the formation of groups and enacting prospective legislation, the Government shall also have to speculate upon the probable consequences of the decisions of the group involving the parent companies, on their respective subsidiaries.
As has already been pondered upon, the inclusion of explicit rules concerning the process of insolvency proceedings of the members of a group of companies has been recently been included by various bodies and countries across the globe making part of new EU Regulation, The German Insolvency Act and the UNCITRAL’s Guide. Therefore, down the line, it is expected that Indian government comes up with new regulations on group insolvency because a country like India which is developing at such a fast rate cannot commercially afford to neglect this regulation and if neglected, we will experience an enormous loss in the coming future. In furtherance to the same, it is expected that when this new approach would be implemented in India, the regulations would not intend to fasten any personality to the group of companies for the point of making it the subject of such application and such regulations does not intend to regulate anything even close to the “insolvency of the group” as if it were an entity with its legal personality, and its own assets available for distribution. Such an approach would not mean that the separate legal personality of each company is ignored as in foreign systems. It is expected that this new chapter in IBC will have a positive effect on the success rate of Indian Group Insolvency proceedings such as Videocon case[ix], and the courts focus more on group restructuring, rather than patchy confined insolvency.