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Group Insolvency In India: Boon To The Creditors Or Bane To The Debtors?

Tanmay Karmarkar
15 May 2020 3:42 AM GMT
Group Insolvency In India: Boon To The Creditors Or Bane To The Debtors?
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Group Insolvency is a process in which claims against debtors of the same group are consolidated in a single resolution application to adjudicate upon by the Adjudicating Authorities ("hereinafter referred as AA"). It was difficult for the AAs across the country to adjudicate upon such resolution requests by the creditors due to the lack of provisions in Insolvency and Bankruptcy Code ("hereinafter referred as IBC"). The Companies Act 2013 itself provides for separate legal entity and preparation of consolidated financial statements of associate and subsidiary companies in the same form. The rule of 'separate legal entity' requires modifications owing to the increase in formation of Corporate Groups in Indian markets. The author in this article analyses the concept of Group Insolvency in brief in the light of judgments and the recommendations put forth by the Working Group formed by the Insolvency Bankruptcy Board of India.

United States Bankruptcy Laws:

United States Bankruptcy Laws, Bankruptcy Courts have consolidated proceedings along with assets and liabilities of the Debtors on the basis of criteria for substantive consolidation viz.

  1. The degree of difficulty in segregating and ascertaining individual assets and liabilities;
  2. presence or absence of consolidated financial statements;
  3. the profitability of consolidation at a single physical location;
  4. the commingling of assets and business functions;
  5. the unity of interests and ownership between the various corporate entities;
  6. The existence of parent and inter corporate guarantees on loans; and g. the transfer of assets of without formal observance of corporate formalities.[1]

Group Insolvency in India:

IBC lead to positive changes such as consolidation of several fragmented laws, adjudication under one forum and steady increase in domestic and foreign investments to name a few. Even though IBC provides for insolvency procedure for corporate debtor as a single entity, but the code fails to envisage procedure for synchronization or consolidation of claims by different corporate debtors belonging to the same group.

As mentioned earlier, IBC lacked provisions to entertain such applications, consolidations were admitted by AA in the following cases to name a few (not according to the timeline):

Sr. No

Case

AA

1

Edelweiss Arc v Sachet Infrastructure

NCLT Delhi Special Bench

2

SBI v Videocon

NCLT Mumbai Principal Bench

3

Lavasa Corporation

NCLT Mumbai Principal Bench

4

Japyee Infratech

Supreme Court

5

Amrapali Group Companies

Supreme Court

The Insolvency and Bankruptcy Board of India ("hereinafter referred as IBBI ") to address issues pertaining to group insolvency formed a Working Group and released its report on 23rd September 2019. The Working Group on consultation of various stakeholders and experts have recommended framework for insolvency resolution and liquidation of corporate debtors. The 'corporate group' for the purpose of triggering consolidation as per the suggestions of IBBI includes subsidiary, holding and associate companies defined under Companies Act, 2013. In certain cases, the Supreme Court applied the doctrine of piercing of corporate veil[2] to make the group companies liable to each other. However, an application can be made to AAs to include companies not falling under the purview of definition, in cases where the companies are 'intrinsically linked'.

The issue of Consolidation of Claims of debtors from group companies is a matter of concern not only to Indian Legislature but also to other countries. The rationale behind raising concerns pertaining to the above-mentioned proposition is four-fold,

  1. There exists or there are chances of existence of linkage between the companies because of related party transactions.[3]
  2. The Companies Act and IBC both recognise and uphold the principle of Separate Legal Entity and Limited Liability.
  3. Thirdly, the relevance between transaction of different group companies owing to the possible symmetry or asymmetry of distribution of information and control in the group companies.
  4. Possible creation of dominant shareholding, formation of a controlling group and loans and advances granted to the subsidiary companies by parent companies, asymmetrical sharing of information relating to credit amount or creditors[4] and inappropriate transfer of assets[5].

The Principal Bench of NCLT Mumbai in the case of State Bank of India & Anr v Videocon Industries Ltd. & Or of 2019 on the perusal of 'Group Insolvency' Jurisprudence, has set out examples which trigger the 'consolidation' of Insolvency Process. The approval of the resolution is subject to preliminary enquiry as the process should be beneficial to the stakeholders. NCLT Mumbai approved the resolution as the business activities of the Corporate Debtor were 'inextricably linked and intertwined'.

The aspects for inquisition set out by the court are as follows:

  1. Common Control
  2. Common Directors
  3. Common Assets
  4. Common Liabilities
  5. Inter-dependence
  6. Inter-lacing of finance
  7. Pooling of resources
  8. Co-existence for survival
  9. Intricate link of subsidiaries
  10. Inter-twined accounts
  11. Inter-looping of debts
  12. Singleness of economic units
  13. Common Financial Creditors
  14. Common Group of Corporate Debtors

In light of the same judgment, consolidation was allowed by the same bench for faster resolution in for subsidiaries of Lavasa Corporation.[6] The Principal Bench has facilitated consolidation for faster resolution considering the abovementioned parameters. The factors set out in Videocon are the factors for determination of consolidation and should not be considered as the basis for triggering consolidation of Insolvency.

There is a need for the Insolvency and Bankruptcy Board of India (IBBI) to introduce certain amendments and addendums to the IBC 2016. IBBI is currently working on the same and have suggested phased implementation of consolidation, subject to initiation by the stakeholders. The phased implementation requires appointment of single insolvency professional and group committee of creditors.

This mechanism for procedural co-ordination should be applicable to the defaulted companies regardless of their solvency for faster resolution and upholding the purpose of this procedure. It is important to note that Companies Act in India upholds the concept of 'shadow director',[7] which makes the holding company liable for the acts done by subsidiary companies.

Recommendations of the Working Group

For facilitation of group insolvency application, Section 60 of the IBC, Rules and Regulations of the Code and associated legislations need amendments in order to give NCLT jurisdiction over the entire group.[8] The recommendations made by the Working Group are as follows:

  1. Introduction of Joint Application process
  2. Designating single Insolvency Professional and AA
  3. Formation of 'Group Creditors Committee' at the discretion of Committee of Creditors
  4. Group Co-ordination proceedings subject to maximum votes by Committee of Creditors
  5. Rules against 'perverse behaviour' of group companies
  6. Extension of timeframe to 420 days

The introduction of the amendment to include Group Insolvency proceedings under IBC jurisdiction is important for revival and value maximization of companies in distress. It is not only the inceptions of provisions which shall facilitate smooth functioning of the consolidation procedure, but also the infrastructure required for proper adjudication. The economic rationale for providing framework has certain parameters as suggested by IBBI which includes value maximization, procedural efficiency, cost efficiency, and avoidance of intra-group battles. Moreover, the AA should exercise their powers and discretion to allow consolidation to prevent abuse and delay of the procedure. The abuse of the process might burden the already overburdened judiciary. Thus, with exercise of due caution, this process shall facilitate faster resolution, adjudication of consolidation of claims and thus reduce the burden on the already overburdened judiciary.

Views Are Personal Only
(Author is 4 th year BBA LLB student of Symbiosis Law School, Hyderabad)


[1] In re Vecco Construction Industries, 4. B.R. 407, 410 (Bankr E.D. Va 1980)

[2] Salomon v. A Salomon & Co Ltd [1896] UKHL 1, [1897] AC 22

[3] UNCITRAL, UNCITRAL Legislative Guide on Insolvency Law, Part three: Treatment of enterprise groups in insolvency, (2012), Para 93.

[4] Department of Company Affairs, Ministry of Law, Justice & Company Affairs Government of India, Report on Corporate Excellence on a Sustained Basis to Sharpen India's Global Competitive Edge and to Further Develop Corporate Culture in the Country, Para 1.4, (2002).

[5] Ministry of Finance and Company Affairs, Government of India, Report of the Committee on the Companies Bill 1997, 2002, Para 6.11 available at .

[6] MA 3664/2019 in C.P.(IB)-1765, 1757 & 574/MB/2018

[7] Section 2(60) Companies Act 2013

[8] Report on Group Insolvency by Working Group formed by IBBI available at https://www.ibbi.gov.in/uploads/whatsnew/2019-10-12-004043-ep0vq-d2b41342411e65d9558a8c0d8bb6c666.pdf

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