Introduction
In 2016, the Insolvency and Bankruptcy Code (“the Code”) was introduced in India. In such a short span of time, the Code has established its jurisprudence. However, the code requires reforms to keep up with the insolvency regime across the globe and to help the Indian economy overcome territorial boundaries. In January 2019, the centre set up an 11-member working group to look into the working of the Code and the reforms it accordingly needs; ‘Group Insolvency’ being one of them.[i] In March, the Insolvency Law Committee headed by Injeti Srinivas was reconstituted to look into the framework of Group Insolvency along with the other reforms suggested.[ii]
What is Group Insolvency?
For corporate groups to succeed globally in their operations, specific needs of different markets have to be considered. Multiple challenges are put forward by foreign markets and their laws in this regard. The best way to deal with such distinctive markets is to incorporate a subsidiary company in that foreign country where the business is to be established under the company law of the country parent company is established in. This business strategy led to the rise of corporate groups all over the world. From an economic perspective, these corporate groups are ‘one organism.’ However, from a legal perspective, the principle set forth by Salmon v. Salmon[iii] of a separate legal entity is still followed. Thus, for an action against each entity/subsidiary, a separate Corporate Insolvency Resolution Process (“CIRP”) has to be initiated against them separately by their creditors even though all of them largely belong to the same group.
This principle of separate legal entity is utilised by the corporate groups in covering their assets. These group companies have several subsidiaries in different jurisdictions with a holding company managing all of them. The makers of the corporate structure are clever enough to keep the assets of the group away from such holding companies through several layers; sometimes even in different jurisdictions to completely insulate their assets from insolvency processes.[iv]
The treatment of corporate debtors as separate legal entities is accentuated by the court’s reluctance in piercing the corporate veil.[v] Insolvency laws in India, thus, fail to manage the CIRPs filed separately in different jurisdictions against the insolvent entities of the same multinational corporate enterprise together as a single proceeding. Group Insolvency is a framework where if multiple entities of a single group go insolvent, their resolutions can be consolidated in one court so that firstly, the group can be restructured as a whole and secondly, its combined assets can be utilised in the best interest of both the group corporate and the debtor.[vi] This structure allows substantive consolidation which enables clubbing of assets and liabilities of the group members in a way that they can be treated as a single economic organism.
It naturally follows that for this concept to work, one jurisdiction has to be chosen to deal with all the resolutions against various entities of a corporate group regardless of their location. The jurisdiction, so chosen, is popularly known as the Centre of Main Interest (COMI).[vii] The problems arise in the selection of COMI. The factors such as the laws of which country would be most beneficial for the resolution process and whether the final outcome will be recognised by the other state involved are often taken into consideration. The UNCITRAL Model Law on Cross Border Insolvency provides a framework for coordinative approach between jurisdictions where a foreign representative will be appointed by each state involved to “administer the reorganization or liquidation of the debtor’s assets.”[viii] Chapter V of the EU Insolvency Regulations[ix] also contains various rules for integrating the insolvency proceedings concerning group companies.
Since the norm is that the creditors can exercise their right only against the company with which they have entered into a contract, there is no concept of general group liability. Thus, for a group liability to exist, a statutory authority must be given to the companies in their respective jurisdictions. Hence, for group insolvency to be effective, more and more jurisdictions must incorporate the structure of cross-border insolvency so that when a jurisdiction is chosen as COMI, the statutory provisions do not present any hurdle to the resolution process.
Group Insolvency in India
While the Code is silent about group insolvency, the courts are trying to fill in this lacuna through judicial pronouncements. When the Videocon Group went insolvent, fifteen different resolution applications were filed against its fifteen different group companies. On 8th August 2019, the National Company Law Tribunal, Mumbai Bench granted substantive consolidation of 13 companies of the Videocon Group in the case of State Bank of India v. Videocon Industries Ltd.[x] giving a classic example of group insolvency carried by the courts in India.
The argument given in favour of consolidation, which became the basis of the judgement, was that the group worked as a single economic unit.[xi] The companies had voluntarily formed an obligor/co-obligor structure through contractual agreements which pooled their assets and liabilities. All the lending had been done on the basis that the corporate debtors would be ‘jointly and severally’ liable for the obligation leaving their assets and business functions ‘intricately intertwined’.[xii]
The other argument was that the consolidation would lead to a better asset-liability framework for the bidder, paving way for better resolution plans. Many corporate debtors, like the trading companies, would not have many assets as compared to a manufacturing company which would have lands and factories as its major assets. Hence, the likes of trading companies would get much less or probably no resolution plans causing them to ultimately plunge into liquidation and the object of the Code i.e. to save corporate entities and keep them as a going concern may get defeated.
The court examined the necessity of consolidation with the help of principles laid down by UK/USA courts[xiii] and concluded that ‘equity and fairness’ can be the basis for lifting the corporate veil.[xiv] It also indicatively listed twelve ingredients one can look for before triggering consolidation, some of them being, common control, common assets, common liabilities, inter-lacing of finance, an intricate link of subsidiaries, looping of debts etc.
The court divided the group enterprises into two categories.[xv] The first category is of the groups, which when brought together for the resolution process gets better asset value and separately gets plunged into liquidation. The second category belongs to the companies which can survive even if their CIRP are dealt with separately. The court said that the former case should be the one granted with consolidation.
This case has laid down an elaborate jurisprudence for Group Insolvency wherein it brought in promising offers to the bidders for better resolution plans for the group, thereby getting each corporate debtor its best value. Hence, Group Insolvency has found its way in India through courts and now, finding its way into the statutory books.
Challenges in its Way
This new advancement of Group Insolvency comes with its own set of challenges and issues which need to be kept in mind while it is drafted. Issues have to be resolved regarding companies with a huge turnover, which are financially independent and self-sufficient in running their company as a going concern but are being dragged in the insolvency due to the group members. For example, KAIL was one of the fifteen Videocon group entities which were requested to be consolidated. The court decided to keep it out of the consolidation because KAIL was a self-sufficient company with a huge turnover and was independently capable of maintaining itself as a going concern.[xvi]
If consolidated with other entities, KAIL’s asset-value would have decreased which would have hurt its creditors’ interest leaving them insecure about their share in the consolidated asset of the Group. If creditors are left insecure then that would reflect in either their willingness to give credit or their raise in the amount of interest. In the case of operational creditors, if the assets are consolidated then their chances to hold 10% of the total due amount decreases. Hence, their chance to be a part of Committee of Creditors goes down and if operational creditors are ignored then nobody would provide goods and services on credit. There would be a demand for advance payment which would be bad for the Indian economy.
Conclusion
Individual Insolvency proceedings against various companies of the same group in the different jurisdictions across the world result in an undue delay to the innocent creditors. In such a scenario, consolidation of the subject-matter companies would act in the benefit of creditors and the resolution process of such group insolvency would be quick and in a timely manner.
In India, though the Code does not provide for specific provisions related to group insolvency, the courts, through its power of judicial interpretation, have come to the rescue and resolved some cases accordingly. However, specific provisions related to this concept needs to be incorporated in the code in order to bring certainty and uniformity in the law. Investors shall accordingly plan their investment; otherwise unnecessary delay in courts and other complexities would make India a less attractive investment destination.
[i] IBC reforms: Govt invites views on group insolvency, pre-packs, The Hindu Business Line, available at https://www.thehindubusinessline.com/economy/ibc-reforms-govt-invites-views-on-group-insolvency-pre-packs/article26867006.ece.
[ii] Report of the Insolvency Law CommitteE, Ministry of Corporate Affairs, Government of India, http://www.mca.gov.in/Ministry/pdf/ReportInsolvencyLawCommittee_12042019.pdf.
[iii] [1896] UKHL 1, [1897] AC 22.
[iv] Vinod Kothari & Sikha Bansal, Entity Versus Enterprise: Dealing With Insolvency Of Corporate Groups, Vinod Kothari Consultants, available at http://vinodkothari.com/wp-content/uploads/2019/06/Entity-vs.-Enterprise.pdf.
[v] Ibid.
[vi] See- Report Of The Working Group On Group Insolvency, Insolvency and Bankruptcy Board India, available at https://ibbi.gov.in/uploads/whatsnew/2019-10-12-004043-ep0vq-d2b41342411e65d9558a8c0d8bb6c666.pdf.
[vii] Timing Is Everything: Herman Jeremiah, Different Approaches To The Relevant Date For Determining COMI In Cross-Border Recognition Proceedings, Mondaq, available at https://www.mondaq.com/InsolvencyBankruptcyRe-structuring/837102/Timing-Is-Everything-Different-Approaches-To-The-Relevant-Date-For-Determining-COMI-In-Cross-Border-Recognition-Proceedings.
[viii] UNCITRAL Model Law on Cross-Border Insolvency with Guide to Enactment and Interpretation, UNCITRAL, available at https://www.uncitral.org/pdf/english/texts/insolven/Leg-Guide-Insol-Part3-ebook-E.
[ix] Regulation (EU) 2015/848 of the European Parliament and of the Council of 20 May 2015 on insolvency proceedings.
[x] State Bank of India & Mr. Venugopal Dhoot v. Videocon Industries Ltd & Ors., Order dated August 8, 2019, (https://nclt.gov.in/sites/default/files/final-orders,pdf/VIDEOCON%20INDUSTRIES%20LTD.%20MA%201306%20OF%202018%20%20CP%2002%20-%202018%20NCLT%20ON%2008.08.2019%20FINAL.pdf)
[xi] Ibid, page 7.
[xii] Ibid, page 11.
[xiii] Ibid, page 44.
[xiv] Ibid.
[xv] Ibid, para 82, page 48
[xvi] Ibid, para 83(a), page 49.
Image taken from https://www.moneycontrol.com/news/business/insolvency-of-real-estate-firms-to-be-limited-to-project-not-across-group-nclat-4931701.html.
This blog is part of RSRR Rolling Blog Series. By Shiphali Patel, 4th Year Student, Dr. Ram Manohar Lohiya National Law University, Lucknow.