Group Insolvency – The Need Of The Hour – Insolvency/Bankruptcy

Against the backdrop of recent judicial precedent,
this article delves into the need for a group insolvency framework
in India, and analyses the report published by the CBIRC in
2021.

Globalisation has led to a significant increase in the number of
enterprises which comprise of several closely connected entities
that may operate as a single economic unit.¹ As a
consequence, difficulties may arise when 1 or more entities in that
single economic unit become insolvent as the inability of 1 entity
to pay its debts may impact stakeholders in another entity within
the group.

To address such issues, the UNCITRAL Model Law on Enterprise
Group Insolvency (Model Law) was
introduced.² The Model Law recognises the need for a
transparent and predictable regime to facilitate insolvency of
entities within an enterprise. It focuses on group insolvency
proceedings – i.e., insolvency of some or all entities in a
group, either insolvent or nearing insolvency where the assets and
liabilities of such entities are clubbed together for the purposes
of protecting, preserving, realizing, and enhancing the value of
these entities and their assets.

Following liberalisation, there has been a rise in the number of
enterprise groups in India. India ranks 3rd globally in terms of
the number of family-owned businesses,³ and Indian
listed companies in the NIFTY 50 index have approximately 50
subsidiaries on average.⁴ Interestingly, there are 15
listed companies in India that have over 100 subsidiaries and some
have more than 200 subsidiaries.⁵

The interconnected nature of entities within an enterprise may
lead to assets of a business line being scattered across the group.
The financing secured by an entity may also be funnelled to other
members of the group. Therefore, if an entity within an enterprise
is insolvent or nearing insolvency, creditors and, or, insolvency
professionals may struggle to take control of the scattered assets
and secure the debts, and this could adversely the value of the
entity.

The Insolvency and Bankruptcy Code, 2016 (IBC)
does not deal with group insolvency but there is a growing
consensus that it should be amended to incorporate a framework for
group insolvency. Such a framework would streamline the insolvency
process for enterprises and would help creditors secure true value.
However, the implementation of a group insolvency framework would
require substantial amendments to the existing framework for
corporate insolvency resolution. The Insolvency and Bankruptcy
Board of India (IBBI) – through its Working
Group on Group Insolvency (Working Group) –
and the Ministry of Corporate Affairs (MCA)
– through Cross-Border Insolvency Rules/Regulations Committee
(CBIRC) – have both issued reports proposing
the implementation of a group insolvency framework in India.

Indian Jurisprudence

Despite the absence of a group insolvency framework, benches of
the National Company Law Tribunal (NCLT) have
suo motu applied principles of group insolvency on a
case-by-case basis to better achieve the objectives of the
IBC.⁶ Illustratively, during the insolvency of
Videocon Industries,⁷ the
NCLT, Mumbai, permitted consolidation of the insolvency proceedings
of 13 of 15 entities in the Videocon group on grounds that the
operations of these entities were inextricably linked and the
entitles were also involved in availing loan facilities under a
composite agreement.⁸ The NCLT, Mumbai, relying on
precedent from the USA and the UK, held that group insolvency may
be permitted where there is evidence of: (i) common control,
assets, directors, liabilities; (ii) interdependence of the
companies; (iii) interlacing of finance; (iv) pooling of resources;
(v) co-existence for survival; (vi) intricate links between the
entities; (vii) intertwined accounts; (viii) inter-looping of
debts; (ix) singleness of economic of units; and (x) common
financial creditors.⁹

Thereafter, during the insolvency of Lavasa
Corporation,¹⁰ the NCLT, Mumbai permitted
the consolidation of insolvency proceedings of Lavasa Corporation
and its 4 wholly-owned subsidiaries, including 2 subsidiaries that
were not undergoing insolvency resolution (subject to the approval
of their creditors). The NCLT based its decision on the fact that
the debts of all 4 subsidiaries were guaranteed by Lavasa
Corporation, and the resolution plan was conditional on the
consolidation of the insolvency process of all the entities.

The National Company Law Appellate Tribunal
(NCLAT) has also permitted a form of group
insolvency for 5 entities who jointly owned a plot of land and were
operating as a consortium in Edelweiss Asset
Reconstruction Co Ltd v. Sachet Infrastructure Pvt Ltd &
Ors.¹¹ In that case, the NCLAT
directed that the corporate insolvency resolution process
(CIRP) of the 5 entities occur simultaneously
through a single resolution professional.

From the jurisprudence, it is clear that group insolvency is
predicated on the insolvent entities being intricately linked and
operating as a single economic unit. In addition, the consolidation
of insolvency proceedings must be consistent with the objectives of
the IBC.

Interestingly, not all benches of the NCLT are united in the
belief that they may effect group insolvency resolution where
appropriate. In 2023, the NCLT, Chennai rejected a request to
consolidate the insolvency proceedings of a holding company and its
subsidiary on the grounds that IBC does not empower the NCLT to
entertain such requests.¹² While this was subsequently
reversed by the NCLAT, the case is presently sub-judice before the
Supreme Court.¹³

Legal Framework

Since the Model Law was only introduced in 2019 – after
the publication of the report of the Working Group,¹⁴
the CBIRC was tasked with developing a framework for group
insolvency in the context of the report of the Working Group and
the Model Law. The CBIRC analysed the legal framework for
consolidating assets during group insolvency in the USA, the UK and
other jurisdictions, and based on its examination, did not
recommend adopting the Model Law. Instead, the CBIRC proposed its
own framework for group insolvency.

The report issued by the CBIRC (CBIRC
Report)¹⁵ identified 2 key aspects of group
insolvency: (i) substantive consolidation – i.e. the
consolidation of assets and liabilities of 2 or more group entities
into a single insolvency estate: and (ii) procedural coordination
– i.e. coordination and synchronization of concurrent
insolvency proceedings of group entities. The CBIRC Report suggests
that any framework for group insolvency should be voluntary,
flexible and enabling in nature, and, with this objective in mind,
the CBIRC Report proposes a draft framework for group
insolvency¹⁶ incorporating the procedural co-ordination
mechanisms, which should be implemented only in phased manner.

Substantive Consolidation

According to the CBIRC, substantive consolidation should be
resorted to in exceptional circumstances as it deviates from the
settled principles of separate legal identity or incorporated
entities and limitation of liability.¹⁷ The CBIRC has,
therefore, suggested that provisions for substantive consolidation
be formulated at a later stage after Indian jurisprudence has
evolved further.

Procedural Coordination

The CBIRC was of the view that group insolvency may be initiated
by the corporate debtors or their creditors filing a joint
application before any NCLT exercising territorial jurisdiction
over of any of the corporate debtors to:

1. Initiate CIRP against entities belonging to the same group;
   or




2. Initiate group coordination proceedings between 2 or more
   corporate debtors undergoing CIRP who belong to the same
   group.

To facilitate the group insolvency process, the CBIRC Report
inter alia recommends:

1. Defining ‘group’ on the basis of control¹⁸
   (as defined under the Companies Act, 2013) and significant
   ownership¹⁹ (in terms of the Competition Act, 2002)
   vis-à-vis 2 or more corporate debtors.




2. That the committee of creditors (CoC) for each
   corporate debtor form a separate CoC in respect of the enterprise
   called the group CoC. This group CoC would be responsible for
   communication, cooperation and information between such corporate
   debtors. However, the participation of a corporate debtor in the
   group CoC is voluntary which would enable each corporate debtor to
   opt-out from participating in the group CoC, severely hampering any
   attempts at group insolvency resolution.




3. The appointment of a group coordinator in charge of
   constituting and conducting the group CoC. The group coordinator
   would be responsible for aiding the resolutions professional or
   liquidators of the corporate debtors in information sharing,
   resolution of disagreements, etc.




4. That the group CoC formulate a strategy which may involve
   undertaking combined valuation, negotiating resolution plans for
   some or all participating group members etc. However, the group CoC
   would not be empowered to approve any resolution plan for any of
   the corporate debtors.²⁰

The CBIRC Report does not recommend the appointment of a single
resolution professional for all group entities at the time
commencement of CIRP. Instead, it recommends that the CoCs of the
respective corporate debtors appoint a single resolution
professional if they deem it necessary. The CBIRC Report also
suggests that the solvent members of a group be allowed to
participate in the group insolvency process.

The CBIRC Report goes a long way in formulating a legal
framework towards group insolvency. It appears to have struck a
balance between respecting separate legal personality of the
solvent entities and maximising value from the insolvent entities
within a group. The recommended definition of ‘group’ is
also consistent with the present statutes.

However, the CBIRC’s recommendation that group insolvency be
voluntary and flexible may run contrary to the substantive
consolidation jurisprudence that has developed thus far by the
Indian courts – i.e. where consolidation is directed at the
request of the resolution professional. A robust group insolvency
framework should, therefore, define strict parameters for the
initiation of substantive consolidation.

The CBIRC has recommended that exclusive jurisdiction be
conferred on a NCLT having territorial jurisdiction over any 1 of
the corporate debtors. However, the recommendations are silent on
how the relevant NCLT will enforce its orders outside its
territorial jurisdiction on non-cooperating corporate debtors,
particularly in cases where the resolution professional has sought
assistance²¹ or is pursuing applications for avoidance
or preferential transactions. This is a missed opportunity,
particularly considering the fact that the particular issue of
NCLTs enforcing orders outside their jurisdiction has been
addressed in respect of schemes of arrangement under Sections
230-232 of the Companies Act, 2013 where the registered offices of
the entities are in different jurisdictions. In such cases, the
NCLT is empowered to transfer the proceeding from 1 NCLT to
another.²²

Although group insolvency will require co-ordination between
multiple creditors, corporate debtors, resolution professionals,
etc., and applications will have to be filed before the NCLT for
initiation of group coordination proceedings and approval of the
group strategy, the CBIRC has not recommended extending the
timeline for completion of CIRP provided under the IBC.

Looking Ahead

While the CBIRC Report takes a step towards formulating a
framework for procedural coordination in the event of group
insolvency, it passes the baton to the judiciary to develop the law
on substantive consolidation. This is likely to be problematic
given that different courts and tribunals may have differing views
on substantive consolidation.

Reports indicate that the Central Government is planning to
amend the IBC to provide for insolvency and resolution of group
entities.²³ There is an urgent need to create a
statutory framework for group insolvency to address the economic
realities and once enacted, it will go a long way to protect the
creditors ensuring efficient and timely resolution of the insolvent
entities in a group. However, a group insolvency framework that
does not fully address substantive consolidation and, or, does not
address the issue of tribunals enforcing orders outside their
jurisdiction may create further confusion between the
stakeholders.

Footnotes

1. Illustratively, Lehman Brothers, the
4th largest investment bank in United States (at the time) had
multiple entities across jurisdictions but essentially functioned
as a single unit.

2. UNCITRAL Model Law on Enterprise Group
Insolvency with Guide to Enactment – available at (https://uncitral.un.org/en/MLEGI)
and last accessed on 16 January 2024 at 1222 hours.

3. Page 33 of the CS Family 1000 in 2018,
Credit Suisse AG, Research Institute.

4. Para 1, page 9, OECD (2022), Company
Groups in India – available at
(https://www.oecd.org/corporate/ca/Company-Groups-in-India-2022.pdf)
and last accessed on 30 January 2024 at 1705 hours.

5. Ibid.

6. i.e. to facilitate insolvency
resolution in a timebound manner, maximise value and promote
entrepreneurship while balancing the interests of stakeholders.

7. State Bank of India v.
Videocon Industries Limited, 2019 SCC OnLine NCLT
745

8. The 2 entities from the Videocon Group
were not consolidated in this process as they were able to run
their operations separately and as going concerns.

9. Ibid.

10. Axis Bank Limited, In
re, 2020 SCC OnLine NCLT 3484

11. Edelweiss Asset
Reconstruction Company Limited v. Sachet Infrastructure Pvt.
Ltd., 2019 SCC OnLine NCLAT 592

12. In the matter of Regen
Powertech Pvt. Ltd. & M/s. Regen Infrastructure & Services
Pvt. Ltd. IBA/1099/2019 & IBA 1424/2019, order
dated 1 November 2021

13. Committee of Creditors of Regen
Powertech Private Limited. v. Echanda Urja Private Limited, Civil
Appeal No. 6690-6706/2023.

14. Report of the Working Group on
Insolvency, prepared by the Working Group on Group Insolvency dated
23 September 2019 – available at
(https://ibbi.gov.in/uploads/whatsnew/2019-10-12-004043-ep0vq-d2b41342411e65d9558a8c0d8bb6c666.pdf)
and last accessed on 19 March 2024 at 1200 hours.

15. Report of CBIRC-II on Group
Insolvency, prepared by the CBIRC, 10 December 2021 – available at

(https://ibbi.gov.in/uploads/resources/9ff4f639c0d2a29ea188fd0cba332273.pdf)
and last accessed on 19 March 2024 at 1200 hours.

16. Ibid.

17. Ibid.

18. Section 2 (27) of the Companies Act,
2013 defines control as including “…the right to appoint
majority of the Directors or to control the management or policy
decisions exercisable by a person or persons acting individually or
in concert, directly or indirectly, including by virtue of their
shareholding or management rights or shareholders agreements or
voting agreements or in any other manner…”

19. The CBIRC Report recommends defining
significant ownership “…as the ability to exercise
twenty-six per cent or more of the voting rights…” in
the other entity, which is similar to Explanation (b) to Section 5
of the Competition Act, 2002.

See page 26 of Report of CBIRC-II on
Group Insolvency, prepared by the CBIRC, 10 December 2021 -
available at
(https://ibbi.gov.in/uploads/resources/9ff4f639c0d2a29ea188fd0cba332273.pdf)
and last accessed on 19 March 2024 at 1200 hours.

20. Resolution plans will be placed
before the respective CoCs of each corporate debtor

21. Under Section 19 of the IBC

22. JAK Builders Pvt. Ltd.,
In re, 2018 SCC OnLine NCLAT 631

23. For conglomerates going into
bankruptcy, a clearer path is emerging, Mint, 22 December 2023
– available at
(https://www.livemint.com/companies/news/for-conglomerates-going-into-bankruptcy-a-clearer-path-is-emerging-11703184372844.html)
and last accessed on 9 January 2024 at 1605 hours.

Originally published 1 April 2024

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