readiness-of-india-for-group-insolvency

The working group on Group Insolvency submitted its report to the Insolvency and Bankruptcy Board of India in September, 2019.

Background

  • The Insolvency and Banking Code that came into being in 2016  seeks to create a unified framework to resolve Corporate insolvencies in a strict time-bound manner.  
    • This is undertaken through a process, known as Corporate Insolvency Resolution Process (CIRP)
    • The process is initiated by the National Company Law Tribunal
  • The Working Group on Group insolvency was constituted with a mandate to examine the issues arising in CIRPs vis-a-vis Group companies, i.e. distressed companies linked to other group companies.

Significance

  • The importance of group company insolvency lies in benefits such as information symmetry amongst stakeholders and also cost effectiveness of insolvency proceedings of distressed companies.
  • It will also pave the way for a smoother ‘Exit’ of distressed firms.
  • Liquidation of group companies will come as a breather for banking reeling under NPAs.

What are Group Companies ?

  1. Group companies are defined as a set of entities which are interlinked in terms of shared control or economic dependencies. 
  2. For e.g. In the corporate insolvency resolution process of Venugopal Dhoot vs SBI, the National Company Law Tribunal (NCLT) had called for consolidation of assets and liabilities of 13 group entities of Videocon.
  3. The Insolvency & Bankruptcy Code, 2016  doesn’t have a framework to harmonise corporate insolvency resolution process and liquidation proceedings related to group companies

Recommendations of WorkingGroup

Recommendations 

Description

  1. Definition of Corporate group by means of amendment to the IBC.
  • The working group has taken up analysis of  definitions of group companies in various legislations in Indian and international realm such as Foreign Direct Investment Policy, Competition Act, SEBI Regulations, Companies Act, 2013, EU Regulations on Insolvency Proceedings and UNCITRAL Guide on Insolvency.
  • It  recommended the inclusion of associate, holding and subsidiary companies in the definition of Corporate Group.

Existing Legal provisions: Subsidiaries are considered a separate legal entity and holding company does not own assets of its subsidiary.

  1. Information Sharing
  • In line with insolvency regimes of the EU and UNCITRAL, the working group has recommended that information related to insolvency proceedings must be shared between IPs, CoC, and adjudicating authorities.
  • It hasn’t given a concrete mechanism for it, however it can be done by uploading the relevant information on Information Utilities.
  1. Group Coordination Proceedings
  • The working group has recommended the appointment of a group coordinator.
  • The group coordinator is tasked with supervision of valuation of total assets, common information memorandum, expression of interest, group CoC and resolution plan. 
  • As the group company insolvency is riddled with complexities, it has called out for extending the time limit to 420 days from existing 330 days for CIRP.
  1. Single Professional, Group CoC and Joint Applications
  • If all companies in a Group have defaulted, then a joint application will suffice for commencement of the CIRP.
  • It has also recommended a single adjudicating authority that will be incharge for insolvency proceedings of group companies.

Exception: It has called for allowing multiple adjudicating authorities or insolvency professionals in the following cases 

  1. Entailing conflict of interest
  2. Resource crunch
  3. If the stakeholders are going to be adversely affected.

Status of the Recommendations

However, despite the report being submitted long back, IBBI has failed to implement the working group’s recommendations till now.

Challenges pertaining to the Recommendations

  • The term commercial understanding that is used in  the definition of Group Company is vague and may result in interpretation issues, and may lead to piling up of frivolous applications before the authority.
    • Due to piling up of frivolous applications, proceedings may be delayed. 
    • It will also clog up the judicial infrastructure at disposal.

Way Forward

  • IBBI should define a Group Company in a holistic manner that will provide a holistic definition to provide inclusion for such companies that are linked either by horizontal integration (cross-ownership) or by vertical integration (layers of parent and subsidiary companies).
  • The onus should be on the adjudicating authority, to assert the horizontal as well as vertical integration. 
  • On the part of adjudicating authority, it is essential to assert the horizontal as well as vertical integration as it will lead to dealing with a separate CIRP for each company.
  • Separating CIRP would end up in reduction in the value of assets, in contravention to  the Preamble of the IBC which envisages Principles of Maximisation of assets.

Salient Features of IBC

  1. It applies to both individuals and companies.
  2. Earlier it provided for a 180-270 days period to resolve insolvency but now the deadline of 330 days has been set for completion of the corporate insolvency resolution process (CIRP), including litigation and other judicial processes.
  3. It provides immunity to the debtors from claims of resolution by creditors during this period of resolution.
  4. It provides for a common platform of debtors and creditors of all classes to resolve insolvency.
  5. The Code gives the highest priority to those who have brought interim finance to meet the costs of resolution or liquidation, followed by dues to workers for the past two years and dues to secured creditors in equal priority. 
  6. Employees other than workmen, and unsecured creditors and operational creditors are further down the line in the priority of receiving resolution or liquidation proceeds.

            

Source: Mint

Source: TaxGuru

Laws prior to IBC

Some of the insolvency laws which failed to make an impact.

  • Sick Industrial Companies (Special Provisions) Act, 1985 (SICA)
  • The Securitisation and Reconstruction of Financial Assets and Enforcement of Securities Interest Act, 2002 (SARFAESI)

Also readInterim Order On Mahadayi Tribunal’s Award

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Image Source: The Indian Express