GROUP INSOLVENCY – NEED OF THE HOUR?
ABSTRACT:
Group insolvency is a concept where the insolvency of two or more companies can be joined into a consolidated CIRP which helps every stakeholder involved in the resolution process. The authors have firstly explained the consequences and effects of group insolvency and followed by the Board’s recognition of Group insolvency in the Insolvency and Bankruptcy Code (“Code” hereinafter) and further explained the hindrances of initiating group insolvency and the recent judicial pronouncements under this topic. The authors have finally explained the cross border and how it is recognized under the ambit of group insolvency and have finally concluded with the need for an amendment in the code regarding group insolvency.
INTRODUCTION:
Insolvency and Bankruptcy Code is a special code that was brought in to provide a cover for those companies which are suffering to pay back their creditors. While the code is still in its nascent stage, the legislative and judiciary have been taking active steps to provide clarity in various code areas. The Supreme Court in its Videocon Judgement has cleared the air on the aspect of substantive consolidation of various subsidiaries with the parent company. While the separate legal entity concept is of vital importance, lifting of corporate veil serves the purpose of the code in a better way. However, lifting the corporate veil to make all the subsidiary companies also be a part of its Corporate Insolvency Resolution Process (CIRP), possesses various legal challenges and the need of the same right now becomes an important question to deal with in the first place.
GROUP INSOLVENCY:
The lifting of the corporate veil is an important concept and can be used to preserve companies from misusing the concept of the corporate veil in certain circumstances. In the case of CIRP of a parent company that has several subsidiaries under its control will be under the same CIRP process and if the same is granted, it would allow the creditors who are owed money to get their money which they deserve. As a consequence of not lifting the corporate veil, the parent companies which are under the CIRP are smart enough to transfer their assets to their subsidiaries which restricts the amount of money that the creditors would get less money from the assets disclosed by the parent company. To maximize the value of assets disclosed by the parent company which is going through CIRP, lifting the corporate veil might be needed to preserve the rights of the creditors, but the same is a complex process and there is a need for clarity on the same.
CONSEQUENCES OF INITIATING GROUP INSOLVENCY:
· Maximizing the value of assets:
The value of assets that are administered by the parent company and the subsidiary company is likely to be maximized when the group insolvency of both the companies are allowed by the adjudicatory authorities. This allows the liberty to the resolution applicants to preside over the assets as a whole between the main and subsidiary company and that there will be no need for diversification of assets and a single resolution applicant can utilize the value of the available assets. Moreover, if substantive consolidation is allowed, the resolution application for both the companies can be taken by the same resolution applicant avoiding a scenario wherein, when there is two different company and in which one of the companies does not have many assets unlike the other company, the former company will not receive any bids to take over the company. In the case of, Axis Bank ltd. v. Lavasa Corporation Ltd., wherein the adjudicatory mechanism allowed ‘consolidated resolution plans’ over ‘stand-alone resolution plan’ since the subsidiary companies were hugely dependent on the parent company.
· Procedural benefits:
Procedural coordination allows the adjudicatory authorities to allow for joint application against the parent company and subsidiary company instead of allowing separate CIRPs which will enable the adjudicating authority to adjudicate the matters together. In a joint application, a single adjudicatory authority should be designated to govern the proceedings which will avoid duplication of work through information sharing and help to adjudicate the matters in a better way and fast disposal of matters by adjudicatory authorities. A single Insolvency Professional should be appointed for the companies in procedural coordination and Group CoCs can be possible with the discretion of each CoCs of each company, which will help in coordinated negotiation with the resolution applicants and allow in maximizing the value of assets since there will be an easy exchange of information between the parties involved. In addition to this, coordination proceedings are to be governed by a Framework Agreement approved by the CoC of each company in which the consensus would have to be reached about estimated costs of proceedings, the distribution of costs of proceedings, the Adjudicating Authority which will hear the proceedings etc., Post the signing of framework agreement every adjudicatory mechanism will be intimidated and the cases from different adjudicatory authorities will be transferred to the one preferred by the companies mentioned in the framework Agreement.
The aforementioned procedural benefits are ever-present in group proceedings and it just results in easy exchange of information and reduces the delay involved in a separate insolvency proceeding and importantly reduces the duplication of work which is necessary to comply separately for each company. However, this needs to be allowed only if the companies in the group satisfy the factors mentioned in the Videocon case (supra) and the procedural benefits in group insolvency post satisfying the factors only be utilized by the adjudicatory authorities.
· Lifting of Corporate Veil:
Corporate Veil is when the company has its own separate legal entity and can sue and be sued under its own name and grants protection to its shareholders and directors. However, when the shareholders or the directors who are responsible for the company do some fraudulent activities, such a veil is lifted in order to make the said persons liable. When it comes to insolvency law, the concept of lifting the corporate veil was discussed in the Report of The Insolvency Law Committee” dated 26th March 2018:-
“It was noted that the treatment of group companies within insolvency laws is a complicated subject. Since lifting of the corporate veil in insolvency may affect corporate debtor entities significantly, this issue may be dealt with in the long-term once the present system is well established.”
From the extracted version of the Report, it is clear that lifting the corporate veil was seen as something that could be used in the future and not until the present Insolvency regime is established properly.
However, when there were certain circumstances or factors that the adjudicating authority was satisfied, the corporate veil has been lifted and group insolvency has been approved. The Supreme court in the case of Arcelomittal India (P) Ltd. vs. Satish Kumar Gupta held that, “It is thus clear that, where a statute itself lifts the corporate veil, or where protection of public interest is of paramount importance, or where a company has been formed to evade obligations imposed by the law, the court will disregard the corporate veil. Further, this principle is applied even to group companies, so that one is able to look at the economic entity of the group as a whole.” Recently in the case of the State Bank of India v. Videocon Industries Ltd, the Mumbai NCLT considered 12 different factors such as Common Control, Common Directors, Common Assets, Common liabilities, etc., wherein the NCLT looked into such factors on which the tribunal came to the conclusion that corporate veil can be lifted in such a case. Although the adjudicating authority has held that upon satisfaction of the said factors the corporate veil can be lifted, the corporate veil has to be lifted and should be ensured that it does not lose its significance in a bid to make a way for group insolvency and the factors mentioned in the Videocon case (Supra) are to strictly construed.
IBBI’s RECOGNITION OF GROUP INSOLVENCY:
The Insolvency and Bankruptcy Code has not recognized group insolvency by an express provision, but the adjudicating authority under Section 7 of the code employs the word ‘jointly’ which allows a group of financial creditors to trigger the code. This allows a financial creditor to trigger the code as a group. It is also noteworthy that Section 60(3) of the Code provides that the insolvency proceedings against the debtor company and its guarantor shall be transferred to the Adjudicating Authority dealing with insolvency resolution process of the said corporate debtor. Section 18(f)(v) grants the power to the power to the Resolution Professional to take control of securities including shares held in any subsidiary of the Corporate Debtor once the insolvency resolution application is admitted. Section 36 (3)(a) essentially concludes, if the parent company goes into liquidation, the liquidation estate shall take over of such assets including shares held in any subsidiary of the corporate debtor.
Henceforth, from the aforementioned provisions, it can be inferred that the intention of the legislature was to provide for joint or group proceedings when the parties are related to each other and when different proceedings are initiated before the Adjudicating Authority. However, such mentioned provisions might not always be adequate for tackling the complexities in group insolvency between different companies and there is a need for proper guidelines and express provision to tackle the complexities involved in group insolvency.
HINDRANCES TO INITIATE GROUP INSOLVENCY:
· Meaning of “Group” in “Group Insolvency”:
In one of the first cases in Indian Jurisdiction, the NCLT Mumbai took into twelve factors such as Common Control, Common directors, Common assets, Common liabilities, Inter-dependence, Inter-lacing of finance, Pooling of resources, Co-existence for survival, Intricate link of subsidiaries, Inter-twined accounts, Inter-looping of debts, Singleness of economic of units, Common Financial creditors, Common group of Corporate Debtors. The glossary to Part III of the UNCITRAL Legislative Guide on Insolvency Law on ‘Treatment of enterprise groups in insolvency’ (“UNCITRAL Guide”) defines an enterprise group as “two or more enterprises that are interconnected by control or significant ownership,” with control being “the capacity to determine, directly or indirectly, the operating and financial policies of an enterprise.” As of now, there is no definition or guidelines to determine the companies which are all part of the same group. The main factors to consider the same are control and ownership which can be used to determine whether a particular company is a subsidiary of another company. In such a situation, it is easy to form a group and request group insolvency by the creditors. However, if we restrict the classification of a group in a group insolvency proceeding, it will be a loophole in the system as companies would try to escape from the defined ambit. In other situations, it will not be easy to find out whether two companies are related or not. The classification cannot be done with a straight jacket formula and the factors to be taken into account will vary from case to case. The burden of proof might be placed upon the subsidiary to prove before the court that they are not a subsidiary of the other company. The Court upon its satisfaction can declare whether the company is a subsidiary based on the evidence relied upon by the said company. However, the factors to consider should not be narrow and should be broad enough to consider the same. Therefore, the legislative if it intends to have a successful group insolvency process in India, one of the primary things is to try to involve all those companies who function as a group to enjoy the benefits of group insolvency.
CROSS BORDER INSOLVENCY UNDER IBC
Cross border involves on situation when the debtor holds assets in more than one country or in cases where the creditors are from more than one country. The overall objective of initiating an insolvency proceeding is achieved on implementation of Cross border proceedings, as it safeguards the interest and longevity of the company of creditor and corporate debtor, respectively.
It is important to understand that at present, the Indian legal system does not have any provisions recognizing the cross-border insolvency under IBC. However, the legislature has put forth two provisions in its bill under IBC which the Central Government is yet to implement and proceed.
Section 234 of the Act, which is yet to be enforceable discusses about the Agreements with foreign countries. On the perusal of the provision, it makes us understand that there must be a bilateral agreement with another nation between the Central government so as to administer their cross-border ramification which will be pave way for application of the Code at any place where the corporate debtor’s or its personal guarantor is situated.
In furtherance to this, Sec 235 of the Act deals about letter of request, which mainly concentrates on applying the doctrine of reciprocity. It states that when the liquidator or the Resolution Professional of a corporate debtor or its personal guarantor are the parties against whom insolvency resolution process is involved, feel that any action or evidence regarding the latter’s asset are needed which are located outside the country. On such circumstances, the former makes an application to the NCLT and if the Adjudicating Authority is satisfied, would issue a letter of request to such country as per such agreement.
The legislatives intend of including such provision in the act, which still requires amendment, is mainly to maximize the assets of the corporate debtor, but in contrary the legislature knows on execution and implementation of cross border insolvency, there would arise conflicting views on every subject matter. Since, every country’s insolvency law has its own unique distinctiveness, during the formation of treaty with 2 different nations, the involvement of negotiation would be lengthy, leading to chaos.
The first-ever recognition of cross border insolvency in India was in the case of SBI v. Jet Airways (India) Ltd . The factual matrix of the case is that, in 2019 the SBI with other financial creditors, as consortium of creditors had filed an application at the NCLT as Jet Airways were bankrupt. On acceptance of such application, the NCLT had initiated CIRP process against the corporate debtor, wherein it realized that a previous bankruptcy petition is filed in Netherland’s District court for a due owing Rs 280 Crores to 2 European creditor. In their proceedings, the Dutch court had appointed the Administrator to take charge of the assets of corporate debtor, which are located in their country. However, on the application filed at Mumbai NCLT, the administrator had filed an application requesting the Tribunal to withhold their proceedings and recognize their bankruptcy proceedings, as it will lead to two parallel proceedings happenings in different jurisdictions.
Nonetheless, the NCLT Mumbai Tribunal did not withhold their insolvency proceedings and validated that since cross border insolvency is not a recognised practice in India, the application of the Dutch Administrator cannot be entertained. Being aggrieved by the Bench’s decision, he had knocked the doors at the Appellate Tribunal. The NCLAT, for the first time held that cross border insolvency can be recognised provided the Administrator shall not alienate the assets present in their country and shall accordingly coordinate with the Resolution Professional as per the agreement made between the parties.
In furtherance, the NCLAT Tribunal made incorporated the Model Law framework on recognizing a “Joint Corporate Insolvency Resolution Process” by a cooperation agreement between the Resolutional Professional and the Dutch Professional, wherein India is made as the centre of interest and Dutch Administrator as non-main insolvency proceedings in the insolvency process. It is necessary to note that, the Dutch Administrator was being represented as a creditor for foreign creditors, however he was not given any voting rights in the Committee of Creditors.
With adverse changes in the development of the society, the judiciary have also been adopting to these dynamic changes, which is explicitly seen in the Jet Airways case on recognizing the concept of cross border insolvency in India. The NCLAT had applied the universalist approach on recognizing the cross-border insolvency, as the doctrine concentrates on the aspect that the jurisdiction of such matters lies at the place where the corporate debtor is domiciled or has its registered office.
RECENT DEVELOPMENTS ON GROUP INSOLVENCY BY JUDICIARY
With the legal framework on group insolvency is yet to be formulated, the judiciary has so far dealt with precision on considering the corporate behaviour of the companies on matters pertaining to group insolvency. In recent times, the Mumbai Bench of NCLT in the case of State Bank of India v. Videocon Industries Ltd, has passed an order entertaining Group Insolvency and have determined the conditions to be ascertained for regulating such joint insolvency application against the corporate debtor.
An application was filed by the State Bank of India seeking for consolidation of CIRP process against the Videocon Industries group for default in payment of Bank loans and guarantees. The consortium of 18 Banks which was led by SBI intend to make Videocon group as a corporate debtor by consolidating a group 15 Videocon companies. The main reason for applying such a consolidation being the subsidiary companies of Videocon were interdependent with one another and inseparable, as a result, it was difficult to identity and segregate assets and liabilities of each company. The corporate debtor companies were inextricably interlinked and intertwined amongst each other, thereby while filing financial statements they used to give overall consolidated statements of their company to the parties under the Rupee Term Loan Agreement. The Bench were flooded with applications of creditors and transfer orders passed by the Principal Bench of NCLT Delhi to seek relief regarding the matter on Videocon insolvency application under one Bench. The plea of the SBI was consolidation of all the petitions filed and to issue directions on treating the CIRP process as one in respect of all the Videocon group of companies.
It was observed that the corporate debtors had availed financial assistance from all the banking institutions as a single economic unit and their business and operations ran under a single unit, with this reliance did the creditors provided the funds. Since the corporate debtor had acquired the funds through RTL agreement from the Banks, which were utilized by all the subsidiaries, the loan was acquired with the understanding that the corporate debtors will be jointly and severally liable for the obligation owed to the financial lenders. In furtherance, the shareholding pattern of the corporate debtors gives a clear view of unity of interest and ownership between each company. Adding on, it was shown that the assets and liabilities of the corporate debtors were completely knotted into one whole, which thereby was inseparable and if done with be injustice to interest of other creditors. The applicant further claimed that there exist multiple expressions of interest floated in each company, and if the there is no consolidated CIRP process, the corporate debtors would reach the stage of liquidation which would be against the objectives of IBC.
The Bench consisting of Justice M.K. Shrawat takes into consideration the US Bankruptcy Laws and the UNICTRAL Model and intended to pass an order for substantial consolidation, wherein he quotes – “Consolidation has been made at circumstances where it is necessary as it acts as a mechanism to maximize the value of financially built stressed group of companies.” The bench made it clear that on the matter that there is no single yardstick to get approval for consolidation of corporate debtors. However, with reliance to the facts and circumstances of the present case, the bench had come up with setouts which can trigger on taking consolidation of insolvency process. However, it the Bench consolidated 13 out of 15 companies, by leaving the KAIL Ltd and Trend Electronic Ltd companies from consolidation as it these companies were financially strong and did not have any common work operation with other subsidiaries, thereby were comparatively independent than other companies. The parameters which were considered for consolidation of Videocon group companies were – i) Common Control, ii) Common Directors, iii) Common Assets, iv) Common Liabilities, v) Inter-dependence, vi) Inter-lacing of finance, vii) Pooling of resources, viii) Co-existence for survival, ix) Intricate link of subsidiaries, x) Inter-twined accounts and xi) Inter-looping of debts. Therefore, the judgment gave a yardstick for looking into the rationality of “consolidation” of all the companies under one CIRP process.
The parameters set out by the Videocon Judgment were relied on various other cases, wherein one such case is in Axis Bank Ltd v. Lavasa Corporation Ltd, the applicant being the financial creditor of Lavasa Corp Ltd had filed a Sec 7 application seeking for consolidated corporate insolvency with its wholly owned subsidiaries. The bench applied the yardstick set by Videocon judgment on recognizing consolidated insolvency process, wherein, after evaluating each criterion it was concluded that the subsidiaries are directly related and inter-dependent to the corporate debtor. The bench further ordered to initiate a consolidate corporate insolvency process of the corporate debtor and its 100% subsidiary companies.
In the case of Edelweiss Asset Reconstruction Company Ltd v. Adel Landmarks Ltd & Ors, wherein the applicant had filed a Sec. 7 application against the corporate debtor and until the matter were heard, the applicant, being the appellant in the present case had filed another Sec 7 application against the Corporate Guarantors. In toto, there were 9 Corporate Guarantors against whom the CIRP process were filed by the applicant, claiming that the CIRP cannot be filed against the corporate debtor alone, since the rest of the 9 corporate guarantors have been consolidated on constructing housing projects. Moreover, an agreement between the corporate debtor (Adel Landmarks Ltd) and the 9 corporate guarantors were signed for the development of constructing infrastructures for the allottees. Thereby, the court observed and held that there is evidence to show that 5 corporate guarantors have acted in developing the infrastructure and the agreement with the appellant, thus making a joint application is validated. Furthermore, the court declared that if the developers or directors of the rest 4 corporate guarantors are same as the corporate debtor, then CIRP can be initiated against can be clubbed for group insolvency if it is derived that those parties have common developer or common director being the corporate debtor.
Henceforth, from the above discussed cases the judiciary has time and again recognised the concept of group insolvency and has entertained such matters to ensure the creditor’s claims are availed.
CONCLUSION:
It is to be observed that most of the companies in India are having a collective structure who have their market in diverse fields of industries, however, tend to establish a separate company for each field leading to various subsidiary companies. Whereby, all these companies are binding together in terms of the financials, power of control and their operational mechanism under one head, such being the parent company. This demands for a consolidated insolvency proceedings by including all the companies (subsidiaries as well) under the CIRP process to ensure the objective of the code is achieved, which is value maximization of assets for revival, restructuring and continuation of the company.
The major aspect which needs to be taken into consideration is that by introducing group insolvency under the code, speedy CIRP process which are cost-effective to the collective structure companies. Secondly, it will be beneficial for the Adjudicating Authority to imply the doctrine of piercing of corporate veil and making the group companies liable as a whole by treating them as one single economic unit. Moreover, time and again the Adjudicating Authority have taken a positive approach on recognising group insolvency. Overall, if the legislature does bring its own legislation through an express provision or specific Regulations regarding group insolvency, then the group insolvency can be implemented better.