IBC

Group Insolvency Under IBC

The Insolvency and Bankruptcy Code, 2016 does not have any provision for Insolvency or Liquidation of group companies.  Every company is a separate legal person and as such Insolvency Proceedings can only be initiated against individual company. There are circumstances when successful resolution of a company cannot be achieved without involving other group companies who are interdependent on each other in various aspects.

Many of modern businesses are organised in form of group structure. Group structure provides various benefits to a business.  Group structure may help in centralizing control over group companies, reducing risk to an individual company, expansion and diversification of business etc.

Group companies are interrelated operationally, financially and in myriad of ways.  Group companies could be operationally dependent on each other in a way that a subsidiary may not exist without existence of a parent company.  Group company may have common directors. One group company may have given corporate guarantee to another group company.

The Companies Act, 2013 recogonises associate company, holding company and subsidiary company. Associate company, holding company and subsidiary company do not cover all types of interdependencies among group companies.

JUDICIAL EXPERIENCE

Although there is no framework for group insolvency under the Code, NCLT and NCLAT have allowed consolidated Insolvency Proceedings of various companies in unique facts and circumstances of such cases.

VIDEOCON GROUP

Various applications for consolidation were filed before the NCLT Mumbai Bench in Videocon Industries Ltd1 matter. Insolvency Proceedings had been initiated against fifteen companies belonging to Videocon Group. Many of these companies were having various interdependencies.  There was common control, common directors, common assets, common liabilities, interlacing of finance, intricate link of subsidiaries, intertwined accounts and common Financial Creditors.  The NCLT, Mumbai Bench consolidated the insolvency proceedings of thirteen out of fifteen Corporate Debtors belonging to Videocon Group. The NCLT held that there is no single yardstick or measurement on the basis of which a motion of consolidation can or cannot be approved.

LAVASA GROUP

Insolvency proceedings against Lavasa Corporation Ltd have been admitted vide order dated 30th August, 2018 of NCLT, Mumbai Bench. An application was filed before the NCLT by Financial Creditors for consolidation of Insolvency Proceedings of Lavasa Corporation Ltd with its 100% subsidiary companies Warasgaon Assets Maintenance Ltd, Warasgaon Power Supply Ltd, Daswe Retial Ltd. and Daswe Convention Centre Limited.  Out of these, Warasgoan Assets Maintenance Ltd and Daswe Convention Centre were already going through CIRP. There were no Insolvency Proceedings in respect of Warasgaon Power Supply and Daswe Retail Ltd. It is pertinent to mention that no Insolvency Proceedings have been initiated against both these subsidiary companies.

Businesses of all these subsidiaries were dependent on Lavasa Corporation Ltd.  Warasgaon Power Supply Ltd provided stand- alone captive power.  Daswe Convention Centre Ltd maintained and ran convention centre.  Daswe Retail Ltd ran the retail operations within the premises of Lavasa Corporation Ltd. Thus, there were inter-linkages and synergies between these companies to keep Lavasa Corporation Ltd as a running township.

The NCLT applied the principles developed in the case of Videocon, i.e. 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 wined accounts, inter looping of debts, singleness of economic units, common Financial Creditors, common group of Corporate Debtors and directed for consolidation of insolvency proceedings of Lavasa Corporation Ltd  and its 100% subsidiary Warasgaon Assets Maintenance Ltd and Daswe Convention Centre, which were already going through insolvency proceedings.

ADEL LANDMARKS LTD

Insolvency Proceedings against Adel Landmarks Ltd (Principal Borrower) has been admitted on the application of Edelweiss Asset Reconstruction Company. During pendency of proceedings, Edelweiss also filed application for initiation of CIRP against nine Corporate Guarantors which was rejected by the Adjudicating Authority on the ground that for same set of claims, simultaneous proceedings against the Principal Borrower and Corporate Guarantor cannot be initiated.

Appeal was filed before the NCLAT wherein consolidation of insolvency proceedings was    sought on the ground that this was not only a case wherein corporate guarantee has been given by companies in question but also project involved land belonging to these companies. Resolution of Borrower will not be successful without consolidated insolvency of all these companies. The NCLT allowed consolidated Insolvency Proceedings five out of nine companies.

WORKING GROUP BY IBBI

IBBI established Working Group on 17th January, 2019 to recommend a complete regulatory framework to facilitate insolvency resolution and liquidation of Corporate Debtors in a group under the chairmanship of Sh. U. C. Sinha, former chairman of SEBI. 

The Working Group was of the view that if Insolvency Proceedings are initiated at Group Level it may have certain advantages like promotion of information symmetry, reduction in the cost of insolvency proceedings, maximisation of value, reduction in cost of capital, increasing certainty for stakeholders and saving judicial time

The Working Group submitted its report on 23rd September, 2019.  The Working Group recommended for enabling framework for Group Insolvency, which may be voluntarily used by a stakeholder. In the initial stages the Framework will have provisions for coordination, cooperation, and information sharing among Insolvency Professionals, Committee of Creditors and Adjudicating Authorities. Later on, on the basis of experience gained, provisions related with substantive consolidation and cross border consolidation may be incorporated.

The Framework may have provisions for joint application for initiating insolvency, single Insolvency Professional, single Adjudicating Authority, creation of Group Creditors Committee and group coordination committee.

The corporate group has to include holding company, associate company and subsidiary company. If a company is not covered in above category but is intrinsically connected with a group company, an application can be filed before Adjudicating Authority for inclusion.

There may be provisions for perverse behaviour of a Group Company. If a Group Company indulges in fraudulent behavior, claims of such company can be subordinated to other creditors.

Although, these recommendations have been made way back in 2019, no provisions regarding Group Insolvency have been introduced in the Code. The NCLT and NCLAT are passing orders of consolidation of insolvency proceedings on case-to-case basis.

___________________________________________

  1. State Bank of India Vs Videocon Industries Ltd.; MA 1306/2018 in CP No. 02/2018

Mukesh Kumar Suman is an advocate and legal author based at Delhi. He regularly appears before various Judicial Forums including NCLT, NCLAT, High Courts and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

Mukesh Kumar Suman

Mukesh Kumar Suman

Mukesh Kumar Suman is an advocate based at Delhi. He has rich experience in civil, criminal, commercial, arbitration and corporate insolvency matters. He regularly appears before District Courts, NCLT, NCLAT, High Court and the Supreme Court. He can be approached at mukesh_suman@outlook.com or +91 9717864570.

Leave a Reply

Your email address will not be published. Required fields are marked *