When one company within a group becomes insolvent, its financial troubles can affect group companies due to shared financial obligations, making separate insolvency proceedings inefficient. Most insolvency laws are designed to handle individual companies, including the Insolvency and Bankruptcy Code, 2016 (the IBC). Therefore, a dedicated Need for Group Insolvency framework is needed to effectively handle and address complex group structures.
Understanding Need for Group Insolvency
What is Need for Group Insolvency?
Need for Group Insolvency is a framework that allows for the combined handling of assets and liabilities of multiple companies that are a part of a corporate group. It essentially involves insolvency proceedings for multiple entities within a corporate group and aims to address interconnected liabilities, assets, and operations cohesively.
Current Scenario in India:
The IBC lacks provisions for group insolvency. The current framework addresses and is limited to individual entities. This often causes delays in insolvency proceedings and inefficiencies for a corporate group seeking to restructure the group as a whole.
Key Challenges Without a Framework
With the insolvency framework, key challenges arise in dealing with insolvent companies in corporate groups. When there are multiple companies, tracking assets can become extremely difficult, leading to disputes over valuation. There is also a lack of coordination among entities which leads to delays in the resolution process. Different creditors may try to prioritise specific group companies with more readily available assets, leaving other creditors with less favourable outcomes and unfair treatment among creditors. Due to isolated resolutions, there are disruptions in the business operations of insolvent companies.
International Practices in Need for Group Insolvency
To draft a Need for Group Insolvency framework in India it can help to learn from insolvency frameworks that have group insolvency:
UNCITRAL Model Law on Enterprise Need for Group Insolvency (MLEGI):
The purpose of MLEGI is to address insolvency that affects multiple debtors in an enterprise group and aims to protect the interests of creditors, maximise the value of the group’s assets and operations, and facilitate the rescue of financially troubled groups. It offers a framework for cooperation among group entities across jurisdictions and focuses on joint proceedings and cross-border coordination.
USA:
The US Bankruptcy Code treats each company as a group as a separate legal entity for insolvency processes. However, in practice, companies in a group often file for bankruptcy at the same time. Chapter 11 allows for a company experiencing financial distress to reorganise its debts and continue operating while restructuring its finances, providing a path for Need for Group Insolvency by enabling a company to manage multiple creditors and restructure its liabilities under court supervision.
The European Union:
The European Insolvency Regulation, which came into force in 2017 provides rules for cross-border Need for Group Insolvency. It includes provisions for cooperation between courts and insolvency practitioners and a system for coordinating proceedings for the same group of companies. It also encourages joint, simultaneous, or coordinated hearings can help to optimise the potential for dealing with the group as a whole. Therefore, the insolvency framework in the EU encourages voluntary cooperation among group entities.
Read more : Addressing the Issue of Delay in Insolvency and Bankruptcy Law
The Case for a Group Insolvency Framework in India
Key Benefits:
Introducing a framework on group insolvency will establish holistic resolutions, enabling the restructuring of the entire corporate group. It will also minimise double efforts in individual insolvency proceedings, reducing costs. Group insolvency will also address the issues of stakeholders for such insolvent entities, such as creditor interests in group entities.
Recent Developments in India:
The Report of CBIRC-II on Group Insolvency, December 2021 recommended Draft Part ZA, which provides the definition of ‘group’, explains procedural coordination, and the need for Group CoC. The NCLAT in Giriraj Enterprises rejected the consolidation of proceedings because of the absence of equity jurisdictions being vested upon NCLT and the absence of specific provisions under the IBC allowing consolidation or simultaneous running of insolvency proceedings. However, in Bikram Chatterji v. Union of India, the court mandated that the assets of the 40 group firms in the Amrapali group could be attached and that all bank accounts belonging to the companies and their directors be frozen due to the nature of transactions between the group companies. In Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Private Limited, the NCLAT held that group insolvency proceedings were required to be initiated against 5 companies that had been working as a joint consortium to develop a residential colony,
Implications for Key Stakeholders
For Creditor:
Creditors in group insolvency need to navigate complex inter-company transactions and relationships to understand the corporate group’s financial situation. Creditors will need to collaborate with other creditors across the group, potentially through a “group Committee of Creditors”, making the coordination between multiple stakeholders delay the insolvency process. It also requires greater transparency and efficiency in recovering dues.
Read more : Doctrine of Commercial Wisdom of CoC
For Debtors:
Group insolvency will require a consolidated resolution plan, that may involve asset transfers between group companies to maximise value for creditors, benefiting the debtor by providing a broader range of options for recovery. Debtors will need to form a holistic restructuring for the survival of the group with minimum disruptions to their business operations.
For Insolvency Professionals:
Insolvency professionals need to analysis of inter-company relationships, manage creditor coordination, and avoid potential conflicts among stakeholders. Given the complexity of group structures, insolvency professionals need to conduct extensive due diligence to fully understand the group’s financial position. Therefore, group insolvency requires insolvency professionals to enhance their skills to manage the coordination in group resolutions.
Challenges in Implementation
The current insolvency framework in India, faces legal and procedural complexities and other factors, making it difficult to address group insolvency:
Legal and Procedural Complexities:
The current IBC framework does not address group insolvency, leading to ambiguities in how to consolidate proceedings and manage the rights of creditors across different group entities.
Stakeholder Resistance:
Group insolvency can lead to potential conflicts between creditors and debtors due to the complexity of transactions, and differing priorities among creditors based on their relationship with different group entities. It leads to disagreements over the distribution of proceedings during the insolvency process. There is also a chance for a risk of abuse by group companies to evade liabilities.
International Cooperation:
When a group of companies in an insolvency proceeding operates across multiple jurisdictions, coordinating with foreign courts and creditors becomes difficult. Further, the absence of a detailed cross-border insolvency framework requires complex bilateral agreements with other countries to address such situations.
Proposed Framework for Group Insolvency in India
The proposed Group Insolvency framework in India, currently under discussion, aims to streamline the insolvency resolution process for interconnected companies by introducing the following concepts:
Centralized Administration:
Appointing a single resolution professional for group entities allows for a coordinated and efficient resolution strategy. This minimises the complexities and maximises the likelihood of a successful restructuring across all entities involved.
Procedural Coordination:
There is a requirement of common timelines and procedures for all group entities. By ensuring coordinated actions between different insolvency proceedings, the value of the entire group’s assets can be maximised, and reduce the conflicts between creditors of different entities within the corporate group.
Cross-Border Adoption:
In today’s economy, many businesses operate across multiple jurisdictions. Therefore, it is important to incorporate provisions for group insolvency with foreign entities.
Safeguards Against Abuse:
Multiple stakeholders in group insolvency lead to the abuse of the resolution process under the IBC. A legislative framework can ensure that group insolvency is not used to defraud creditors or evade liabilities.
Conclusion
Here mention about introduction of a group insolvency framework in India is essential for addressing the unique challenges of corporate groups. There can be legislative amendments to explicitly incorporate provisions for group insolvency, including clear definitions and procedural mechanisms. The Insolvency and Bankruptcy Board of India can issue detailed regulations to guide the implementation of group insolvency frameworks. Therefore, policymakers need to address the numerous legislative gaps and ensure the smooth implementation of group insolvency.
FAQs
1. What is group insolvency?
Group insolvency is a framework that allows for the consolidation of assets and liabilities of multiple companies in a corporate group facing insolvency.
2. Why is group insolvency important for India?
Group insolvency allows for a more efficient and streamlined resolution process when multiple companies within a corporate group experience insolvency. This enables better utilisation, cost reduction, and improving creditor protection by treating the group as a single economic unit.
3. What are the challenges in implementing a group insolvency framework?
There are many legal and procedural complexities on the applicability of group insolvency, potential conflicts among stakeholders, and difficulties in aligning domestic frameworks with global standards, creating many barriers to implementing a group insolvency framework.
4. How can global practices help India develop its framework?
Global practices, such as the UNCITRAL Model law, can be adopted by India to encourage cooperation among group entities to develop a framework for group insolvency.