The Insolvency and Bankruptcy Code, 2016 ("IBC") is a significant reform for the Indian economy because it allows a creditor to initiate insolvency proceedings against a Corporate Debtor ("CD") in order to protect asset value. While the IBC includes detailed provisions for dealing with a CD's insolvency on an individual basis, it does not include a framework for initiating insolvency on a group or enterprise level. While India generally follows the separate juristic personality of corporations, exceptions have been created over the years through judicial pronouncements and legislative actions where group companies can be held liable for the debts of their associates and subsidiaries. Financial (inter-corporate guarantees for loans taken by one group company) or operational links (dependence on a group company for supply chain) can exist between companies in a group. In these cases, treating the insolvency of each group company in an isolated manner might be expensive, and might result in creditors realizing a lesser value.
This newsletter focuses on the group insolvency legal framework in India.
2. The present framework
It is necessary to examine the present framework. The Corporate Insolvency Resolution Process ("CIRP") may be initiated before the National Company Law Tribunal ("NCLT") when a financial or operational default1 has occurred and it may be initiated by either inancial or operational creditor, or by the CD itself. When such an application is moved and hearings conducted, the NCLT, may, if it finds merit allow the application and appoint an Interim Resolution Professional ("IRP"), who is vested with the management of the CD and take all necessary steps to initiate CIRP, including seeking claims from different creditors. Additionally, a moratorium is declared on legal proceedings of pending or new suits against the CD. Without detailing the process, briefly the IRP constitutes a Committee of Creditors ("CoC") who, in turn, determine if the IRP should become the Resolution Professional ("RP") who then plays a key role in determining if the company should be liquidated or if a resolution plan can be implemented. This, of course, presupposes that someone is interested in taking over the problems of the company and ensure it is not wound-up.
The present regime under the IBC only deals with insolvency of one company and does not talk at all of group insolvency. Nonetheless, the courts in India have used their judicial powers to develop a working framework to make group companies liable for each other.
3. Group insolvency jurisprudence
Indian courts attempted to bridge the gap by developing a working framework for resolving debt owed by CDs that are inextricably intertwined or are part of a group where it is necessary that some or all of the group companies need to go through CIRP. They created a single yardstick based on the law developed by UK and US courts and have addressed the aforesaid issue. Below is as a recap of some important body of judge made law.
3.1 The Videocon Case: In 2018, State Bank of India initiated CIRP against 15 companies of Videocon group which were launched across different NCLTs in India. However, clearly managing the proceedings pan-India was not easy for Videocon. Accordingly, the different companies got together and approached the Principal Bench of NCLT, in Delhi for consolidation of CIRP of all the companies. In Venugopal Dhoot v. SBI & Ors2 NCLT considered the cross-collateralization, guarantee comforts, or inter-company loans by the CDs to other group companies and directed the consolidation through NCLT Mumbai to facilitate hearing of the matters and avoid conflicting orders.
The NCLT Mumbai considered all the CIRPs and passed its judgment in SBI v. Videocon Industries Ltd. & Ors.3 The bench consolidated 13 CIRPs out of 15. Considering the law developed by UK and US courts with respect to process of consolidation, NCLT developed a single yard stick for initiating insolvency of group companies which considered the following: (a) common control of the Dhoot family, (b) V.N Dhoot as common director, (c) common assets amongst the companies. For example, one company leased its land to another group company to carry on manufacturing, (d) common liabilities; for instance, guarantee comforts issued by a CD to a bank on behalf of other companies, (e) interdependence since (in this case) all products sold by differ entities were marketed under the common Videocon trademark, (f) interlacing of finance rupee term loans were used for refinancing of existing debt, (g) pooling of resources as companies had common directors, office staff, accountants, and others, (h) intertwined accounts; all subsidiaries prepared a common position of their assets and liabilities in their consolidated accounts, (i) interloping of debts where the financial arrangements provided for protection of debt of subsidiaries, (j) singleness of economics of units as the group was known by its brand name "Videocon", (k) common financial creditors; the lenders were members of consortium of banks which were common for all subsidiaries and (l) common group of debtors who were combined together for availing various loans. In essence, the present judgment introduced the concept of group insolvency regime in India.
3.2 Axis Bank Case: The yardstick developed by NCLT in Videocon was upheld in Axis Bank Ltd & Ors v. Lavasa Corp Ltd.4, in which the holding company's financial creditors filed an application for consolidation of Lavasa Corporation Limited's CIRP and its two wholly owned subsidiaries. In the current case, financial creditors wanted to settle "Lavasa's" entire group debt. The NCLT, directed the consolidation of the Lavasa group's CIRP. The aforesaid position was further strengthened by National Company Law Appellate Tribunal ("NCLAT") in Radico Khaitan Ltd. V. BT & FC Pvt. Ltd.5 Here, the appellate tribunal considered an appeal filed by the operational creditor Radico Khaitan, where it challenged NCLT's order rejecting its request for CIRP consolidation. Applying the principles developed for group CIRP consolidation, NCLAT allowed the appeal and directed the consolidation of the relevant entities CIRPs.
3.3 Edelweiss Case: It is essential to highlight another relevant case, Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Pvt. Ltd. & Ors6. Here, NCLT admitted group insolvency proceedings against Adel Landmarks Limited, the principal borrower and holding company of Adel Group. Corporate guarantees were given by other group companies of Adel group (corporate guarantors), for securing loan to Adel. During the pendency of Adel's CIRP, Edelweiss Edelweiss filed separate applications for initiation of CIRP against the corporate guarantors. In its order, NCLT noted there was no such need for initiating CIRP since a petition had already been admitted for the same debt against Adel. Edelweiss appealed to NCLAT and contested that it was not possible to launch CIRP against Adel only as it had decided to develop a residential colony in consortium with corporate guarantors, and, for a successful insolvency resolution, the lands of all the corporate guarantors had to be consolidated for construction of the housing projects. The primary issue before the NCLAT was whether CIRP could be initiated against more than one CD for same set of claims. It held group insolvency proceedings were required to be initiated against five companies that had been working as a joint consortium to develop a residential colony and directed that simultaneous CIRP should continue under the guidance of the same RP. This case is another step in the judicial leaning towards a pragmatic view in group insolvency cases.
3.4 IL&FS Case: Finally, in the collapse of the IL&FS Group, which required the resolution of 348 group companies, NCLAT approved the Central Government's resolution framework on October 15, 2018, and set a 90-day deadline for implementing the plan fostering public interest protection and debt resolution for the group. While the insolvency resolution of IL&FS is outside IBC, in its order of June 22, 20217 NCLAT held that "from various matters arising under the provisions of IBC, Law has developed where Group Insolvency is also permissible."
In India, when different group entities become insolvent, it makes it difficult to determine the assets and liabilities since there is generally an inextricable link amongst them. The foregoing judicial precedents establish where business operations are interlinked and segregation may lead to an unviable solution, the courts step in to assist group CIRP consolidation and resolution. Considering the absence of a standard framework for insolvency of group companies and the economic benefits arising therefrom propelled the Insolvency Bankruptcy Board of India ("IBBI") to consider and develop a framework on the subject. It set up a Working Group who, after consultation with stakeholders, compiled its recommendations and submitted its report to the IBBI.
4. Working Group suggestions
The Working Group8 discussed the need for a comprehensive framework as courts face varied situations and challenges. According to the report, the likelihood of a successful revival of an organization is much higher if the group's indebtedness is resolved collectively. As a result, the Working Group examined the aspects of the current framework and recommended the following framework, which could be implemented in two stages.
In the first phase, the Working Group's suggestions be applied initially only to companies in a domestic group. The second phase should introduce cross-border group insolvency mechanisms depending upon the implementation of the first phase, but we are not detailing that process here since the Indian Parliament did not consider or implement the recommendations, and the most recent amendments to the IBC in 2021 did not address group insolvency at all.
For the first phase, the suggestion was to use Procedural Coordination Mechanisms ("PCM") as a trial. PCM are rules which coordinate insolvency processes of various group companies without interfering with the division of assets and substantive creditors' claims of each group company. According to the report, PCM lowers costs and clubs the time which gets reduced if different insolvency processes are followed. It consists of the following elements (a) financial or operational creditors, or group companies themselves may file a joint application against all CDs that have defaulted and are part of a group. Apart from reducing the need to manage multiple applications across different forums, it encourages the coordination among different group companies. (b) where multiple courts and insolvency representatives are involved, they be mandated to cooperate, communicate, and share information with one another in order to effectively administer various proceedings. (c) insolvency proceedings may be handled by a single NCLT to avoid conflicting orders and to facilitate hearings. (d) only multiple RPs may be appointed for different companies if the appointment of a single RP would result in a potential conflict of interest, or the same RP would not have sufficient resources to carry out his/her duties in respect of multiple appointments. (e) a group CoC be formed at the discretion of the CoCs of each group company. The composition, constitution, and costs of such group creditors' committee may be decided contractually between the CoCs of a corporate group. (f) group entities must complete CIRP within the extended time frame of 420 days, i.e., 330 + 90 additional days.
The IBC does not include any provisions for group insolvency. However, a paradigm shift is required to transition from entity resolution to enterprise resolution. If adopted, the foregoing recommendations can assist courts in cases such as the IL&FS group, where NCLAT lifted the moratorium on offshore companies and 22 other companies in the group that could service their debt obligations despite the absence of any statutory regime under the IBC. So, in other words, IBC requires an overhaul so specific statutory provisions are incorporated in order to give NCLT more bite. If adopted and backed by statute, the Working Group's recommendations will also aid NCLT in bringing creditors certainty, uniformity, and timely debt resolution, while the statutory regime under IBC will aid in the resolution of group companies effectively.
1. Section 3 (12) IBC defines “default” as non-payment of debt by CD in part or whole, when became due and payable, Section 4 IBC prescribes the financial threshold to initiate insolvency proceedings i.e., default of Rs 10 million or about USD 121,000) or more by the CD. USD 1 = INR 82 and rounded off
3. 2019 SCC Online NCLT 745
4. MA 3664 of 2019 in CP 1765-1757&574/2018 on 26.02.2020
5. [CA(AT) (INS) No. 919/2020 dated March 26, 2021
6. 2019 SCC Online NCLAT 592
7. Company Appeal (AT) No. 346 of 2018 dated June 22, 2021
8. The report is available on https://ibbi.gov.in/uploads/whatsnew/2019-10-12-004043-ep0vq-d2b41342411e65d9558a8c0d8bb6c666.pdf [last accessed on December 16, 2022]
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.