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Group Insolvency - An Overview
In 2016, The Insolvency & Bankruptcy Code (IBC) was presented with objectives of severe reforms which was goal-oriented towards resolutions. The Code in span of very short time has built up and established its jurisprudence. However, there also exists several scopes of amendments in the code which is expected to be changed and which shall be updated in consonance with the bankruptcy system over the globe and enable the Indian economy to conquer territorial boundaries. The Insolvency Law Committee headed by Srinivas was reconstituted to investigate the structure of Group Insolvency alongside different changes recommended.
Subsequently, the abovementioned working group analysed the several definitions of ‘group company’ in several legislation from several jurisdictions, such as Foreign Direct Investment Policy, Competition Act, SEBI Regulations, Companies Act, 2013, EU Regulations on Insolvency Proceedings and UNCITRAL Guide on Insolvency.
After analysing, the working group identified that rules of ‘control and ownership’ are common over every one of these enactments. Thereby, it was suggested that the meaning of Corporate Group ought to incorporate associate, holding and subsidiary organizations and if an organization isn’t covered within the said definition and yet is characteristically connected to frame some portion of a group in a “commercial understanding”, at that point the Adjudicating Authority may include such company for the group of companies.
Different difficulties and challenges are put forward by foreign business and their laws. The most ideal approach to manage and deal with such distinctive markets is to incorporate a subsidiary company in that foreign nation where the business is to be established under the company law of the national parent company it is set up in. This business strategy prompted the ascent of corporate groups everywhere throughout the world. From a monetary point of view, these corporate groups are ‘one organism.’ From a lawful viewpoint, the standard set out by Salmon v. Salmon of a separate legitimate entity is still followed. In this way, for activity against every entity (or subsidiary), a different Corporate Insolvency Resolution Process (“CIRP”) must be started against them independently by their creditors despite the fact that every one of them generally has a place with the same group.
This standard of separate legitimate or legal entity is used by the corporate groups in covering their assets. These group companies have several subsidiaries in various jurisdictions with a holding organization or company dealing with every one of them. The creators of the corporate structure are sufficiently shrewd to get the assets of the group away from such holding organizations through several layers; here and there even in different jurisdictions to totally protect and insulate their assets from insolvency processes.
The treatment of corporate indebted individuals as separate legitimate entities is highlighted by the court’s reluctance in penetrating the corporate veil. Insolvency laws in India, consequently, neglect and fail to deal with the CIRPs filed independently in different jurisdictions against the bankrupt entities of the equivalent multinational corporate enterprise all together as a single proceeding. Group Insolvency is a framework where if multiple entities of a solitary group go wiped out and insolvent, their resolution can be united in one court so that firstly, the group can be rebuilt all in all and secondly, its combined assets can be used to the greatest advantage of both the group corporate and the debtor. This structure permits substantive consolidation which empowers clubbing of assets and liabilities of the group members such that they can be treated as a solitary financial organism.
It naturally follows that for this concept to work, one jurisdiction must be picked to manage all the resolutions against different entities of a corporate group paying little mind to their location. The jurisdiction, so picked, is prevalently known as the Centre of Main Interest (COMI). The issues emerge in the choice and selection of COMI. The factors like, the laws of which nation would be generally most beneficial for the resolution procedure and whether the ultimate result will be perceived by the other state involved are frequently thought about and taken into consideration. The UNCITRAL Model Law on Cross Border Insolvency gives a structure to coordinative methodology between jurisdictions where a foreign representative will be appointed by each state involved to “administer the rearrangement or liquidation of the account holder’s or debtor’s assets.” Chapter V of the EU Insolvency Regulations additionally contains different principles for incorporating the bankruptcy procedures concerning group companies.
Since, the standard and norm are that the creditors can practice their right only against the organization with which they have gone into an agreement, there is no concept of general group liability. Thus, for a group liability to exist, a legal position and statutory authority must be given to the organizations in their respective jurisdictions. Henceforth, for group insolvency to be successful, an ever-increasing number of jurisdictions must consolidate the structure of cross-border indebtedness with the goal that when a jurisdiction is picked as COMI, the legal arrangements or statutory provisions don’t present any obstacle to the resolution procedure.
With group structures holding prominence in the business scene of India, there has been a need to outline and frame a comprehensive group insolvency framework. There are situations where the stakeholders may expand their interests and the chance of revival of organizations might be higher if organizations in a group are settled and resolved together. However, the Insolvency and Bankruptcy Code, 2016 (‘IBC’) doesn’t conceive a structure to either synchronize indebtedness procedures of various organizations in a group or to resolve their insolvencies together. In a portion of the cases such as, Videocon, Era Infrastructure, Lanco, Educomp, Amtek, Adel, Jaypee and Aircel , the Adjudicating Authority under the Code just as the Supreme Court, have passed orders to partially enhance such issues. This featured the need to look at the desirability, attainability and feasibility of having a group insolvency structure.
Group insolvency in India
While the Code is silent about group insolvency, the courts are attempting to fill in this lacuna through legal professions. At the point when the Videocon Group went insolvent, fifteen distinctive resolution applications were filed against its fifteen diverse group companies. On 8th August 2019, the National Company Law Tribunal, Mumbai Bench allowed meaningful consolidation of 13 organizations or companies of the Videocon Group in the case of State Bank of India and Another v. Videocon Industries Limited and Others, REED 2019 NCLT Mum 08503, giving an exemplary case of group insolvency carried by the courts in India.
The contention given in favour of consolidation, which turned into the premise of the judgment, was that the group worked as a solitary monetary unit. The organizations had deliberately framed an obligor/co-obligor structure through contractual agreements which pooled their assets and liabilities. All the lending had been done on the premise that the corporate debtors would be ‘jointly and severally’ at risk and liable for the obligation leaving their assets and business functions ‘unpredictably intertwined’.
The other contention was that the consolidation would prompt a superior liability framework for the bidder, clearing route for better resolution plans. Numerous corporate debtors, similar to the exchanging organizations or trading companies, would not have numerous assets when contrasted with a manufacturing organization which would have lands and industrial facilities or factories as its significant assets. Subsequently, the likes of trading companies would get substantially less or most likely no resolution plans making them eventually dive into liquidation and the object of the Code which is to spare corporate entities and keep them as a going concern may get defeated.
There was a need of consolidation with the assistance of standards and principles set somewhere around by UK/USA courts and concluded that ‘equity and fairness’ can be the basis for lifting the corporate veil which was analysed by the High court of Calcutta. In the same matter, the court demonstrated twelve ingredients one can search for before activating consolidation, some of them being, common control, basic assets, basic liabilities, between binding of account, multifaceted connection subsidiaries, looping the debts, and so on.
In addition, the court divided the group enterprises into two categories. Firstly, the primary category is of the groups, which when united for the resolution procedure shows signs of improved asset value and independently gets plunged into liquidation. Secondary, the second category has a place with the organizations which can endure and survive regardless of whether their CIRP are managed independently. Lastly, the court said opined that the former case ought to be the one granted with consolidation.
This case has set out an intricate and elaborate jurisprudence for Group Insolvency wherein it brought in promising proposals to the bidders for better resolution plans for the group, along these lines getting each corporate debtor its best worth. and value. Conclusively, Group Insolvency has discovered its way in India through courts and now, discovering its way into the legal books.
Identification of ‘Group’
The identification is proposed to be based on triple-criteria, which were:
· Inter-se relation among the organizations or companies.
· Fulfilment of commencement standard by the organization.
· Regardless of whether the organization is a domestic organization.
The Working group has recommended that “corporate group” ought to have two essential ingredients as Ownership and Control. In addition to that, the Working group also suggested that even organizations which are not covered under the definition however are characteristically connected will form some part of a ‘group’ in commercial understanding. Herein, the principal factor in deciding whether the organization will be incorporated or not will rely on the value addition to be the other organization in the indebtedness without destroying the value of the organization being incorporated. Here an another critical view was that the framework has been made regarding the organizations; along these lines, other corporate structures like limited liability partnerships or other body corporate have not been incorporated.
Challenges in its way
This new advancement of Group Insolvency accompanies its own set of challenges and issues which should be remembered and kept in mind while it is drafted. Issues must be settled in regards to organizations with a gigantic turnover, which is monetarily independent and self-sufficient in running their organization as a going concern but is being dragged in the insolvency because of the group members.
Individual Insolvency procedures against different organizations of the same group in the different jurisdictions over the world result in an undue delay to the innocent creditors. In such a distinctive situation, the union of the subject matter would act in the advantage of creditors and the resolution procedure of such group insolvency would be quick and in an ideal way.
The need of group insolvency system is required to address different developing worries, as was apparent from recent indebtedness cases. However, as the Code develops from the idea of ‘entity’ to ‘enterprise’, the stakeholders, including the administrators and the legal executive, shall contribute as well as gain from the experience it brings to the table. In addition, the usage of the group framework is in a phased manner which will prompt the improvement of law and development of jurisprudence alongside the cases. Along these lines, the input obtained from the execution of the gathering structure will assist the administrators with devising fundamental revisions in the equivalent.
Conclusively in India, the Code doesn’t accommodate and provide for specific arrangements or provisions identified with group insolvency, the courts, through its capacity of legal translation or judicial interpretation, have acted as the hero to rescue and settle a few cases accordingly. In any case, specific provisions identified with this concept should be incorporated in the code so as to get sureness and consistency in the law. Investors shall accordingly plan their investment; otherwise, pointless deferral or delay in courts and different complexities would make India a less alluring investment destination.