Group Insolvency in India and the way Ahead

Insolvency and Bankruptcy Code 2016 (hereinafter ‘IBC’) became a revolutionary step by providing comprehensive, efficient and robust mechanism in resolving corporate distressed entities. The code not only focuses on reviving the company but also to pay off the creditors. However, IBC has still a long road to walk as there are certain areas which are left wide open and need to be visited by the law framers. Areas like Cross-border Insolvency which was untouched by the framers prior to Jet Airways case[1] but as the need arose, the legislature adopted UNCITRAL’s model laws on Cross Border Insolvency (Draft Part Z)[2]. One such area which has now presented itself before the framers is Group Insolvency. In this article the author would focus primarily upon the concept of Group Insolvency and the loopholes.

It has been a practice that some companies form other subsidiaries to expand their business operations thereby forming a group structure or entities. These entities are connected financially, functionally, or these companies provide guarantee or collaterals to these subsidiaries. While, these companies though inter-connected respects separate-entity status of their subsidiaries, but such inter-linkage still creates challenges when one of such companies become insolvent. When such cases arise, creditors often seek to maximize their security interest by consolidating these companies. Here, comes the concept of group Insolvency, which is simply a concept where “corporate debtors belonging to same group of companies are consolidated in a single resolution application to be adjudicated upon by the Adjudicating Authorities” ("AA").[3]

However, introduction of this concept in IBC is very unlikely in the near future as it poses some regulatory difficulties in its inclusion like it goes against the concept of ‘Separate Legal Entity’, against the principle of ‘Default’, and against ‘Solvent Entities’. Even the Working Group on Group Insolvency has also shown restrain in suggesting the introduction of group Insolvency.[4] However, NCLTs has already applied this concept in cases by relying on its inherent power as provided in Rule 11 of the NCLT Rules, 2016[5].

NCLT in State Bank of India v Videocon Industries ltd.[6] is a landmark judgment decided by Mumbai bench, where it relied upon US and UK courts judgment to introduce the concept of Group Insolvency. In this case, Videocon Industries Ltd. (hereinafter ‘VIL’) established some subsidiaries to carry on the business activities of oil and natural gas, telecommunication and electronic goods. The tribunal ordered consolidation of CIRP against 13 out of 15 companies of VIL.

The NCLT here suggested three-step test to ascertain if the Group Insolvency can be done or not. The first step is where the NCLT took note of the practice prevalent in US and set out 14 factors (non- exhaustive) to be considered. Factors are:

“(i) common control; (ii) common directors; (iii) common assets; (iv) common liabilities; (v) inter-dependence; (vi) interlacing of finance; (vii) pooling of resources; (viii) co-existence for survival; (ix) intricate link of subsidiaries; (x) intertwined accounts; (xi) inter-looping of debts; (xii) singleness of economics of units; (xiii) common financial creditors: (xiv) cross-shareholding”.[7]

The second step is to analyze the status of the assets and liabilities of the companies, and if the assets and liabilities are so inter-connected that if separate CIRP initiates or CIRP initiates only against one then the “possibility of restructuring or the option of maximisation of value of assets become so bleak which shall overweigh the consolidation.”[8] Lastly, if the companies even though separated can still be able to kept as going concern and pay-off the common liability, then they need not pulled in Group Insolvency.

This trend was further followed in other judgments, naming Edelweiss Asset Reconstruction[9] case where NCLAT initiated CIRP parallel against 5 companies and in Lavasa Corp[10] where the insolvency of subsidiaries were depended upon the insolvency of the parent company, thus the tribunal allowed group insolvency of Lavasa group.

Loopholes

This concept does seem a next step towards settling the claims of the creditors, however, it is also filled with some loopholes which will put it on target of multiple litigations challenging its validity. Some of the challenges while dealing with group insolvency are:

1.      No fault of Solvent Entities: As aforesaid we have seen how group insolvency stretches towards not only insolvent companies but also companies which are not insolvent but shares assets and liabilities with other insolvent companies.  Doing this would be a violation of the right of those solvent companies which are paying off their debt and will also affect their business activities as no other company would like to deal with them.

2.      Does not Follow the principle of ‘Default’: The standard principle to file an application for CIRP (as provided in Sections 7, 8 and 9 of IBC) is to first see whether the corporate debtor has defaulted, and then only CIRP will be initiated (this is also became discretionary because of Vidarbha Industries v. Axis Bank[11]). However, group insolvency does not seem to follow the ‘default’ principle as it allows roping in those companies also which are not insolvent.

3.      Does not follow Solomon judgment: Solomon case, a landmark judgment on the principle of ‘Separate legal entity’ provided that a company has its own entity and is separate from its founder.  This principle also provides that shareholders are not liable for the company’s liabilities. Thus, some solvent inter-connected companies are also a shareholder in one-another and because of group insolvency, the question can be raised that how the creditors can claim from shareholders.

Conclusion

IBC has proven to be potent tool in restructuring and resolving a company and paying off the creditors. But as it is still in its nascent stage, it has a long road ahead to cover which entails many new challenges such as Group Insolvency. This concept is certainly beneficial for creditors though detrimental to companies who are solvent but are interlinked with an insolvent company.

The position on Group Insolvency is not yet clear as the working group on group insolvency has still not given a green flag to it. However, there are some precedence from US and UK which provides a possibility of it becoming a part of IBC but the fate of Group Insolvency is still in the hands of Indian Law Framers.

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[1] Rakhi Nargolkar, Cross Border Insolvency- State Bank Of India V. Jet Airways (India) Ltd, Indian Journal Of Corporate Law And Policy (Jan. 7, 2023), https://ijclp.com/cross-border-insolvency-state-bank-of-india-v-jet-airways-india-ltd/#:~:text=The%20landmark%20case%20of%20State,resolution%20plan%20for%20its%20turnaround.

[2] Ministry of Corporate Affairs, ‘Overview of Cross-Border Insolvency Framework For Corporate Debtors Under The Insolvency And Bankruptcy Code, 2016’.

[3] Tanmay Karmarkar, Group Insolvency In India: Boon To The Creditors Or Bane To The Debtors? (2020), https://www.livelaw.in/columns/group-insolvency-in-india-boon-to-the-creditors-or-bane-to-the-debtors-156784 (last visited Mar 25, 2021).

[4]  Report of the Working Group on Group Insolvency, At p. 25, available at https://ibbi.gov.in / uploads / resources / d2b41342411e65d 9558a8c0d8bb6c666.pdf

[5] Rule 11, NCLT rules, 2016.

[6] [2020] 115 taxmann.com 104/159 SCL 387 (NCLT-Mum.)

[7] Id., at 78.

[8] Id.

[9] Edelweiss Asset Reconstruction Co Ltd v. Sachet Infrastructure Pvt Ltd & Ors, (Company Appeal (AT) (Insolvency) No. 377 of 2019).

[10] Axis Bank Ltd & Ors v. Lavasa Corp Ltd, MA 3664/2019.

[11] 2022 SCC OnLine SC 841.

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