“Bridging the Legal Gaps: The Exigency for a Group Insolvency Framework in India’s Business Ecosystem.”

Abstract:

The continuously evolving business landscape presents the need for a structured legal system to deal with insolvency cases. The primary contention of this paper is that the current legal framework, which overlooks Insolvency and Bankruptcy in India, does not adequately address group insolvency. The companies prefer group operations for several benefits; meanwhile, the creditors also prefer group lending for interrelated financing; since the corporate structure in India continues to grow and intertwine, the interdependence of separate legal entities may have a domino effect on others if one of these entities becomes insolvent. Therefore, it becomes necessary to have group insolvency, but the current Indian law, i.e., IBC (Insolvency and Bankruptcy Code), falls short; there is no provision that deals with the insolvency of the groups of entities inter-related. The study highlights the limitations of the fragmented approach of the Indian law towards group insolvency. The study emphasizes the potential benefits of implementing an international insolvency regime for group insolvency in India, i.e., the UNICITRAL model law on Enterprise Group Insolvency and the European Insolvency regime. The research also includes a comparative analysis of both these predominant regimes for a better understanding of the nuances between them so as to identify the best suitable model for India to implement. Through different case studies, the research aims to highlight the consequences of not having a legal framework for group insolvency and also highlights the advantages of implementing it. Considering the continuously evolving business landscape, an in-depth understanding of group insolvency becomes essential so as to create a legal framework addressing the critical gaps present in the current legal infrastructure.  

Keywords:

Insolvency, UNCITRAL, IBC, Bankruptcy, Insolvency regime, Group insolvency.

Introduction:

The current legal framework that regulates all cases related to insolvency in India is the Insolvency and Bankruptcy Code, 2016. The major flaw in this statute is that there is no provision regarding the insolvency of entities in a group structure, where various entities of a corporate group file for insolvency, and a single court is responsible for consolidating all the claims together so that all the entities under a corporate group can be restructured as a group and the assets of all the entities can be utilized in a way so that it falls in the best interest of both the debtor and the corporate group; the statute only covers the insolvency and liquidation process of a single corporate entity. Group structure in entities means that there are various companies that have other subsidiary companies or associated organizations, and one parent company holds the whole unit of subsidiaries. This type of structure has been adopted by many due to globalization, allowing them to operate in several countries. It is preferred by corporations because there are various benefits, such as spill-over benefits where the profits of other companies can be used by the parent or the holding company. Additionally, creditors prefer lending to these corporate group structures due to the interconnection between the financials of these groups.

Initially, group insolvency was not included in the Insolvency and Bankruptcy Code because the authorities thought that in India, the infrastructure is not as such, which may have corporate group structures. The resolution of insolvency cases under the Insolvency and Bankruptcy Code has faced many challenges, during which the issue related to the insolvency of corporate group structure became a hurdle for the adjudicating authorities. One such landmark case which exemplifies this issue was adjudicated by the National Company Law Tribunal, Mumbai, where thirteen Videocon group enterprises filed for insolvency, and the tribunal merged all the claims into a single claim in their judgement. This judgement by the tribunal disturbed the very basic corporate law of “Separate Legal Entity,” which is responsible for separating the parent company from its subsidiaries. This highlighted the need for group insolvency in India because apart from the Videocon Group case, several other claims for insolvency were made under IBC to the adjudicating authorities for the insolvency of various subsidiary companies together, like Jaypee Group and Amrapali Group.

The WG Report (Working Group’s Report) on group insolvency describes a “Group” as a “set of entities, related by either economic dependencies or shared control, carrying on business in pursuit of a common objective.” Although the group structure in India is not a separate legal entity, it encompasses various legal entities. In a corporate group structure, numerous financial transactions, such as cross-lending and cross-guarantees, occur between the subsidiaries and between the parent company and its subsidiaries. Now, when the debtor company faces a financial setback, this affects not only the lending company but also other interrelated companies in the group, resulting in the insolvency of a whole corporate group. After defaulting, the debtor usually starts an insolvency process under IBC, i.e., CIRP (Corporate Insolvency Resolution Process) before the National Company Law Tribunal in India. Now, the interrelation between the entities makes it difficult for the authorities to assign “default” to the entire corporate group; since the corporate group operates in an interrelated manner, this makes it necessary to have a collective/group insolvency process for the smooth functioning of CIRP, without adequate legal system it would be next to impossible to adjudicate the matters relating to corporate group insolvency.

Research Methodology:

Since the research paper is descriptive in nature, the research is done using secondary sources like articles, websites, journals, and newspapers to gain a much deeper understanding and analysis of Group Insolvency in India. 

Review of Literature:

KM, P.P. and Wadhawan, A., 2020. Introduction of Group Insolvency Regime in India: Identifying the Challenges and Proposing the Solutions. NLIU L. Rev., 10, p.254:

The paper delves into the research on identifying various challenges that might be faced while implementing a Group Insolvency framework in India. The challenges mentioned include managing cross-border insolvency, defining corporate groups, the extent of liability in group proceedings and other jurisdictional issues. Additionally, the current scenario of group insolvency has also been discussed through judicial precedents and an analysis of WG report has also been conducted. 

Insolvency Framework in India:

Although there is no specific provision under the Insolvency and Bankruptcy Code of India, there are various provisions that have the essence of group insolvency; the following are the provisions that deal with group insolvency under IBC[1]:

1. Section 60(2) and 60(3) of IBC, 2016 – These sections of the provision deal with cases where the insolvency has been filed by the debtor and the guarantor; in such cases, this provision makes it compulsory for the same adjudicating authorities to take up both the matters. Therefore, it enables the creation of a link between the debtor and the guarantor of the same corporate group.
2. Section 18(f) of IBC, 2016 – This section, read along with Section 36, which talks about the liquidation of the estate, gives the power to control the shares of the subsidiary companies to the liquidator and resolution professional of the parent company. The resolution plan of the company deals with the assets of the parent company, which includes the share of the subsidiaries under the parent company.
3. Section 5 (24) of IBC, 2016 – This section defines “related parties” concerning corporate debtors. This includes shareholding in subsidiary companies, companies in which the directors and/or managers have shareholding, and companies that are related by virtue of contracts. Additionally, it covers the companies that are engaged in policy making and interchange of employees, inter alia. 
4. Proviso to section 21(2) and section 29A (j) of IBC, 2016 – The proviso to section 21 (2) and section 29A (j) prescribes a comparatively longer period of time to apply for “application of avoidance” for transactions between the related parties. Additionally, section 21 mentions prohibitions on the ability of related parties to vote as a part of the Committee of Creditors (CoC). 

Case Laws:

1. Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Pvt. Ltd. (2019)[2] – In this case, the court took into consideration the consolidation of the resolution plan for all corporate debtors. The court held that the ‘resolution professional’ of the primary debtor, in this case, ‘Adel Landmarks Limited,’ will act as a common resolution professional for all corporate debtors collectively so that CIRP against ‘Adel Landmarks Limited’ proceeds jointly. 
2. State Bank of India & Anr. v. Videocon Industries Ltd. & Ors. (2019)[3] – In this case the whole Videocon group went insolvent and filed for Insolvency proceedings; there were thirteen different resolutions process filed by thirteen different companies, it was thus sought by the parties that all the matters pertaining to insolvency should be dealt by the same adjudicating authority and all the applications must be consolidated. The NCLT, Mumbai, ordered that all the matters must be consolidated and must be dealt with by one adjudicating authority. The NCLT gave the reasoning for the same since the directors of the companies, assets, and liabilities are all common and there exist intertwined accounts. Therefore, the corporate debtor group must be combined, and one single committee must be constituted so that any future conflicts can be avoided. This case is one of the landmark cases that consider the need for Group Insolvency in India.
3. Chitra Sharma v. Union of India (2018)[4] – The Supreme Court, in this case, ordered the Jaypee Group to deposit some amount of money for the insolvency proceedings that were initiated against the entities of Jaypee Group. 
4. Bikram Chatterji v. State Bank of India[5] – In this case, the buyer of the houses sold by the ‘Amrapali Group’ filed a petition before the court of appeal regarding their interest in relation to the undergoing insolvency process of several Amrapali Group Companies. During this petition’s proceeding, the SC (Supreme Court) referred to the group as a whole and gave an order that all the assets of all the companies within Amrapali Group should be attached, and all the bank accounts of the group companies shall be frozen.   

Need for Group Insolvency Provisions in India:

In the report by the Cross Border Insolvency Rules/Regulations Committee (CBIRC) on Group Insolvency, the committee addressed the progress of Group Insolvency in India; the report mentions that there have been several insolvency cases that address the issue of the interconnectedness of group companies, this conveys that there are several issues that may be faced by the adjudicating authorities while dealing with the case of group insolvency, the challenges that arise while dealing with the insolvency of Corporate Group are often distinct from that of a single-entity. After globalization, it is common for the group of companies to be interrelated and interdependent on each other’s finances and operations. Now, during the time of insolvency of these groups, it would be very ineffective and costly to treat each company within the group as a separate legal entity. Also, it may go against the expectations of creditors, who usually make lending based on the finances of the whole group. 

A report by the “Organization for Economic and Cooperation Development (OECD),” which was prepared with the help of inputs provided by the “Stock Exchange Board of India (SEBI),”[9] mentions that, on average, there are over 50 subsidiaries of 4100 listed companies (the data was collected from these 4100 companies itself), it also mentions that there are over 100 subsidiaries of 15 listed companies, and several other listed companies have around 200 subsidiaries each. Additionally, around 40 largest companies, according to their market capitalization, have three or more layers of subsidiary companies. It is important to mention that this data does not include the number of parent or holding companies at the top of the management level. 

The significant shift in the judiciary’s stance on group insolvency came after NCLT’s judgement in the case of IL & FS Group. In this case, there were 348 companies under the IL & FS group that were required to get resolution; NCLAT approved the resolution of the companies under the Central government’s resolution framework. Since the resolution of IL & FS was outside the scope of IBC, NLCAT, in its order held that “from various matters arising under the provisions of IBC, Law has developed where Group Insolvency is also permissible.”[10] This statement by NLCAT coveys that group insolvency is taking place through judicial resolution, and there is an urgent need to regulate all these insolvency cases through dedicated provisions under IBC. 

International approach towards Group Insolvency: 

UNICITRAL Model Law on Enterprise Group Insolvency (MLEGI):

The following are the key provisions of MLEGI[6]:

1. It contains provisions regarding cooperation and coordination between insolvency representatives and courts when the matter concerns the insolvency of several entities of a particular group. 
2. It develops an insolvency solution for the corporate groups, either as a whole or part of the group; the procedure for insolvency takes place in a single insolvency planning proceeding, this proceeding may be commenced at a place where at least one of the members of the group has its Centre of Main Interest (COMI).
3. The companies within a group are not required to compulsorily participate in the single insolvency proceeding, the companies voluntarily coordinate the procedure for group insolvency. 
4. An appointment is made for a group representative; this appointment is made so as to coordinate the development of the group insolvency through a planning proceeding. 
5. An approval of the “post-commencement finance arrangement” is required in relation to the group insolvency. Additionally, the provision of funding must be authorized within these arrangements. 
6. “Planning proceeding” has been given the cross-border recognition so as to facilitate the development of the “Group Insolvency Solution.”
7. Appropriate measures have been taken to reduce the commencement of “non-main insolvency proceedings” and to facilitate the claims of creditors of the companies within the group. This includes foreign claims, but these claims can only be made in the main proceeding.    

European Union Insolvency Regulation (EIR):

The following are the key provisions of EIR[7]:

1. The provision under EIR obligates the courts that are dealing with the insolvency proceeding, as well as the individual insolvency practitioners of the group’s companies to coordinate and cooperate with each other. The Insolvency practitioner is responsible for checking whether there is any possibility of restructuring the group members.  Additionally, he may appear before the foreign courts that have initiated insolvency proceedings against the group.
2. The insolvency practitioner, in certain circumstances, is permitted to “request a stay” on the realization of the company group’s assets during an insolvency proceeding with respect to another group company. The stay is generally requested to implement a cross-border restructuring plan proposed by the insolvency practitioner keeping the best interest of creditors as the primary objective.
3. The provision under EIR provides “Group Coordination proceedings” in which a group coordinator is appointed, an insolvency practitioner cannot be appointed as one. In this kind of proceeding the group companies have the liberty of voluntarily participating in it, the insolvency practitioners may decide whether to be a part of the proceeding or to opt out of it wholly or partially. 
4. The provision also allows the reconstruction or liquidation of the group companies by a single insolvency practitioner; some courts do the same on the basis of COMI (Centre of Main Interest), where the proceeding is conducted by the insolvency practitioner of the group company who has COMI.

Even though there are various similarities among the predominant insolvency regulations, there are a few provisions which are more specific in nature under EIR. Still since MLEGI has a universal approach unlike EIR which is specific to European countries, MLEGI is a more appropriate model for India to adopt, because of its universal approach it would be easier to conduct cross-border insolvency proceedings since the basic provisions would not vary resulting in less conflicts and more coordination and cooperation. 

Suggested Framework for Group Insolvency in India:

Taking into consideration the need for a group insolvency framework, the Insolvency and Bankruptcy Board of India formed a Working Group on Group Insolvency, Shri U.K. Sinha was appointed as the chairman of the Working Group. This group had the responsibility to recommend a regulatory framework so as to regulate the insolvency and liquidation of a corporate group. Additionally, a committee was formed under the chairmanship of Dr. D.P. Krishnan, “Cross Border Insolvency Rules/Regulations Committee,” this committee was responsible for reviewing UNICITRAL Model Law on Enterprise Group Insolvency. 

Following are the key recommendations made by WG (Working Group)[8]:

1. There must be a Group Insolvency Framework under the IBC, which should be enabling, voluntary and flexible in nature. Additionally, WG recommended that in the initial stage of implementation, the first phase should target the domestic cases and then in the later stage, a framework for cross-border insolvency should be included. 
2. WG recommended that the implementation of “UNICITRAL MLEGI” should not be done in India for some time, and said that such implementation might be taken into consideration post-enactment of cross-border group insolvency framework. 
3. The definition of “Group” under the framework must be inclusive in nature so as to include a large number of Corporate groups within the ambit of the definition. 
4. It was recommended that the group insolvency framework should only apply to the group’s companies against whom insolvency proceedings or liquidation of assets is taking place, this provision must not include the solvent members of the group. 
5. The proceedings for insolvency of Corporate Debtors must take place under the same Adjudicating Authority. Additionally, the common Insolvency Practitioner should act as the liquidator for the group. 
6. The Insolvency Practitioner and the Committee of Creditors appointed by the group must coordinate, cooperate and share related information with all the members of the group.   

Benefits of implementing group insolvency:

1. It increases the probability of the creditor’s recovery. 
2. It helps in the comprehensive assessment of all the assets and liabilities of the Corporate Group. 
3. It helps in selling the assets at optimal prices, as it coordinates the insolvency proceedings of the whole group. 
4. It reduces administrative costs as all the insolvency matters are consolidated and handled by a single Insolvency Professional. 
5. It provides for a more effective restructuring plan for the group as a whole.
6. The confidence of investors and creditors is boosted since group insolvency allows for a systematic insolvency procedure. 
7. It helps to prevent sudden market falls due to the insolvency of large, corporations; this is because of the coordinated procedure of resolution. 
8. It helps in the coordination of Cross-border insolvency procedures as it reduces the risk of conflicts and legal uncertainties. 

Conclusion and a way forward:

Presently, in India, there is no provision under IBC regarding group insolvency, although the lacuna is filled by the courts through several case laws, as discussed in the paper.  Considering the need for a group insolvency framework in India, IBC must be amended by the parliament and specific provisions regarding Group Insolvency must be incorporated. In addition to amending the law and incorporating provisions, several changes need to be made in the procedural aspect, such as with respect to the expansion of bench strength in NCLT and NCLAT, and specific procedures regarding the listing of cases with respect to corporate debtors of same corporate group. Additionally, a training programme would be required to up-skill the insolvency professionals and registry staff and make the judges aware of the procedures and provisions. The Insolvency and Bankruptcy Board of India would be required to prepare regulations with respect to the group insolvency framework. Also, there must be some involvement of technology by digitising the process of filing, and information portals must be made. 

One of the many problems that may arise after the implementation of such a framework, which adds the associated companies under one single group, would be the difference in the definition of ownership, the solution to this problem is to implement certain criteria, i.e., the interconnectedness between the companies, reliance on finances of each other, and the degree of control, instead of solely relying on significant ownership. 

Nevertheless, considering all of the aspects of the Insolvency of groups in India and majorly due to courts allowing group insolvency to take place through their judgements, it is imperative to implement a framework regarding group insolvency and incorporate certain regulations, so as to avoid any future conflicts and make sure that the procedure for insolvency runs smoothly without any hurdles. 

References:

[1] ICSIIP, Framework for Group Insolvency under IBC, 2016, https://icsiiip.in/panel/assets/images/knowledge_capsules/16331592943245IBC_Knowledge_Capsule_14.pdf

[2] Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Pvt. Ltd. & Ors, Company Appeal (AT) (Insolvency) Nos. 377 to 385 of 2019- decision dated 20.09.2019

[3] State Bank of India & Anr. v. Videocon Industries Ltd. & Ors, CP No. 02/2018 & Ors- decision dated 08.08.2019

[4] Chitra Sharma v. Union of India, (2018) 18 SCC 575

[5] Bikram Chatterji v. Union of India, (2018) 17 SCC 707

[6] United Nations Commission on International Trade Law, https://uncitral.un.org/en/MLEGI, (last visited 15 July).

[7] Sid Pepels, Group Insolvency Proceedings Under the Revised EU Insolvency Regulation, Jones Day, https://www.jonesday.com/en/insights/2017/05/group-insolvency-proceedings-under-the-revised-eu-insolvency-regulation

[8] Ravi Mittal, Group Insolvency: Harnessing Synergies, https://ibbi.gov.in/uploads/resources/eab27488d871106920be49844c1a78fe.pdf

[9] Vinod Kothari and Sikha Bansal, Group Insolvency: Relevance of Substantive Consolidation in Indian Context, https://vinodkothari.com/2024/01/group-insolvency-relevance-of-substantive-consolidation-in-indian-context/

[10] PSA, Group Insolvency in India, Mondaq, https://www.mondaq.com/india/insolvencybankruptcy/1265976/group-insolvency-in-india

Author, 

Mehul Raj,

3^rd year learner at Symbiosis Law School, NOIDA.