Insights
Group insolvency under IBC: These are the changing trends in India
June 29, 2024The IBBI Working Group on Group Insolvency (under the chairmanship of UK Sinha) and the MCA Cross Border Insolvency Rules/Regulations Committee having submitted their reports (collectively “Reports”) had recommended the introduction of a framework governing the resolution of enterprise groups under the Insolvency and Bankruptcy Code, 2016 (“IBC”) in September 2019 and December 2021 respectively.
However, the suggestions contained in the Reports have not yet been implemented to provide a solution for group insolvencies. Currently, the group insolvencies in India are being resolved through concepts and practice developed through judicial activism and legal innovation, with jurisprudential learnings from mature insolvency jurisdictions like the United States.
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The substantive consolidation of individual insolvencies of several companies in a group was first ordered by the National Company Law Tribunal (“NCLT”) in the case of 13 Videocon group companies, relying on its equitable jurisdiction under Rule 11 of the NCLT Rules, 2016, which states that the NCLTs have inherent powers to make such orders as may be required for meeting the ends of justice or to prevent the abuse of the process of NCLTs.
Since then, group insolvencies under IBC have seen myriad creative solutions from the judiciary depending upon the facts and circumstances of the case, which are also resonated in the Reports, including:
- Substantive consolidation of the assets and liabilities of the corporate debtors in a group.
- Joint application for the initiation of insolvency of multiple corporate debtors in a group.
- Appointment of a single insolvency professional and designation of a single adjudicating authority (in spite of a different registered office based jurisdiction) to oversee the insolvencies of multiple corporate debtors in a group.
- Formation of a single committee of creditors or conducting joint meetings of the committee of creditors of different corporate debtors in a group; and (v) rules to deal with intra-group perverse behaviours or transactions.
Major change in judicial approach to group insolvencies
Based on practical experience from mature jurisdictions, the Reports had suggested the incorporation of a group insolvency framework which would be creative, flexible, enabling, and voluntary in nature. Pertinently, even the NCLTs had taken a flexible and voluntary approach to group insolvencies, i.e., substantive consolidation or procedural coordination was ordered by the NCLTs upon request by the resolution professional(s) and the committee of creditors(s), where they deemed it necessary in the interest of all stakeholders and for the purposes of resolving the group-wide stress in an orderly manner.
However, in the recent case of Giriraj Enterprises vs. Regen Powertech Private Limited, Company Appeal (AT) (CH) (Ins) No. 323/2021, the Hon’ble National Company Law Appellate Tribunal (“NCLAT”) diverged from the approach in the earlier group insolvency cases.
The NCLAT, in this appeal, held that reliefs in group insolvency cases had not been ordered by the Adjudicating Authorities in exercise of their equity jurisdiction (relying on the holding of the Hon’ble Supreme Court that the Adjudicating Authority is not vested with equity jurisdiction) and rather with the intention of achieving ‘maximisation of value of assets’ and ‘value addition’, which are the main objectives of the IBC.
Importantly, in the said case, the Tribunal ordered the consolidation of the insolvency of the holding company with its wholly owned subsidiary, while rejecting the resolution plan approved by the committee of creditors of the holding company in its standalone insolvency and despite opposition from the committee of creditors of the holding company – the Bench stated that the businesses of the two entities were intrinsically intertwined and the commercial wisdom of the committee of creditors of the subsidiary company was to be equally considered. The aforesaid judgement is currently sub-judice in appeals before the Hon’ble Supreme Court.
Conclusion
The divergence of approach to group insolvency in the aforesaid judgement is one example of the uncertainty and unpredictability caused due to a lack of uniform, consistent, and consolidated framework governing group insolvencies in the country. The public statements from government sources seem to indicate that the group insolvency is on the government’s priority list and rightly so.
The ad hocism in practice due to reliance on judicial discretion for commercial solutions, makes the Indian insolvency regime uncertain and unpredictable and leads to inconsistent outcomes, which are not in the interest of the economy at large.
As a result, while the judicial learnings remain contemporarily relevant, there is an urgent need for legislative intervention to lay down a statutorily recognized framework governing group insolvencies in India.
This article was originally published in CNBC TV18 on 29 June 2024 Co-written by: Anoop Rawat, Partner; Ahkam Khan, Associate. Click here for original article
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Contributed by: Anoop Rawat, Partner; Ahkam Khan, Associate
Disclaimer
This is intended for general information purposes only. The views and opinions expressed in this article are those of the author/authors and does not necessarily reflect the views of the firm.
