Globally, the business of corporations is increasingly operated through ‘enterprise groups’. In India too, many companies operate through multi-layered structures, with high levels of inter-connectedness. While there are several valid reasons for conducting business operations through group structures, they also lead to numerous issues.
In recent years, burgeoning debt at some of the top conglomerates/business groups in India — Videocon, Jaypee, Lanco, Essar or Anil Ambani’s Reliance ADA group — have shaken the banking system. While the Insolvency and Bankruptcy Code was introduced in India in 2016, it only deals with insolvency of a corporate debtor on a standalone basis. Hence each entity in a group is considered and administered separately in insolvency. This has led to several problems. For instance, in the Videocon case, multiple companies of the Videocon group were put through the insolvency process. But the NCLT subsequently ordered that all companies be dealt by the same Bench to avoid conflicting orders. Similarly, in the Jaypee Infratech case, the Supreme Court had stepped in to offer respite to homebuyers because while Jaypee Infratech was under insolvency, its parent company Jai Prakash Associates was not at the time.
Hence the adjudicating authority under the IBC as well as the Supreme Court, in some cases, have passed orders to address key issues in dealing with group companies. But the judicial discretion — or in other words, the absence of a legislative framework — may not always achieve the best result.
Also, as is evident in the ongoing progress of IBC cases, large accounts getting tangled in various courts is costing banks dearly. If companies in a group undergo multiple separate proceedings, it would only lead to higher cost and time in resolution, as dealing with intricate interlinkages — operational and financial — could be a herculean task. Also, in many cases, the bidders may find more value in buying the stressed company along with other companies within the group.
Against this backdrop, the UK Sinha-led working group on dealing with group insolvency has struck the right note with its recommendations. However, implementation of the framework with minimal judicial interventions and adhering to timelines by scaling up resources will be imperative.
The working group has recommended implementing the framework in phases. In the first phase, the framework may not include substantive consolidation — consolidating the assets and liabilities of different group companies as part of a single insolvency estate.
This is a prudent suggestion, as mandating substantive consolidation can be detrimental to certain stakeholders who may have structured their linkages to remain ‘independent’ of the group companies (such as SPVs).
But at the same time, as became evident in the IL&FS case — involving a complex web of structures with 302 entities and significant intra-group exposure — there is also a need to pierce the corporate veil in certain cases. Hence the working group has rightly recommended that for now, substantive consolidation may be applied in limited circumstances, either when opted by the creditors or ordered by courts, as is the case currently.
The working group has also recommended that the framework apply only to domestic companies in the first phase. While developments surrounding Nirav Modi’s entities, that filed for bankruptcy in the US, have revealed the urgent need for a robust cross-border insolvency law in India, it is yet to be implemented. The Insolvency Law Committee (ILC) last year had put forth its recommendations on such cases. Until there is progress on this front, implementing cross-border group insolvency may be difficult.
Nonetheless, the framework will have to be widened soon to cover Indian companies operating in other jurisdictions through multi-layered structures.
In dealing with group insolvency, it is first important to ascertain what defines a ‘group’. The working group has recommended going with the definition under Companies Act 2013, to provide clarity and more understanding among various parties.
But given that such a definition may not be exhaustive, the panel has rightly recommended that an application can be made to the adjudicating authority to include companies that may otherwise be interlinked to form a group. While this is important, it could also lead to interim litigations, delaying the process.
A critical point raised by the panel is that the framework should not apply to companies that have not committed default. This is significant because there can be situations where certain companies in a group are solvent and have not defaulted.
The first element of the group insolvency framework laid down by the working group is procedural coordination mechanisms. Procedural coordination essentially means coordination in conduct and administration of multiple insolvency proceedings. But the assets and liabilities of each group company should remain separate and distinct to preserve the substantive rights of claimants, as laid down in the UNCITRAL guide on ‘Treatment of enterprise groups in insolvency’.
The framework may provide for joint application, a single insolvency professional and a single adjudicating authority, forming a group creditors’ committee and group coordination proceedings. A single adjudicating authority will help lower litigation costs.
Formation of a group creditors’ committee is essential. But as noted by the working group, it is important that such a group creditors’ committee only act as a support for each committee of creditors (CoC) of companies in the group, and does not take decisions without the consent of each CoC. This will ensure that rights of financial creditors in each group company are not disrupted.
Another key recommendation of the working group has been on subordination of claims of related parties of the debtor. Here, the panel has rightly suggested that ordinarily, the claims of other group members should not be subordinated (to the rights of external creditors) and that only in exceptional circumstances (when the court finds an intention to defraud the creditors or to divert funds), should the claims of the group member be subordinated.
This is a prudent suggestion, given that a blanket mandate for subordination of claims may discourage intra-group dealings/lending.
While the recommendations are sound, ironing out the chinks in the existing IBC process will be imperative before implementing the group insolvency framework. According to IBBI data, as of June 2019, of the 2,162 cases admitted, just 120 cases have seen resolution. Barring few accounts, the average recoveries has been poor at 30-35 per cent.
Greater complexities in dealing with group companies could delay the process further, unless judicial interventions are minimised. For instance, reaching consensus at the individual company level (within the CoC) itself is proving a tough task. Under group insolvency, coordinating expectations of CoCs across multiple companies would be a herculean task.
Also, under the suggested framework, a company may opt out of group coordination proceedings. While this flexibility is important, how this would impact the resolution process at the group level needs to be seen. Also, the panel has recommended a maximum timeline of 420 days (90 days more than the mandated 330 days for individual insolvency); meeting this deadline appears to be a difficult task. But unless a time-bound resolution for group companies is ensured, the framework for group insolvency could be counter-productive, leading to loss of asset value rather than the oft-repeated intent of value maximisation under the IBC.