GROUP INSOLVENCY: A PRACTICAL APPROACH

The concept of Group Insolvency is new in India and has not yet been enacted. It refers to the process of clubbing together all the assets and liabilities of entities under a group company and collectively undertaking the insolvency proceedings as one substantive consolidation of the group company, with its associates and its subsidiaries.

Here, entities under group company refers to independently incorporated entities, linked through common shareholding, common directors, cross shareholding, interlinked finance, interlinked debts etc.

GROUP INSOLVENCY UNDER IBC 2016

Group insolvency resolution is said to be a complex subject and it was decided by the law makers in our county that as insolvency law is a new concept in India, it may be too soon to introduce such a complex subject.

Nonetheless, the courts had to deal with prayers for consolidation of cases of group companies and lately, are taking cognizance of such insolvency while adjudicating upon insolvency matters.

There have been a number of situations where the corporate debtor in a CIRP does not have assets for insolvency resolution in a meaningful way, but there would be holding companies or associate or subsidiary companies of the same group with proportionate assets that could facilitate the CIRP of the corporate debtor. But such assets cannot be utilized for that purpose as the Insolvency and Bankruptcy Code 2016 does not recognize and deal with the concept of group insolvency.

ADVANTAGES OF GROUP INSOLVENCY

Some of the advantages of group insolvency are as follows:

1. Lesser confusion- Different CIRP for claims under same group company may cause confusion amongst the investors regarding allocation of resources with the group. Hence, group insolvency can help in avoidance of this confusion.
2. Cost Effective- Group insolvency will incur lesser cost as compared to different CIRP.
3. Better co-ordination
4. No duplication of effort- Under group insolvency, resolution professional can avoid duplication of effort for each entity in piecing together information about common investments.
5. Better Clarity- Under group insolvency, the resolution professional will get a better idea and clarity by looking at the assets, liabilities and investments of the entities of group company together.

OBSTACLES UNDER GROUP INSOLVENCY

Even though the concept of group insolvency comes with a number of advantages, but we cannot avoid the obstacles in the practical applicability of this concept.

There have been a number of cases where the courts and/or tribunals had to deal with prayers for consolidation of group companies for collectively undertaking its insolvency process. In many of such cases, the court allowed such consolidation, but later faced challenges in accomplishing the goal intended behind such consolidation.

The execution of group insolvency may have the following challenges:

1. Creditors uniformity: The creditors may have different loan profiles, different terms and conditions. This may create disturbance in clubbing and merging of group assets and liabilities for the purpose of CIRP.

In the case of Bikram Chatterji & Ors. v. Union of India & Ors, the properties were consolidated and attached in view of the insolvency proceedings initiated against the different companies under the Amrapali Group. This led to complexity and confusion due to lack of lender homogeneity.

• Cross-border challenge- Co-ordination with foreign representatives and controlling foreign assets may become a challenge.

In case of Bank of India vs Videocon Industries Limited & Ors, the Adjudicating Authority allowed consolidation of assets and liabilities of Videocon group company to undertake its corporate insolvency resolution process. The claims regarding guarantees given to the creditors of foreign subsidiaries were admitted, however their assets could not be merged, which led to a heavy mismatch between the assets and liabilities of the group company.

• Loss for subsidiaries/ associate entities: When one entity of the group company is undertaking insolvency process, and the group insolvency is proposed, the subsidiaries and the associate entities of the group company also suffer in that process even after performing well in their own separate entity. This leads to loss of assets and properties of such subsidiary/associate entities resulting in decrease of their market value and further causes hinderance in their operation.

• Valuation of the subsidiary entities affected by liability of the Group company: In case of group insolvency of the entire group company, the valuation of the subsidiary entity can be affected by the liabilities of its parent company due to consolidation of their assets and liabilities together, thereafter causing loss to such subsidiary entity.

CONCLUSION

The concept of group insolvency offers a number of advantages that may help speed up the insolvency proceedings by dealing with the entire group company together. But its practical approach has been suggesting otherwise.

It is important for our law makers to structure the process of group insolvency in a strict manner for it to cause less confusion and complexity. Further, it is important to look into the challenges of group insolvency and come up with reasonable solutions for the same before introducing this concept under the Insolvency and Bankruptcy Code, 2016.

It is believed that if challenges under group insolvency is dealt in a proper manner, group insolvency can be a game changer and save effort, time and cost of the debtor, creditors and the adjudicating authorities.

-Shraiyashi Bhatt, Associate, SUO Law Offices