Group Entity insolvency is a need for the hour to increase the recovery where the subsidiary is highly profitable company and the parent or other company of the group which is under financial distress and faces insolvency. The cost incurred on the brand value, advertisement and other mutual expenses which has been encashed by the group companies should also be made liable for the...
Group Entity insolvency is a need for the hour to increase the recovery where the subsidiary is highly profitable company and the parent or other company of the group which is under financial distress and faces insolvency. The cost incurred on the brand value, advertisement and other mutual expenses which has been encashed by the group companies should also be made liable for the repayment of the debts of Group entity.
The concept of piercing of corporate veil and separate legal existence should be taken into consideration. Corporation depends on a legal process to obtain its legal personality and, once formed, will be subject to the regulatory regime applying to entities so formed. Promote procedural convenience and cost-efficiency; it may not only facilitate the obtaining of comprehensive information on the business operations of the group members subject to the insolvency proceedings, but also assist in the valuation of assets, in the identification of creditors and other parties in interest and in avoiding duplication of effort.
Enterprise groups are ubiquitous in both emerging and developed markets, with a common characteristic of operations across a large number of sometimes unrelated industries, often with family ownership in combination with varying degrees of participation by outside investors.
Procedural coordination refers to what in practice may be varying degrees of coordination with respect to the conduct and administration of multiple insolvency proceedings commenced with respect to two or more enterprise group members involving one adjudicating authority.
NEED FOR GROUP ENTITY INSOLVENCY
The group entity insolvency is a much-needed reform in order to culminate the threat of filing insolvency application with a malicious intent. Carrying out the guarantee given by company overseas has been a problem always for execution. In one jurisdiction, cross-guarantees may operate to reduce the regulatory burden on companies by bestowing accounting and auditing relief on companies that are party to the arrangement.
There are several instances in India even on the absence of group insolvency provision the judiciary has given appropriate decision based general principles.
Obviously in SBI vs Videocon[1] is a landmark case for group insolvency in other than that there are plenty of cases where the NCLT and NCLAT has set a landmark for group insolvency also for its implementation in India through a proper code.
Even in the case of Radico khaitan ltd vs BT&FC pvt. ltd the NCLAT Delhi had the issues for a typical group insolvency case where the assets hold by the subsidiary is on the behalf of the parent company and it doesn’t have its own business to run and business of Corporate Debtors is inextricably interlinked and intertwined. The shareholding pattern of the Corporate Debtor shows that the Corporate Debtors promoted, owned and controlled Corporate Debtors had common shareholders and directors and the control of both the companies was in the hand of the same persons and it was prayed for the assets and liabilities of the Corporate Debtors to be interlinked also the CIRP of the Corporate Debtors ought to be consolidated. The NCLT of Bengaluru has rejected this prayer and it went for an appeal to NCLAT where the appeal was allowed and single RP/liquidator to be appointed and perform functions under the code[2].
In the matter of Edelweiss asset reconstruction company limited vs Sachet Infrastructure private limited NCLAT Delhi case was that there were 9 corporate debtors and formed a consortium with nine by therein decided to develop the area by constructing flats/ shops for allottees. According to them, lands of all the nine ‘Corporate Debtors’, in question, have been consolidated for the purpose of construction of the housing projects the Agreements were signed by 9 CD for the construction and the lead borrower also availed Rs. 170 Crores from FC for such development and executed corporate guarantee for the loan. Later EARC who brought loan from financial creditor and filed a Sec-7 application against all 9 corporate debtors together in single application but the AA rejected the facts for group insolvency when later went for appeal NCLAT “held Adjudicating Authority has failed to appreciate the relevant fact that in the facts and circumstances, a group insolvency is to be initiated and in absence of simultaneous ‘Corporate Insolvency Resolution Process’ against five ‘Corporate Debtors’ the Adjudicating Authority will admit the applications under Section 7 filed by ‘Edelweiss Asset Reconstruction Company Limited’ is completed in one go by initiating a consolidated ‘Resolution Plan(s)’ for total development”[3].
In the case of Axis bank vs Lavasa corporation. The financial creditors of Lavasa Corporation Limited (“LCL)” seeks ‘consolidation’ of the respective insolvencies of LCL and two of its wholly-owned subsidiaries, WAML and Dasve Convention Centre (DCCL). WAML is a wholly-owned subsidiary of LCL and was formed to infrastructure/ project facility including right of collection of usage charges at its Hill Station Township& DCCL is a 100% subsidiary of LCL. The CIRP of LCL had commenced on 30.08.2018 & the CIRP of WAML, had commenced on 17.12.2018 & CIRP of DCCL had commenced on 05.02.2019. The contract under which the building is managed can have no effect after lavasa resolution and it would lead WAML without purpose to carry on the company. The DCCL, undergoing CIRP since 05.02.2019 does not have any Financial Creditor assets owned by LCL and its only object is for the functioning of the Convention Centre in the Lavasa City.
So, the consortium of applicants prayed for consolidation of lavasa CIRP along with its group companies
The NCLT Mumbai bench held that
“Consolidated Corporate Insolvency Process of Lavasa Corporation Limited and its 100% subsidiary Companies viz. WAML and Dasve Convention Centre Limited, all of which are undergoing CIRP. RP of the principal company i.e., of Lavasa Corporation Limited is appointed as the RP for the Consolidated CIRP of the Corporate Debtor (LCL)[4]”.
These are some landmark judgements by NCLT and NCLAT where they have incorporated the group entity concept in cases which seem to be appropriate for that. The facts also clearly state about the interdependence of the companies with the subsidiaries and the transactions between proves so.
HOW TO DETERMINE THE INTER DEPENDENCE OF GROUP ENTITIES
The degree of integration of a group might be determined by reference to a number of factors, which include the economic organization of the group.
The test for considering the group entities as one and the same based on the decision making/hierarchy of powers vested with the board
- Whether the administrative structure is arranged based on the independence of the various members?
- Dependence of group members on enterprise group for bank guarantee and other security purpose?
- Handling of personnel matters by centrally, the extent to which the parent makes major decisions on policy, operations and budget?
- How the group manages its marketing the importance of intra-group sales and purchases, the use of common trademarks, logos and advertising programmes and the provision of guarantees for the products? and
- The public image of the group the extent to which the group presents itself as single enterprise and the extent to which the activities of the constituent members are described as operations of the group in external reports, such as those for shareholders, regulators and investors?
These are some tests which need to be carried as a pre-qualification to treat the group entity as one & same and treat them to be part of insolvency.
The Failure of business of 1 subsidiary company can cause financial trouble in other connected entities, with a high degree of interdependence and linked assets and debts between its different parts. In those circumstances, it might often be the case that the insolvency of one or more group members would lead inevitably to the insolvency of all members has domino effect, and there may be some advantage in judging the imminence of the insolvency by reference to the group situation as a whole or coordinating that consideration with respect to multiple members.
HOW TO INITIATE GROUP ENTITY INSOLVENCY PROCEEDINGS IN INDIA
According the model framework provided the proceedings can be initiated by way of
1. JOINT APPLICATION
The method to file joint application on behalf of multiple corporate debtors belonging to same group that have committed a default. The Process can allow to file application jointly on 2 or more group entities before any NCLT which has jurisdiction on any 1 entity or can form of separate applications & being filed simultaneously on behalf of each such group member which later can be consolidated.
2. COMMON FORUM
The CIRP of group entities must be under the same NCLT whichever primarily admits the application and the corporate debtor may be suitable to be Adjudicating Authority for other group members. The application in respect of CD of same group entity should be shifted to the NCLT which first admitted the CIRP of a corporate debtor belonging to such group. It is also that application to object such transfer can only be taken on exceptional situation and will be on the discretion of the AA to admit the CIRP.
3. SINGLE INSOLVENCY PROFESSIONAL
With respect to corporate debtors undergoing CIRP/liquidation proceedings, the Adjudicating Authority may appoint a common RP/liquidator, if the same would aid in achieving value-maximising returns for creditors. The IBC did not deny on appointing common Resolution professional for the group entity.
Conflict of Interest of insolvency professional
If the insolvency professional feels that, during the course of administering parallel insolvency proceedings, they are unable to resolve the conflicts of interests, they should approach the Adjudicating Authority for necessary directions regarding how to proceed.
4. GROUP COC
It is recommended that the respective CoCs of corporate debtors belonging to the same group may decide to form a group CoC to enable smoother coordination of the CIRP proceedings of such corporate debtors. Important decisions will be taken by the COC of the particular CD as they know the nuances of the CD to which they have lend the money and the commercial wisdom is limited to the particular CD alone.
INITIATION OF A GROUP COORDINATION PROCEEDING
The CoCs of two or more corporate debtors that belong to a group (undergoing CIRP) may vote by 66%, at any time during the CIRP, to initiate group coordination proceedings. Only upon the approval of COC the RP can file to AA for coordination proceedings. Where the corporate debtor is undergoing liquidation, the liquidator may apply to the Adjudicating Authority for initiation of group coordination proceedings after consulting the stakeholders’ consultation committee.
The CD which participates in the coordination proceedings which is under liquidation must decide to either approve the group plan or if it should opt-out of the proceedings[5].
These are the basic understanding about the functioning of the group insolvency and once upon the approval how the functioning would be.
Thinking in a broader prospect the company which has incurred the debt for the business of different entities in a group are dependent on each other; or various group entities have many common assets; or where there are multiple common liabilities and related party transactions amongst various group entities, it may not be feasible to conduct insolvency proceedings for each group entity in isolation. Each entity in a group being able to tap synergies with others in the group when solvent, and yet being blind to the inter-linkages when it comes to insolvency, is anomalous.
Videocon, Jaypee, Aircel had the common problem of interconnection of group entities and these cases are a giant eyeopener for group insolvency in India and it’s the right time to set the record straight.
Authors: Hariharran.G, B.Com. LL.B.(Hons), Graduate Insolvency Programme & Aakash Sai Gundu, BBA.LL.B. Graduate Insolvency Programme. Views are personal.