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The Insolvency and Bankruptcy Board of India has released the report of the working group on group insolvency, proposing reforms in the legal framework to address insolvency and bankruptcy of companies that belong to the same group.
Rationale for the framework of group insolvency in India
Presently, the Insolvency and Bankruptcy Code, 2016 (IBC) does not provide for a consolidated mechanism to (procedurally or substantively) synchronise insolvency proceedings of corporate debtors within the same group. In spite of this, adjudicating authorities under the IBC (the “AAs”) have passed orders taking into consideration corporate debtors and their interconnections with other group companies such as in cases of Sachet Infrastructure, Videocon, Amtek Auto, Jaypee etc.
By way of the background of a few of such instances, in SBI v. Videocon, the AA held that the assets and liabilities of 13 Videocon companies shall be substantively consolidated for the purpose of their corporate insolvency resolution process (“CIRP”). The AA based its decision on factors such as common control, common directors, common assets, interloping of debts, common financial creditors, etc. In the matter of Edelweiss ARC v. Sachet Infrastructure, the AA directed procedural consolidation of insolvency proceedings against 5 companies working as a consortium to develop a residential plotted colony. The court even mandated a single resolution professional to guide the simultaneous CIRPs and complete it in one go with a consolidated resolution plan(s) for total development.
The rationale behind adopting a Framework is multi-fold:
As observed by the working group, codifying a Framework can have advantages such as reduced cost of proceedings, exchange of information, more certainty for stakeholders and maximisation of value.
Scope of the Framework
The Framework proposed by the working group to deal with the insolvency of companies or corporate groups is as follows:
Working group recommendations
The working group has recommended amending the IBC, the corresponding rules and regulations and other relevant laws to enable its recommendations for the Framework. The key working group recommendations are set out below:
Each company is a legal person having its own distinct identity and presently, the processes set out in the IBC apply only in respect of the company against whom an application for insolvency resolution has been filed and admitted. While the provisions of the present IBC and the emerging jurisprudence are aimed at revival of every company in distress and maximization of its value, there have been several instances where recovery has been limited or has failed on account of the corporate debtor’s insolvency resolution being dealt with in isolation, to the exclusion of the other entities in the group which form part of intrinsically linked operations or supply chains.
While weighing the recommendations of the working group, utmost consideration should be given to ensure that the Framework is not a subject of abuse, where stakeholders invoke the Framework with the sole intent of extending the CIRP by an additional period of 90 days. To this extent, AAs will have to exercise cautious discretion. The need for this process check can be seen as hugely pertinent in view of the recent instances where the IBC has failed to meet its primary objective of time-bound stress resolution and prevention of asset value erosion.
Nonetheless, the recommendations of the working group, if implemented with caution, will be a definite step towards taking the insolvency reforms forward. The working group report will serve as a guiding principle for the proposed phased implementation of the group insolvency regime for effectively tackling the substantiated issues which have arisen in cases of group insolvency.
Dhwani Shah is currently working as a senior associate at Talwar Thakore & Associates, Mumbai.