Status as on- 26/09/2020
In today’s world, huge corporations operate through a web of companies [“group enterprise”]. Under this setup, the parent company will have multiple subsidiaries operating at different levels of production/supply chain. Currently, the Insolvency and Bankruptcy Code, 2016 [“IBC”] provides for a framework for the resolution of an corporate company on a standalone basis. This means that if corporate insolvency resolution process [“CIRP”] is initiated against one of the companies of a group enterprise, then other companies will remain immune from such proceedings. This standalone CIRP may create lot of issue for the resolution of the company.
Why Group Insolvency?
While working the CIRP of standalone company out the group companies, the lack of information and way of operation mode-operandi make the CIRP handicap to get the optimized resolution. For example, if any real estate project is being developed by 2 or more corporate companies, then if CIRP is initiated against 1 company, it may create lot legal and practical issues in CIRP. Therefore, in order to initiate group insolvency, the CIRP should be initiated against all the companies under a Group.
The idea of group insolvency means taking the entire group enterprise into insolvency at the same time by filing only one application before the National Company Law Tribunal [“NCLT”]. The insolvency of a group enterprise has a lot of potential for maximization of the value of a corporate debtor. However, owing to lacuna in law, stakeholders are not able to maximize their interests. The lacuna exists because the law recognizes the separate legal identity of corporate entities.
Barth of Group Insolvency in India
Despite the aforementioned lacuna, the courts in India have allowed group insolvency in certain cases. The first case of group insolvency in India related to the insolvency of the Videocon group, where the NCLT consolidated separate proceedings against multiple Videocon companies into one CIRP. Group Insolvency has also been initiated to give relief to homebuyers. For instance, in Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Pvt. Ltd., the National Company Law Appellate Tribunal [“NCLAT”] ordered initiation of group insolvency against five companies that had been working as a joint consortium to develop a residential real estate project. Furthermore, the NCLAT ordered that the CIRP against five companies should be carried under the guidance of the same Resolution Professional. Similarly, in Bikram Chatterji v. Union of India, the Supreme Court came to the aid of the aggrieved homebuyers of the Amrapali group companies. The Supreme Court ordered attachment of properties of all forty group companies in the Amrapali group.
Experience has shown that group insolvency leads to better results, both for the creditors as well as the successful resolution applicants. Group insolvency also helps the forensic auditors to ascertain the existence of fraudulent transactions inter-se the group enterprises. Group insolvency provides a cost-effective mechanism for the resolution of huge corporations with complex corporate structures, as there will be only resolution professional who will be required to be paid for the resolution of entire group enterprise. Under the current legislative setup, since separate CIRP has to be initiated against every company, a different resolution professional is required to be appointed for each company, which increases the insolvency resolution process costs manifold.
Given the large number of benefits offered by the concept of Group Insolvency, it is imperative for the Parliament to give legislative recognition to Group Insolvency by adding the necessary provisions under the IBC. Till the time the legislature recognizes the concept of Group Insolvency, it is advisable to the creditors to make a plea of initiating Group Insolvency while filing an application for initiation of CIRP against a corporate debtor.
Disclaimer– The above article is based on the interpretation of the related laws and judicial pronouncements. The readers are expected to take legal advice before relying on this article. The author can be reached at firstname.lastname@example.org or call the IP expert at 8383011629.