What is Group Insolvency?
A vast number of companies in India are essential for a group structure, accordingly which they are interconnected basically, monetarily, and functionally related. This requires a coordinated perspective on their business while planning to accomplish value maximization of the assets during the time spent rebuilding and restoration or liquidation.
Group insolvency can be defined as clubbing of the assets and the liabilities of the individual companies which are linked together as subsidiaries, one being a holder company and it is done to have insolvency proceedings as one substantive consolidation of these companies.
Why is there urgent need for group insolvency laws in India?
The Indian Bankruptcy Code 2016 having been amended n number of times is still silent about “group insolvency” but it is pertinent to note that the courts are trying to fill in the lacunae with the help of some landmark judgements given in US where there is no express provisions for substantive consolidation of the insolvent entities with the solvent entities yet under their equitable power they can do so and even from UNCITRAL MODEL LAW which defines the procedure of consolidation of insolvent entities along with insolvent entities.
For the first time, NCLT faced this issue in the case of SBI v. Videocon Industries Ltd. [1] which highlighted the dire need to have group insolvency laws in India. In this case, all the members of the group were at default and hence insolvency proceedings were initiated against each one of them but the question here arises is that is it fair to club solvent entities along with insolvent entities which is against the fundamental principles of corporate laws infringing the separate legal entity principle.
The Courts has time and again come across the issue in various cases now and the report of the working group has also recommended that substantive consolidation can be made in exceptional cases where the entities are interlinked, interdependent and when the benefits of clubbing outweigh the harms made to the creditors.
What is pertinent to note here is that the main goal of the insolvency proceedings is to pool the assets and liabilities of various related entities so as to wipe out the intercompany loans so as to satisfy the claims of the creditors from a common pool of assets which is a remedy of equity.
INTERNATIONAL ASPECT
USA
The USB Code does not have any express provisions of substantive consolidation yet the courts under equitable power via Section 105 of the Bankruptcy code. There is no standard for the basis of clubbing assets of solvent with insolvent entities yet it can be assessed from a case-to-case basis.
The following landmark precedents are:
- In re Snider Brother Inc, Here it was held that the two constituents of the test have to be seen: Firstly, that there is necessity for substantive consolidation and harm can be prevented with the help of this equitable power;
Secondly the benefit of this consolidation supersedes harms inflicted on the objecting creditors.[2]
- In re Giller, Here the third constituent of the test was introduced which said that prejudice would arise from not substantive consolidating the debtor.[3]
- In Re Augie/Restivo Banking Company case imposed a burden on the person who seeks consolidation that the person will have to indicate that the creditors treated the group as a single economic entity and that the matters were so interconnected that it will be unworkable to conduct an independent insolvency proceeding.[4]
- In re Meridian Place, W., Inc -In this case the bankruptcy court held substantive consolidation of the debtor with non-debtor as they were second -self of each other.[5]
UNCITRAL
The United Nations Commission on International Trade Law has examined and amended the position concerning the Group Insolvency: Draft Model Laws in part 3 of the UNCITRAL legislative guide so as to exercise control in the procedure, administration of the proceedings including solvent & insolvent entities in a group. It will consider these factors firstly the addition of the solvent entity whose insolvency seems to be fast approaching. In this case it advises the involvement of the solvent entity in the consolidated application like the usual standards similar to the other insolvent entities.[6]
Secondly the addition of solvent entity whose insolvency is not fast approaching. In the former. Herein, the characteristics that will be considered will be the following namely: Notable level of dependency, intermixing of the assets, unification of identity-for example single economic identity, dependence on the management, monetary dependence etc.
Note – This involvement here can be initiated by taking consent of the creditors or all the concerned group members.
CASES RELATING TO GROUP INSOLVENCY IN INDIA
- State Bank of India & Anr v. Videocon Industries Ltd & Ors[7] – In this case, NCLT permitted allowing of 13 companies out of the 15 on the grounds that they had common liabilities, assets, directors etc. This ruling was given by taking reference from US, UK courts judgements and hence it laid down the principle of the single economic unit leading to a start to the group insolvency regime in India.
- Edelweiss Asset Reconstruction Co Ltd v. Sachet Infrastructure Pvt Ltd & Ors[8] – In this case, NCLAT laid down the parallel corporate insolvency resolution process against 5 companies to complete it in one go.
- Axis Bank Ltd & Ors v. Lavasa Corp Ltd,[9] In this case, the NCLT grouped the Lavasa group insolvencies to prevent potential losses keeping in mind that the insolvency of the subsidiaries was relied on the result of their parent’s insolvency.
- The late ruin of IL&FS group had 348 organizations additionally carried the need to control the group insolvency structure under IBC. On June 22, 2021, in this case the NCLAT while managing IL and FS cases explicitly, held that by goodness of different settled cases, the law has created where group indebtedness is likewise passable.
THE CHALLENGES AHEAD IN THE FUTURE
- DETRIMENTAL TO THE RIGHTS OF THE SOLVENT ENTITTIES CREDITORS
What here pertinent to note here is that the substantive consolidation of the solvent entities along with the insolvent entities will be detrimental to the rights of the solvent entities’ creditors for no fault of themselves and may push the solvent entities into the hole of insolvency and at the same time would allow gain to the non-solvent consolidated assets.
- AGAINST THE PRINCIPLE OF SINE QUA NON I.E. DEFAULT
The substantive consolidation would be against the most essential requirement under Section 7, 8, 9 of the IBC code, 2016 which states that to begin the insolvency proceedings against the debtor, default is the Sine Qua Non which hence will ultimately contravene the basic principle of insolvency.
- AGAINST THE “SEPARATE LEGAL ENTITY” PRINCIPLE
In Saloman v. Saloman case,[10] the principle of the corporate veil was laid down and held the separate legal entity principle which stated that the shareholders cannot be liable for the insolvency of the company and hence substantive consolidation will ultimately lead to challenges as the questions will be left blank regarding how the creditors from insolvent entities can claim from solvent entities of the group.
CONCLUSION
For substantive consolidating of the solvent entities with insolvent entities to maximize the assets value ,corporate veil will have to be pierce and the NCLT will have to strike a balance and take up the recommendations of the working group and incorporate it in the bankruptcy law of India as the law is silent on it .With the changing times, when all the entities work in a complex manner in the form of a group ,group insolvency against all of them is the feasible solution for this and hence should be implemented as soon as possible.
Author(s) Name: Muskan Sethi (University of Petroleum and Energy Studies, Dehradun)
References:
[1] SBI v. Videocon Industries Ltd., (2018) SCC OnLine NCLT 13182.
[2] In re Snider Brothers, Inc,18 B.R. 230 (Bankr. D. Mass. 1982).
[3] In re Giller, 962 F.2d 796 (8th Cir.1992).
[4] Union Saving Bank v. Augie/Restivo Banking Co, 860 F.2d 515 (2d Cir. 1988).
[5] In re Meridian Place, N W., Inc, 15 B.R. 89 (Bankr. D.C. 1981).
[6] UNCITRAL, UNCITRAL Legislative Guide on Insolvency Law, Part three: Treatment of enterprise groups in insolvency, (2012).
[7]State Bank of India & Anr. v. Videocon Industries Ltd. & Ors, CIVIL APPEAL NO. 4553 of 2018.
[8] Edelweiss Asset Reconstruction Company Limited v. Sachet Infrastructure Pvt. Ltd. & Ors., Company Appeal (AT) (Insolvency) No. 377 of 2019.
[9] Order dated February 26, 2020 in MA 3664/2019 in C.P.(IB)-1765, 1757 & 574/MB/2018.
[10] Salomon v. A Salomon & Co Ltd, (1896) UKHL 1.
