EVOLVING CONCEPT OF ‘GROUP INSOLVENCY’ UNDER THE INSOLVENCY & BANKRUPTCY CODE, 2016 (“IBC”)
Under Section 7 of the IBC, Financial Creditors (“FC”) of the Corporate Debtor (“CD”) can initiate Corporate Insolvency Resolution Process (“CIRP”) against a CD when the CD has committed a ‘default’ in discharge of a ‘debt’ due. Under Section 9, an Operational Creditor (“OC”) can initiate CIRP against a CD on account of non-satisfaction of a debt due to the OC by the CD.
Group Companies, for the purposes of the present discussion, may loosely be defined as otherwise independently incorporated entities which may be linked through cross shareholding, common shareholding, common directors, interlinking of finance, interlinking of debts etc. On account of the fact that these Group Companies are interlinked, cases may arise where the conduct of CIRP in respect of one entity may impact the assets and business of another group company, thereby necessitating the carrying out of the CIRP in a consolidated manner for all the Group Companies.
Under the IBC, there is no mechanism for initiation of group insolvency proceedings in respect of two or more companies belonging to a group of companies which are related through business, like associate or holding companies.
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THE REPORT OF THE INSOLVENCY LAW COMMITTEE, MARCH 2018
1Report of the Insolvency Law Committee, March 2018, Ministry of Corporate Affairs, Government of India
The lack of any framework under the IBC to govern Group Insolvency was acknowledged during the Parliamentary debate on the IBC, and found it’s way into the Report of the Insolvency Law Committee dated March 2018, as a suggestion for amendment to the IBC. It was felt by the Insolvency Law Committee that the nascent stage of Corporate Insolvency Law in India did not allow for the complicated subject of Group Insolvency to be introduced at present. The Committee opined:
“……The current system of insolvency law is new, and it may be too soon to introduce a complex subject, like the present issue. The UNCITRAL Legislative Guide on Insolvency Law166 also provides that the treatment of group companies is a very complex subject in relation to insolvency law and has multiple different approaches in different jurisdictions. Since lifting of the corporate veil in insolvency may affect corporate debtor entities significantly, this issue may be dealt with in the long-term once the present system is well established.”
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TAKING THE BULL BY THE HORNS- NCLT MUMBAI IN THE VIDEOCON DECISION
Report of the Insolvency Law Committee, March
2018, Ministry of Corporate Affairs, Government of India
Notwithstanding the view of the Insolvency Law Committee that the Indian Insolvency Law landscape was not ready for the concept of ‘Group Insolvency’ (in March 2018), the Adjudicatory mechanism under the IBC was called upon to examine the possibility of conduct of CIRP in respect of a Group of companies in the best interests of the stakeholders in the various Group entities.
The Videocon Group, cumulatively owed a debt of about Rs. 20,000 Crores to a consortium of lenders led by State Bank of India. Several of the Group Companies were before the National Company Law Tribunal (“NCLT”), Mumbai Bench facing the prospect of Insolvency proceedings. Vide an Order dated 24.10.2018, the Principal Bench of the NCLT transferred all pending applications under Sections 7 and 9 of the IBC to NCLT Mumbai Bench II for adjudication, so as to avoid conflicting orders by different benches.
A request of the Financial Creditors, which the Principal Bench refused to accede to, was the ‘consolidation’ of the Insolvency proceedings against all group companies, into one single proceeding. This question was left to be urged by the Financial Creditors before the Mumbai Bench hearing the matter.
On 8.8.2019, the Mumbai Bench of the NCLT delivered its decision on the plea of ‘consolidation’ of the insolvency proceedings in respect of the Videocon Group Companies. The prayers of the State Bank of India-led consortium of lenders were broadly along the following lines:
The substantive consolidation of all corporate debtors of the Videocon group into a single proceeding, solely for the purpose of CIRP;
Solely for purpose of CIRP, a merger of all assets and liabilities of all the group companies;
Elimination of inter se debts and liabilities of the group companies;
All guarantees etc. in respect of the credit facilities to be deemed to be one consolidated obligation of CD
Constitution of a common Committee of Creditors, a common Resolution Professional, and a consolidated Resolution plan
While granting these prayers of the consortium of lenders in respect of 13 out of the 15 Corporate Debtors before it, the NCLT took into account, inter alia, the following submissions of the consortium of lenders to the Group:
That the businesses of the Group Companies were interlinked and interwoven;
The Rupee Term Loan facility which was extended by the consortium of Banks led by SBI was extended for the benefit of several among the Group Companies;
All the borrowers (i.e. the Group companies) published consolidated financial statements;
It was argued on the basis of facts that the lenders dealt with these borrowers as a single economic unit;
Most importantly, it was argued that loans were given by the lenders with the understanding of joint and several liability of the borrowers;
It was also pointed out that the Companies were linked through intricate cross shareholdings
In the absence of a legal framework within India, the NCLT examined American and English decisions on ‘consolidation’ of insolvency proceedings to cull out factors which ought to be examined before a decision to consolidate was taken. The factors listed out in the NCLT decision are:
Common Order dated 8.8.2019 passed by the National Company Law Tribunal, Mumbai
Bench in MA 1306/2018 in CP No. 02/2018, CP
No. 01/2018, CP No. 543/2018, CP No. 507/2018, CP No. 509/2018, CP No.
511/2018, CP No. 508/2018, CP No. 512/2018, CP No. 510/2018, CP No. 528/2018,
CP No. 563/2018, CP No. 560/2018, CP No. 562/2018, CP No. 559/2018, CP No.
564/2018 & MA 1416/2018 in CP No. 02/2018 & MA 393/2019 & MA 115/2019 in CP No. 543/2018 & MA 1574/2019 in CP No. 01/2018 & MA 774
/2019 in CP No. 543/2018 & MA 778/2019 in CP No. 559/2018 & MA 1583/2018
IN CP No. 559/2018
Common directors
Common assets
Common liabilities
Inter-dependence
Inter-lacing of finance
Pooling of resources
Co-existence for survival
intricate link of subsidiaries
inter-twined of accounts
inter-looping of debts
singleness of economics of units
cross shareholding
Inter dependence due to intertwined consolidated accounts
Common pooling of resources, etc.
These factors (stated to be non-exhaustive, but “elementary governing factors”) were applied to the facts of the Videocon case, to arrive at a conclusion that a case was made out for consolidation of insolvency proceedings in respect of 13 of the 15 group companies.
The guiding factor was observed to be economic benefit to the stakeholders, and the ultimate question to be answered (even upon ascertainment of the existence of the above factors) was whether consolidation would be more advantageous or less so, to the stakeholders. The NCLT observed that “in other words, if an entity is self-serving, self-dependent and self-sustainable, a view can be taken for not granting consolidation”. Applying this test, it was found that in respect of KAIL Limited and Trend Electronics Ltd, consolidation was disadvantageous to the stakeholders, and was hence denied.
Finally, the NCLT acknowledged that there was nothing in the existing legal framework of the IBC to permit such an exercise of consolidation, and that the Insolvency Reforms Committee had also declined the suggestion for an amendment to include ‘group insolvency’ in the statute.
In this regard, the NCLT opined:
“A philosophical opening remark, before addressing this interesting issue as emerged out of the discussion made herein above, is that if in life an attempt is made to avoid a crucial situation either by ignoring or deferring it, this is experienced that, that very situation or problem resurface so fast so that it compels to deal urgently leaving no scope for avoidance or any more deferment. Thus (sic.) leaves no alternative but to tackle the ‘bull by the horns’”
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WELFARE OF HOMEBUYERS- NCLAT DECISION IN EDELWEISS
The National Company Law Appellate Tribunal (“NCLAT”) in the case of Dr. Vishnu Kumar Agarwal v. Piramal Enterprises Ltd. was posed with the following questions:
Whether CIRP could be initiated against a Corporate Guarantor without first initiating the process in respect of the Principal Borrower?
Whether in respect of the same debt, same default and therefore same claim supported by the same record, CIRP could be initiated against two Corporate Debtors?
The questions arose in view of the fact that the same loan of a principal borrower (which was not a Company) was secured by two Corporate guarantees from two companies.
Order dated 8.1.2019 in Company Appeal (AT)(Insolvency)
Nos. 346 and 347 of 2018
On these aforesaid questions, the NCLAT held that there was no embargo on proceeding against the Corporate Guarantors in the absence of any Section 7 application being filed against the Principal Borrower. On the second question, it was held that once a Section 7 application against one of the Corporate Guarantors was admitted, it could be argued in defense to the subsequent Section 7 application that there was no default on account of admission of the first petition.
It was relying on the answer of NCLAT to the second of the above two questions, that the NCLT Principal Bench in the Edelweiss case rejected the plea by Edelweiss Asset Reconstruction Company Limited to initiate CIRP against the Corporate Guarantors of Adel Landmarks Ltd. It was found that CIRP in respect of Adel Landmarks had already been initiated, and that therefore separate CIRP on account of the same debt could not be sought to be initiated against the Corporate Guarantors.
In appeal before the NCLAT, Edelweiss sought to distinguish the applicability of the decision of the NCLAT in Piramal by highlighting the fact that the Corporate Guarantors of Adel Landmarks were in fact a part of a consortium with Adel, which consortium had jointly undertaken to develop an area for construction of flats/ shops for allottees. Based on this fact, it was argued that a successful CIRP of Adel Landmarks could not be carried out on a standalone basis, without taking into account the land of all the other companies which formed the consortium.
It can be gathered from the above, that the plea was one which was specific to the real estate sector, where multiple entities had joined together to develop a project on conjoint parcels of land.
It was observed by the NCLAT that since the corporate guarantors are also the owners of the land on which the projects are to be developed by the principle borrower, the case is of a joint consortium and the NCLAT agreed to the contention of the appellant (as also of different corporate debtors and the Resolution Professional of the principal borrower) that unless the whole project (including the land) is taken over and developed, the CIRP / resolution plan will not succeed and the projects cannot be completed.
The NCLAT decision is based on the objective of the IBC, viz., early resolution of Corporate Insolvency. The decision appears to acknowledge that in the peculiar circumstances of the real estate sector, ‘Group Insolvency’, or a consolidated or simultaneous CIRP of group companies may be necessitated with the objective of completion of the project at an early date in the interests of the allottees of the project.
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THE ROAD AHEAD FOR ‘GROUP INSOLVENCY’
In the absence of any statutory framework for ‘Group Insolvency’, at present, the aforesaid decisions of the NCLT Mumbai and NCLAT govern the field. The concept is thus limited to the realm of ‘Judge made law’.
It is submitted that some crucial submissions of one of the financial creditors of one of the Group Companies (Infotel Business Solutions Pvt. Ltd.) in the Videocon case will require keen consideration in an appropriate case. The said submissions are likely to arise in the case of Group Insolvency in future, and will require immediate attention of the Legislature or the Judiciary for smoother and effective implementation of the IBC, in this context.
Order dated 7.3.2019 in C.P.No. IB- 172(PB)/2019: Edelweiss Asset
Reconstruction Company Limited v. Manogayan Estates Pvt. Ltd.
The decision of NCLT Mumbai appears not to have been subjected to appeal before
the NCLAT as yet.
In the context of the road ahead for ‘Group Insolvency’, the previous view of the NCLAT in Piramal may be seen, which appeared to restrict applications under Section 7 on account of joint liability to a very specific situation, in the following terms:
“……..Further, though there is a provision to file joint application under Section 7 by the ‘Financial Creditors’, no application can be filed by the ‘Financial Creditor’ against two or more ‘Corporate Debtors’ on the ground of joint liability (‘Principal Borrower’ and one ‘Corporate Guarantor’, or ‘Principal Borrower’ or two ‘Corporate Guarantors’ or one ‘Corporate Guarantor’ and other ‘Corporate Guarantor’), till it is shown that the ‘Corporate Debtors’ combinedly are joint venture company.”
The term ‘joint venture company’ appearing at the end of the paragraph appears to have been expanded to ‘joint consortium’ in the Edelweiss decision.
This only confirms what has been taught by experience of the IBC in 3 years of its existence, viz., that given the importance of this Law, it is only expected that it evolves at a rapid pace through legislative and executive amendments and judicial pronouncements.
While the decision in Piramal is pending appeal in the Supreme Court, the Edelweiss decision appears to have attained finality in view of the fact that (as recorded in the order itself) all parties had supported the Appeal allowed by the NCLAT.
For financial creditors with exposure to such financially vulnerable groups, the road ahead can be mapped out safely, in our opinion, on the basis of parameters set out in the NCLT decision in Videocon, at least until a comprehensive legislative framework emerges.
