Insolvency of corporate groups
CORPORATE GROUP INSOLVENCY
A corporate group is a cluster of companies existing in various structure formats. A corporate group structure may have several operational advantages over isolated entities, such as greater efficiency, better management control and tax incentives. Corporate groups operate through a variety of forms, which may include: operational links such as a dependency on the supply of essential goods; and financial links, which include inter-corporate guarantees or inter-corporate loans and advances. From an economic perspective, these corporate groups are ‘one organism.’ ’ But, from a legal perspective, the principle set forth by Salmon v. Salmon of a separate legal entity is still followed. When one entity of a corporate group enters insolvency, it may make the operations of the entire group difficult. However,` the Insolvency and Bankruptcy Code 2016 (IBC) does not provide for the insolvency resolution of corporate group entities. Group insolvency resolution is said to be a complex subject and it was decided by the law makers in our country that the new Insolvency Law i.e. IBC, being new to India, it may be too soon to introduce such a complex subject like the group insolvency. The rationale being that group insolvency could involve lifting of the corporate veil which could affect the corporate debtor significantly and hence could be taken up after the present system is well established. While the Code is silent about group insolvency, the courts are attempting to fill in this gap through legal professions. The courts had to deal with prayers for consolidation of cases of group companies, notwithstanding the fact that there are no provisions in IBC at present for the same. At the point when the Videocon Group went insolvent, fifteen distinctive resolution applications were filed against its fifteen diverse group companies. The case was State Bank of India Vs Videocon Industries Limited (VIL) & Ors (MA/2385/2019 in C.P.(IB)-02/MB/2018 dated 12.02.2020 of NCLT, Mumbai Bench
The court stated that,” considering the high stakes of the stakeholders and the lengthy arguments raised by various parties demanding a verdict urgently on the issue of ‘ Consolidation’ , no choice is left but to take the call, although with due care that not to exceed the jurisdiction enshrined in the Insolvency Code.”
Further in another case of ArcelorMittal India (P) Ltd. vs. Satish Kumar Gupta reported in (2019) 2 SCC 1, the supreme court considered the matter of lifting of the corporate veil and deciding on group insolvency. The court held that “…where a statute itself lifts the corporate veil, or where protection of public interest is of paramount importance, or where a company has been formed to evade obligations imposed by the Law, the court will disregard the corporate veil. Further, this principle is applied even to group companies, so that one is able to look at the economic entity of the group as a whole…”
Furthermore, the recent collapse of the IL&FS Group, involving another 169 group entities or we can say that the collective default by the Videocon group entities, has further made sure that there is a need to lift the corporate veil for group entities in certain situations, and also regulate the insolvency of groups.
Also in another case of Adel Group, the NCLAT initiated procedural coordination to ensure simultaneous proceedings with a common Resolution Professional for various companies belonging to the same group.
The Insolvency and Bankruptcy Board of India in order to bring foe=rward the group insolvency in India has set up a Working Group on Group Insolvency and this group has complied it’s recommendations for the introduction of the same in the country. The WG has suggested that the group insolvency framework may be introduced in two phases.
- It will introduce procedural co-ordination and rules against perverse behaviour.
- Procedural co-ordination may be implemented via joint CIRP application against group entities and further the formation of group CoCs without supplanting ‘substantive rights of creditors’ at the individual CoC level.
- Further the WG recommended that claims of group entities should stand subordinate to claims of unrelated creditors in ‘exceptional situations of fraud, diversions of funds, etc.’
- The WG noted that the second phase should introduce substantial consolidation and cross border insolvency
- Substantive consolidation refers to the pooling of assets of all group entities into a single estate to fulfil payment obligations.
To conclude, modifications to the Prudential Framework for Resolution of Stressed Assets released by the Reserve Bank of India on June 7, 2019, may also be considered in relation to asset restructuring for group entities. But till group insolvency is not well recognized by the code in India, the courts, through its capacity of legal translation or judicial interpretation will act as saviors in this field. In any case, specific provisions identified with this concept should be incorporated in the code so as to get sureness and consistency in the law.