‘It is common in India to have a bouquet of companies under the same larger umbrella. These companies are crucial to each other’s business in a variety of ways: service providers; operations and maintenance providers; raw material suppliers or consumer of the final goods; distribution channel companies; company handling the financing requirements or logistics of the group; etcetera.
When the primary company starts facing financial challenges; the ripple effects are usually seen in the group companies also especially because they are corporate guarantors of one another.
While the new corporate insolvency regime under Insolvency and Bankruptcy Code, 2016 (IBC) has evolved fairly well in the last about six to seven years, it has to be borne in mind that comprehensive resolution of all the companies in financial trouble in a group could be the ultimate long-lasting solution. A fragmented or a compartmentalised approach won’t work here. However, a situation involving group insolvency was not envisaged when the IBC was enacted.
It has been interesting to observe that where insolvency processes have been initiated against a set of companies under the same group, NCLTs have been open to the idea of consolidation of these different insolvency proceedings to facilitate a comprehensive solution. However, there are no regulations governing group insolvencies as on date.
Consolidation of CIRPs
It is important to understand that procedural consolidation requires clubbing entities working under/with the parent company within one process/procedure. The landmark Videocon case recognised substantial consolidation, where all the assets and liabilities of the companies are thrown into a common pool for Corporate Insolvency Resolution Process (CIRP). Consolidation of CIRPs is generally done to maximise the value of assets in the common pool and to ensure there are no pending issues.
While it remains to be tested legally, it may help in reducing costs of insolvency processes and saves judicial time. But there are also disadvantages, like the cost for hiring additional professionals to run the larger processes involving companies doing businesses in different technical domains; apportionment of dues to each creditor; differences amidst COC members, etc. Noticing the growing need for group insolvency, a working group was set up by the IBBI to examine its viability.
Certainly, there are unchartered legal issues to this approach as voting rights of some creditors would be affected due to the reduction in proportionate debt and a mechanism affixing the voting percentage of the COC members has to be worked out. Further, a “one-size, fits-all” approach cannot be adopted.
For example, a real estate developer might have some projects doing well in one company whereas it might be facing challenges in some projects in another group entity. While the concept of “project-wise insolvency resolution” has already been tested; consolidation of corporate insolvency in such cases could pose severe unforeseen challenges to the stakeholders especially homebuyers and therefore, if undertaken, would require higher judicial scrutiny.
Recent NCLAT judgment
The NCLAT Chennai in the recent Regen case order made some crucial observations with regard to the consolidation of CIRPs while allowing the consolidation of Regen Powertech Private Limited (RPPL) and Regen Infrastructure and Services Private Limited (RISPL). The Appellate Tribunal in its order appreciated the scope and intent of the Code where ‘synergy’ and ‘value addition’ of the assets are a priority.
A large number of stakeholders in the Regen case had contended that the separate CIRPs of RPPL (parent company) and RISPL (wholly owned subsidiary) should be combined/consolidated because of the intertwined nature of business operations and also to maximise the value.
The Videocon case laid down 14 criteria for determining whether CIRP should be ordered. It included common ownership, inter-dependence, inter-twined accounts, common directors to determine the consolidation of CIRPs. This principle was affirmed by the NCLAT, Delhi, in the Radico Khaitan case.
The NCLAT Chennai after referring to these aforesaid precedents allowed for a consolidation of CIRPs; of course there are appeals and other legal proceedings pending in this case.
Conclusion
While the scheme of grouping various CIRPs against multiple related corporate entities into one could be beneficial; careful judicial scrutiny would be required to decide on its necessity on a case-to-case basis. The companies could also be saved from the excessive costs that would bleed out in case of parallel, multiple, independent and sundry processes.
The authorities would also expend less time and resources because of the common COC and the RP for the group of companies; however, the question of how to achieve this at a practical level remains.
While initially there might be a larger number of issues and litigations but in the long run and as the jurisprudence on this evolves; group insolvency resolution is likely to be the way forward in the larger interest of stakeholders once tested practically and legally.
Ultimately, the rationale behind consolidation of CIRPs is that the inter-linked and inter-dependent companies should be treated as one entity and especially if it is likely to provide better results for the stakeholders, namely the creditors, as it would not only help in revival of the distressed companies but also in maximisation of value.
The writer is a practising Advocate in the Madras High Court and author of the book “Defaulter’s Paradise Lost - demystifying the insolvency and bankruptcy code, 2016