A government panel has suggested that a corporate group insolvency framework under the Insolvency and Bankruptcy Code (IBC) should apply to only bankrupt entities that are already undergoing resolution or liquidation process, and not to the solvent firms of the group.
However, financial services providers like banks would be outside the ambit of the group insolvency framework, it has said.
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The panel under retired bureaucrat KP Krishnan has also recommended that the group insolvency framework be adopted in phases and that rules for initiating domestic group insolvency (dealing with assets within the country) be enacted first.
“A group insolvency framework should be laid down under the Code that is voluntary, flexible and enabling in nature,” it said.
The report, the second by the Cross Border Insolvency Rules/ Regulations Committee, was submitted with the ministry of corporate affairs in December 2021, but has now been made public.
The panel has held that India need not follow the provisions of a model UN law on group insolvency at the moment. However, adoption of the Model Law on Enterprise Group (MLEGI) of the United Nations Commission on International Trade Law (UNCITRAL) “may be considered after enactment of single entity cross border insolvency laws and based on learnings from its implementation”. Of course, India has decided to follow the UNCITRAL rules for cross-border insolvency.
It has also suggested that jurisprudence on substantive consolidation — pooling of assets and liabilities of an insolvent group — is a remedy resorted to in exceptional circumstances and provisions governing substantive consolidation may not be stipulated in the IBC at the moment. “The need for such provisions may be contemplated at a later stage, on the basis of practice and jurisprudence evolved in this regard,” it said.
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The need for a group insolvency framework in India was reinforced after the National Company Law Tribunal (NCLT) ordered the “substantive consolidation” of the corporate insolvency resolution process of 13 Videocon Group entities due to their intricately connected business models.
Such an insolvency framework assumes significance, as companies in a group undertake many related party transactions and disentangling the ownership of assets and liabilities, and identifying the creditors of each group member becomes essential if single-entity insolvency proceedings are to be carried out for more than one group firm.
It has called for a broad and inclusive definition of the term “group” so as to include a large number of corporate debtors within the ambit of the framework. “The definition of ‘group’ may be based on the criteria of control and significant ownership. This definition should be applicable to all entities that fall within the definition of a ‘corporate debtor’ under the Code, i.e., companies and limited liability partnerships,” it added.
Under the group insolvency framework, all proceedings related to the insolvent firms a group may take place under the same NCLT. All pending applications and proceedings in respect of group members would be transferred to the NCLT that is the first to admit an application for triggering an insolvency resolution process involving any corporate debtor belonging to the group, the panel has suggested. A common insolvency professional for all these entities would be appointed.
The panel has recommended that a group committee of creditors (CoC) be formed with adequate representation from CoCs of all insolvent entities of the group to oversee the resolution process.
“A group strategy should require the approval of all participating CoCs by 66% of each of their voting shares respectively,” it said. Where a stressed firm participating in a group coordination proceeding is undergoing liquidation, the liquidator would decide whether to approve the group strategy for the corporate debtor it represents.
Once approved, the group strategy will have to be filed with the NCLT and it will be binding on all parties to the group strategy. The panel has also called for effective capacity building measures and increase in the use of technology to improve the efficacy of the group insolvency framework.