In 2016, the 9 (“Code”) was introduced in India. In such a short span of time, the Code has established its jurisprudence. However, the code requires reforms to keep up with the insolvency regime across the globe and to help the Indian economy overcome territorial boundaries. In January 2019, the centre set up an 11-member working group to look into the working of the Code and the reforms it accordingly needs; ‘Group Insolvency’ being one of them. In March, the Insolvency Law Committee headed by Injeti Srinivas was reconstituted to look into the framework of Group Insolvency along with the other reforms suggested.
For corporate groups to succeed globally in their operations, specific needs of different markets are to be considered. Multiple challenges are put forward by foreign markets and their laws in this regard. The best way to deal with such distinctive markets is to incorporate a subsidiary company in that foreign country where the business is to be established under the company law of the country parent company is established in. This business strategy led to the rise of corporate groups all over the world. From an economic perspective, these corporate groups are ‘one organism.’
However, from a legal perspective, the principle set forth by Salmon v. Salmon of a separate legal entity is still followed. Thus, for an action against each entity/subsidiary, a separate Corporate Insolvency Resolution Process (“CIRP”) must be initiated against them separately by their creditors even though all of them largely belong to the same group. This principle of separate legal entity is utilised by the corporate groups in covering their assets.
These group companies have several subsidiaries in different jurisdictions with a holding company managing all of them. Group Insolvency is a framework where if multiple entities of a single group go insolvent, their resolutions can be consolidated in one court so that firstly, the group can be restructured as a whole and secondly, its combined assets can be utilized in the best interest of both the group corporate and the debtor. This structure allows substantive consolidation which enables grouping of assets and liabilities of the group members in a way that they can be treated as a single economic entity.
While the Code is silent about group insolvency, the courts are trying to fill in this lacuna through judicial pronouncements. When the Videocon Group went insolvent, fifteen different resolution applications were filed against its fifteen different group companies. On 8th August 2019, the National Company Law Tribunal, Mumbai Bench granted substantive consolidation of 13 companies of the Videocon Group in the case of State Bank of India v. Videocon Industries Ltd. giving a classic example of group insolvency carried by the courts in India.
The argument given in favour of consolidation, which became the basis of the judgement, was that the group worked as a single economic unit. The companies had voluntarily formed an obligor/co-obligor structure through contractual agreements which pooled their assets and liabilities. All the lending had been done on the basis that the corporate debtors would be ‘jointly and severally’ liable for the obligation leaving their assets and business functions ‘intricately intertwined’. The other argument was that the consolidation would lead to a better asset-liability framework for the bidder, paving way for better resolution plans.
Many corporate debtors, like the trading companies, would not have many assets as compared to a manufacturing company which would have lands and factories as its major assets. Hence, the likes of trading companies would get much less or probably no resolution plans causing them to ultimately go into liquidation and the object of the Code i.e. to save corporate entities and keep them as a going concern may get defeated. The court examined the necessity of consolidation with the help of principles laid down by UK/USA courts and concluded that ‘equity and fairness’ can be the basis for lifting the corporate veil.
It also indicatively listed twelve ingredients one can look for before triggering consolidation, some of them being, common control, common assets, common liabilities, an intricate link of subsidiaries, looping of debts etc. The court divided the group enterprises into two categories.
The first category is of the groups, which when brought together for the resolution process gets better asset value and separately gets plunged into liquidation. The second category belongs to the companies which can survive even if their CIRP are dealt with separately. The court said that the former case should be the one granted with consolidation.
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