October 16, 2019

Corporate Restructuring Under Insolvency Law: An Unvisited Conundrum

- Akshay Nagpal, Partner [ L & L Partners ]
- Niharika Choudhary, Associate [ L & L Partners ]


One of the practical challenges which may be encountered is in relation to seeking approval of NCLT, which has jurisdiction over the acquiring company, for the merger or de-merger scheme...

The recently introduced amendments to the Insolvency and Bankruptcy Code, 2016 (“Code”) are aimed at ensuring greater clarity in the debt resolution process and preventing dilution of legislative intent behind the Code. The amended Code inter-alia provides clarity on the permissibility of corporate restructuring schemes as part of the resolution process. In this regard, Section 5 of the Code has been amended to provide for an explanation in the definition of “resolution plan” clarifying that “a resolution plan may include provisions for the restructuring of the corporate debtor, including by way of merger, amalgamation and demerger”. The intent of the legislature, as also suggested in the report of the Bankruptcy Law Reforms Committee, has always been to keep the scope of the resolution plan as broad and not prescriptive. Similarly, the parameters of the resolution plan as prescribed under Regulation 37 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016, were always broad enough to include “substantial acquisition of shares of the corporate debtor, or the merger or consolidation of the corporate debtor with one or more persons”. Last year, even NCLAT in the case Edelweiss Asset Reconstruction Company Limited v. Synergy Dooray Automotive Limited & Ors., clarified that a resolution plan may provide for merger and amalgamation.

Although the legislature by this recent amendment has provided greater clarity on incorporation of complex plans in the course of insolvency proceedings, yet, it has missed the opportunity to address certain procedural aspects concerning the effective implementation of the resolution plan proposing merger/amalgamation of corporate debtor and another company which is not under insolvency (“Healthy Company”). One of the practical challenges which may be encountered is in relation to seeking approval of NCLT, which has jurisdiction over the Healthy Company, for the merger or de-merger scheme. Ordinarily, in the case of a corporate restructuring scheme, such as merger, involving two companies in different jurisdictions, approval of both the NCLTs having jurisdiction over the respective merging companies is required to be taken in accordance with the procedure laid down under the Companies Act, 2013. This requirement will be applicable even when one of the merging companies involved, is under the insolvency process. However, this requirement of seeking approval of two NCLTs for the merger or demerger which is part of the resolution of the corporate debtor undergoing insolvency is likely to defer the implementation of the resolution plan as a different NCLT (having jurisdiction over the Healthy Company) will freshly evaluate the scheme and the time for obtaining the approval will be subject to the backlog of cases with the NCLT. This delay in the process is likely to clog the system and negatively impact the creditors and other stakeholders. This problem is not acute, if the same NCLT is seized of both the matters – resolution of corporate debtor and approving merger or demerger from the perspective of the Healthy Company. In certain cases (for example in the resolution of Synergies Dooray Automotive Limited and Monnet Ispat & Energy Limited), where registered offices of both the entities involved in the restructuring scheme were under the jurisdiction of the same NCLT, the NCLT has given approval of the merger scheme as part of the resolution plan itself.

At present, the Code does not have any provision on how to handle such matters where a resolution plan envisages merger or demerger involving the corporate debtor and a Healthy Company, where the entities have registered offices in different jurisdictions, or where a resolution plan involving merger or demerger of different yet related corporate debtors whose insolvency processes have been initiated before different NCLTs exercising jurisdiction over the respective corporate debtors. One provision which has so far been utilized to transfer resolution process or merger petition from one NCLT to another NCLT, in order to ease out the approval process, is Rule 16 of National Company Law Tribunal Rules, 2016. This provision provides that President (of Principal Bench of NCLT) shall exercise power to ‘transfer any case from one Bench to other Bench when the circumstances so warrant’. In Uttam Value Steel Limited v. State Bank of India and Anr, NCLT, Principal Bench allowed transfer of resolution process of a group company from NCLT, Chandigarh to NCLT, Mumbai where the resolution process of another group company was pending. In Re. JAK Builders Pvt. Ltd and Others, with respect to merger applications filed before different NCLTs because of registered offices of transferor and transferee in different jurisdiction, NCLAT directed NCLT, Principal Bench to transfer the case from one NCLT before the other NCLT observing that “cases in hand circumstances warrants that the President exercises his power under Rule 16(d) to transfer one of the case from one Bench to another Bench where other matter is pending including the cases where transferor and transferee companies are at different places of the country.” Another instance where the tribunal has shown flexible approach for ease of corporate insolvency is in the Videocon Group companies’ case, where NCLT, Mumbai allowed the resolution professional to consolidate 13 of the 15 Videocon Group companies into a single entity for sake of speed of resolution and maximizing value. This is the first instance of consolidation of insolvency proceedings of group companies that has been permitted under the Code.

While, NCLT and NCLAT have tried to adopt a flexible approach to ease the process of resolution of corporate debtors, especially involving group insolvency and merger or demergers as part of resolution plans, a specific amendment in the Code would have removed all ambiguities around this subject and would have sealed the process where resolution plan involves merger or demerger of one or more companies under insolvency, thereby ensuring timely implementation of the resolution plans. While this procedural aspect missed the bus in this round of amendments, we hope these are not the end of reforms to the Code, and that this anomaly will be addressed in the next round of reforms to the Code.

Disclaimer – The views expressed in this article are the personal views of the author and are purely informative in nature.


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