Considering the issue around CIRP for group companies such as value deterioration in the assets of the group companies and lack of bidders in the market for individual group company, the time seems right to further strengthen the Code by adding a chapter on Group InsolvencyThe Insolvency and Bankruptcy Code, 2016 ("Code"), is often viewed as a platform that has successfully (as many would...
Considering the issue around CIRP for group companies such as value deterioration in the assets of the group companies and lack of bidders in the market for individual group company, the time seems right to further strengthen the Code by adding a chapter on Group Insolvency
The Insolvency and Bankruptcy Code, 2016 ("Code"), is often viewed as a platform that has successfully (as many would say), consolidated the insolvency resolution regime in India, which was earlier compartmentalized in different enactments, making insolvency resolution complex and often conflicting.
Consequent to the enactment of the Code, the Indian economic and judicial system has faced dynamic and institutional changes which have augured well for the stakeholders involved. Time is ripe for the system to explore other facets of the insolvency regime which include group insolvency, which is the defining theme of this article.
Group insolvency ("Group Insolvency") primarily means consolidation of the corporate insolvency resolution process ("CIRP") of different companies of the same group in such a manner so as to have a common CIRP for the entire group. It primarily aims at keeping the group of companies together in order to either restructure the group as a whole or to utilize or liquidate the group's asset value in the best interest of all parties involved.
In the absence of Group Insolvency regime, companies of the same group undergo separate insolvency process which means that assets/investments of only one company will be available to the bidder during the CIRP, leading to asset liability mismatch and resultantly an unsatisfactory bid for the lenders. Further, since there are common sets of lenders for the group companies, it more often than not leads to overlapping of debt facilities and double counting in calculation of outstanding and voting percentages in an insolvency scenario.
This aspect is reflected in the CIRP of Videocon Group companies wherein, the claims of creditors against two of the largest Videocon Group companies namely, Videocon Industries Limited and Videocon Telecommunications Limited aggregate to a staggering INR 88,000 Crore due to overlapping of the debt facilities between the two group companies. However, in reality the actual claim amount may be much lower. This may be the result of a prevalent practice in the project financing market to avail the loans under a co-obligor/borrower structure, wherein two or more companies of the same group avail the indebtedness under one loan arrangement, while creating security over the assets of both the companies and accordingly, both the companies remain jointly and severally liable to repay the loans.
Similarly, if an investment company and its operating companies are into CIRP at an individual level, the creditors of the investment company may not receive satisfactory bids from the bidders under the CIRP of the investment company, since the assets of the investment company are in the nature of investment in the operating companies, which is undergoing simultaneous CIRP and will have a separate bidder.
It has been observed, particularly in the real estate and EPC sectors, that CIRP is initiated against either the parent company or the subsidiary companies. In case of the Lanco Group, wherein while the parent company (i.e. Lanco Infratech Limited) was undergoing CIRP, the subsidiaries including the operational companies were not part of the CIRP initially, which resulted in liquidation of Lanco Infratech Limited due to lack of response by the bidders in the CIRP of Lanco Infratech Limited.
In view of the aforesaid cases, experience suggests that the individual CIRP for each group company is not only difficult but also counterproductive as it would push the group companies to liquidation. On the other hand, a combined resolution plan for debts for the group company during the Group Insolvency may result in maximization of value of assets of the corporate debtor and for the creditors, which is in line with the spirit of the Code.
Another case in point for propagating the idea of Group Insolvency is Jaypee Infratech Limited ("JIL"). In brief, JIL is a special purpose company incorporated to undertake the Yamuna expressway project along with other real estate projects. The CIRP of JIL commenced in August 2017, while its promoter company Jaiprakash Associates Limited ("JAL") was conducting its business as usual. As a common practice in the real estate sector, the construction and development contracts and right to collect certain charges from home buyer was given to JAL and the two companies were jointly developing many real estate projects. This commonality of operations and intermingling of responsibilities resulted in difficulty for the bidders to ascertain the real value of the assets of JIL. A Group Insolvency in such a scenario will not only attract more bidders and create competition in the secondary market but also maximize the value for the stakeholders involved in the resolution process.
Insolvency process of Videocon, Jaypee, Reliance etc. could have yielded better results in a Group Insolvency regime. The major benefit of Group Insolvency is that it will offer a better asset-liability scenario for the bidders to put forward their resolution plan. Group Insolvency will effectively resolve the issue of overlapping of debt facilities leading to double counting of voting share and the claim amount. A group moratorium (pursuant to a regulated initiation of Group Insolvency) will put an embargo on institution or continuation of suits etc. for the group companies, which will be more effective than having separate moratorium for each of the group companies.
In terms of procedural aspects, Group Insolvency will also help the forensic auditors, or the transaction auditors appointed by the resolution professionals to ascertain preferential/undervalues/fraudulent/extortionate transactions including inter-group transactions and will offer administrative convenience to the creditors, resolution professional and other claimants. It is a cost-effective mechanism, since there would be a common resolution professional and its advisors for the entire group clubbed under common CIRP. It will also improve the information asymmetry between the group companies and will bridge the data-gaps, which will be beneficial for the resolution professional to run the CIRP.
The Code is silent on Group Insolvency, however, there are positive steps being taken by the government to fill in the lacuna. The Insolvency and Bankruptcy Board of India ("IBBI") has recently decided to have an advisory body for guidance & stakeholder consultations on the issues of implementation of Code on continuous basis which will be also looking into Group Insolvency. Recently, the Insolvency Law Committee has constituted a working group on Group Insolvency, which will soon present its report to IBBI suggesting a suitable framework for Group Insolvency.
Implementing Group Insolvency framework will not be without its own challenges and teething troubles. Law makers need to be mindful of the inherent issues which may come with the Group Insolvency process such as alignment of management of multiple group companies by single resolution professional, keeping the business of group companies as going concern during the CIRP; alignment of rights between different set of creditors, treatment of operational creditors etc. Nonetheless, considering the issues around CIRP for group companies such as value deterioration in the assets of the group companies and lack of bidders in the market for individual group company, the time seems right to further strengthen the Code by adding a chapter on Group Insolvency.
Disclaimer – The views expressed in this article are the personal views of the authors and are purely informative in nature.