[Piyush Rathi and Saksham Agrawal are 4th Year B.A. L.L.B students at NALSAR University of Law]
A majority of large scale businesses today grow around a parent company that branches out into a group of companies, each of which performs a specific function. Such a structure in the form of a conglomerate provides for administrative convenience to the managers of the companies along with a range of tax benefits. Generally, these companies are interdependent on each other due to the cross-leveraging of borrowings. Owing to this interdependency, it is often seen that if one of the companies is declared insolvent, other companies under the group face a similar fate. Initiation of such insolvencies by different lenders leads to appointment of different resolution professionals (RPs), non-cooperation during resolution process and a fractured resolution. Successful resolution of an entity’s insolvency in a conglomerate is often dependent on the resolution of its other group entities’ insolvencies. The aim of this post is to explore methods of synchronization between insolvency proceedings of entities in a conglomerate.
Common Resolution Professional
One way to bring a degree of harmony in different insolvency proceedings is by appointing a common RP. This will lead to significant decrease in the cost of identifying the group structure and the ownership of assets of the companies. Insolvency proceedings in the matter of Reliance Communications, Reliance Telecom, and Reliance Infratel led to the National Company Law Tribunal (NCLT) appointing a common RP for the three entities. The Insolvency and Bankruptcy Code, 2016 (IBC) does not specify any mechanism which requires appointment of one RP for group companies’ insolvencies. Different lenders initiating resolution process also appoint different RPs. Different RPs might also start working contrary to each other’s interest and this might not be the most effective way to resolve the insolvency due to reasons explained above. A common RP can be more effective.
However, the appointment of a common RP for multiple insolvency resolution processes comes with a significant burden. There are no guidelines as to how many resolution processes an RP can be appointed for. The code of conduct provided in the Insolvency and Bankruptcy Board of India (Insolvency Professionals) Regulations, 2016 require an RP to refrain from accepting too many assignments to which he cannot devote adequate time. Further, the current framework does not allow for the RP to share information related to companies and treat the entities separate without information being shared between the committees of creditors (CoCs) due to confidentiality concerns. However, in case of one RP, it is imperative that he is allowed to share information to maintain efficiency in the process and save on time and resources. Recently, the Ministry of Corporate Affairs (MCA) has invited stakeholders to comment on the proposed insolvency reform particularly regarding group insolvency-related issues. One possible approach which this post advocates is through a consolidated resolution plan which calls for the pooling of assets and liabilities of the group companies.
Recently, in the matter of Vodafone, a petition requesting for consolidation of all petitions and treating all insolvency resolution processes as one in respect of all its group companies was filed. The principal bench of NCLT directed to transfer all insolvency petition related to the group to be heard in a single tribunal in Mumbai. However, the adjudicatory authorities are yet to decide on plea regarding allowing a single resolution process. It is worth noting that currently we do not have any legal framework that supports a single resolution plan for the entire group of entities. The MCA has invited stakeholders to comment on the proposed insolvency reform particularly regarding group insolvency-related issues.
Pooling of Resources
This approach suggests creating a single resolution plan for a group of companies that are facing insolvency proceedings. A single resolution plan in such a situation would mean insolvency of the group as if it were a legal entity of its own. Some scholars suggest that this would mean ignoring the separate legal personality of each company and adopting a position foreign to the general principles prevailing in the legal system of our country. However, such consolidation of the plan for purpose of insolvency would not mean the piercing of the corporate veil. Piercing of corporate veil is a remedy against equity whereas a consolidated resolution plan is a remedy against another creditor. In this suggested method, only the resources of companies which can be brought under the ambit of the IBC under sections 7 to 9 will be pooled.
A single resolution plan would have a range of benefits along with a theoretical backing furthering fairness for all the creditors (financial and operational) and employees. Group companies, especially wholly-owned subsidiaries, are managed in many instances as a single entity. The group treasury function is located in one company with all cash within the group being swept into the bank accounts of one company; the human resources function is typically centralized; brands are developed for the group, not for individual companies; there is only one CEO, one CFO; all or most employees are employed by one or just a few entities within the group. Overlapping of interests and cross-leveraging is a common phenomenon in corporate group structures. Holding companies raising finance to fund its subsidiary is a prevalent practice. Cross- corporate guarantees whereby each company guarantees the debts of each other company within the group are commonplace to the Indian banking system, where the lenders see a group as a whole.
Due to these intricacies, a standalone insolvency resolution plan either does not work or will fetch lower valuation than a group as a whole would do. A consolidated resolution plan would in such a situation overcome these shortcomings and may fetch better valuation. It is in such a situation that the group of companies who are party to this cross- guarantee should be considered akin to a single legal entity for the purposes of these insolvency proceedings. A consolidated resolution plan in such a situation may overcome these shortcomings and may fetch better valuation.
Further, there are several other advantages of adopting a holistic approach to treatment of group insolvencies such as easier enforcement of corporate guarantees provided by group companies, easier detection and mitigation of undervalue and preferential transactions, increased ownership of the resolution plan as interests of all creditors shall be factored in, faster disposal of insolvency applications of group companies and reduction in resolution or liquidation costs for the group as a whole.
Therefore, while engaging in the process of the CoC making a resolution plan, it is encouraged that all assets of the group of companies should be available to meet all of the liabilities of the companies within the group. This would mean that there is one RP appointed for the entire group of companies. This RP then pools the resources of the companies and one CoC is formed. The subsequent resolution plan should also address all of the sick companies in the group. At this stage two options can be explored; one, where all the companies maintain the structure as they did pre-insolvency proceedings; two, where the resolution plan proposes a new structure of the companies where some or all of the companies are merged post-insolvency proceedings. Both of these options have their own set of pros and cons. It is upon the RP, CoC and the NCLT to decide which option would lead to best results for all the stakeholders.
However, it should be recognized that there can be a certain member in group companies that, due to its structural difference, runs independently from the group company. Such a member should be allowed the option of an opt-out from sharing the group liability. Such opt-outs should be restricted under bona fide circumstances.
Since the IBC has only been in force for three years, it is an evolving area of the law. The insolvency of group companies was not contemplated by the original text of the IBC; however, due to the realization of evolving business needs, guidelines and strategies by the Insolvency and Bankruptcy Board of India on the same are imperative. This post has taken inspiration from US, EU, Australia and Germany and has attempted to highlight the possible ways in which the insolvency regime in India can cater to these needs.
– Piyush Rathi