Key highlights of Report on Group Insolvency

CS Peer mehboob , Last updated: 21 December 2023
Share

Background

The Insolvency and Bankruptcy Code, 2016 (Code/IBC) does not explicitly provides for dealing with cases of group insolvency. However, the Adjudicating Authority (AA) at several occasions, has attempted to consolidate the insolvency resolution processes of such companies because of the higher possibility of revival and better value realization. For instance, in the insolvency resolution of Corporate Debtors (CDs) such as Videocon, Era infrastructure, Lanco, Educomp, Amtek, Jaypee, Adel Landmarks etc., wherein special issues arose from their interconnections with other group companies. This highlighted the need to examine the desirability and feasibility of having a framework for insolvency resolution of group companies.

Recognizing the need for a framework on group insolvency, the Insolvency Regulator i.e. Insolvency and Bankruptcy Board of India (IBBI/Board) constituted a Working Group on Group Insolvency (WG) under the chairmanship of Shri U.K. Sinha. The WG was given a mandate to recommend a regulatory framework to facilitate insolvency resolution and liquidation of CDs in a group. The WG submitted its recommendations on September 23, 2019. Ministry of Corporate Affairs (MCA) had also constituted the Cross-Border Insolvency Rules/Regulation Committee (CBIRC) to make recommendations on Cross Border Insolvency. The CBIRC submitted its first Report on the rules and regulatory framework for cross border insolvency on 15th June 2020. To build on the work undertaken by the Working Group, the remit of CBIRC was expanded on 21st February 2020, to analyse the UNCITRAL Model Law on Enterprise Group Insolvency (“MLEGI”) and to make recommendations governing the resolution of group enterprises for the purpose of IBC.

Key highlights of Report on Group Insolvency

On 18th January 2023, the MCA had placed the second report of the CBIRC on enterprise group insolvency based upon UNCITRAL Model Law for enterprise group insolvency. According to CBIRC, the enactment and implementation of group insolvency provisions would minimize costs and maximize the value of entities involved. This article covers the key highlights of the recommendations of the Committee on Group Insolvency.

What Is Group Insolvency

The business of corporations is increasingly conducted by enterprise operating as “group”. This term covers various forms of organisation that are linked together by some form of ownership or control. ‘Group Insolvency’ refers to a legal framework to either coordinate insolvency proceedings of corporate debtor belonging to a group or to have a common resolution for them.

Key Highlights of the Recommendations of the Committee

To build on the work undertaken by the Working Group and to recommend draft framework to facilitate group insolvency resolution based on a review of the recommendations of the MLEGI and the Code., the Ministry of Corporate Affairs constituted this committee (CBIRC) under the Chairmanship of Dr. K. P. Krishnan to analyse the MLEGI. The key highlights of the recommendation of the report submitted by the committee are listed below:

RECOMMENDATIONS
1.	To provide a group insolvency framework under the Code	A group insolvency framework that is voluntary, flexible and enabling in nature should be provided under the Code. Such framework may be introduced in phases. In the first phase, only provisions governing domestic group insolvency may be enacted.
2.	Adoption of MLEGI	The MLEGI may not be adopted at present, and its adoption may be considered after enactment of single entity cross border insolvency laws and based on learnings from its implementation.
3.	Provisions governing substantive consolidation	Provisions governing substantive consolidation i.e. pooling of assets and liabilities of an insolvent group, may not be provided at present. The need for such provisions may be contemplated at later stage, on the basis of practice and jurisprudence evolved in this regard.
4.	Definition of “group”	A broad and inclusive definition of “group” should be provided so as to include a large number of corporate debtors within the ambit of the framework.
5.	Not applicable for Financial Service Providers.	The group insolvency framework may not apply to financial service providers notified under section 227 of the Code.
6.	Not applicable to solvency entities of the group	The group insolvency framework under the Code should apply only to corporate debtors in respect of whom a corporate insolvency resolution process or liquidation process is ongoing. The law shall not apply to solvent members of the group.
7.	Procedural coordination mechanism	A list of procedural coordination mechanism should be available under the group insolvency framework.
8.	Filing of Joint Applications	Filing of joint applications for initiation of corporate insolvency resolution proceedings against multiple corporate debtors belonging to the same group may be permitted.
9.	Same Adjudicating Authority for all group entities	All proceedings related to corporate debtors belonging to a group may take place under the same Adjudicating Authority.
10.	Common insolvency professional	A common insolvency professional may be appointed as the resolution professional or liquidator of corporate debtors that belong to the same group.
11.	Group CoC	A group CoC may be formed with adequate representation from CoCs of all group members.
12.	Cooperation and coordination with each other	The CoCs and insolvency professionals appointed in respect of corporate debtors belonging to the same group should mandatorily be required to cooperate, coordinate and share information with each other.
13.	Group coordination proceeding	The law should enable group coordination proceedings for corporate debtor belonging to the same group and undergoing a corporate insolvency resolution or liquidation process under the Code. The AA may open group coordination proceedings and appoint a group coordinator.
14.	Group Strategy	A group coordinator will conduct the group coordination proceedings and develop a group strategy. A group strategy may provide various combinations of measures that synchronise the insolvency resolution or liquidation proceedings of participating corporate debtors.
15.	Approval of CoCs for group strategy	A group strategy should require the approval of all participating CoCs by 66% of each of their voting shares respectively. Once approved group strategy shall be binding on all parties to the group strategy.
16.	Termination of Group coordination proceeding	A group coordination proceeding shall terminate if the group coordinator applies for a termination order.
17.	Cost of conducting group coordination proceeding	The costs of conducting group coordination proceedings should form part of the insolvency resolution or liquidation process costs of participating group.
18.	Additional 90 days for completion of CIRP	Where group coordination proceedings are opened, an additional 90 days may be added to the time period for completion of he insolvency resolution process for the participating corporate debtors.
19.	No specific provisions to deal with perverse behavior	Specific provision to deal with perverse behavior may not be required as provisions dealing with avoidance, fraudulent or wrongful transactions under the Code may be sufficient.
20.	Use of technology and capacity building measures	Effective capacity building measures and increase in use of technology during implementation will bolster the efficiency of the group insolvency framework.