New group insolvency framework in the works
The report also said that insolvency proceedings of companies which are not categorised as holding, subsidiary or associate but are intrinsically linked with other companies undergoing insolvency be similarly consolidated
A report, authored by a working group led by former Sebi chairman UK Sinha, noted that consolidated or coordinated insolvency proceedings may allow for more efficient resolution for companies with inter-corporate liabilities and operational linkages.
The need for a group insolvency framework has come to the fore in the case of defaults by the Videocon Group, in which the insolvency proceedings of 13 group firms have been consolidated into one proceeding by the Mumbai bench of the National Company Law Tribunal. Meanwhile, 169 group entities of Infrastructure Leasing and Financial Services group are also undergoing debt resolution proceedings outside the Insolvency and Bankruptcy Code (IBC).
The report recommended that insolvency proceedings of companies that are part of a corporate group – holding, subsidiary and associate companies -- be consolidated with a single resolution professional, and adjudicating authority as well as a group committee of creditors (CoC) to assist individual CoCs at the discretion of stakeholders.
The report also said that insolvency proceedings of companies which are not categorised as holding, subsidiary or associate but are intrinsically linked with other companies undergoing insolvency be similarly consolidated. The group did, however, recommend that coordination and information sharing between RPs, CoCs and adjudicating authorities be made mandatory in the case of separate insolvency proceedings from companies which are part of the same group.
The report says that a “group coordinator” may also be appointed to propose a strategy for group resolution, which may include inviting common resolution plans for the distressed group companies. The working group has recommended that creditors be allowed to vote against a joint resolution by majority vote. The framework has also proposed that stakeholders be allowed to seek an additional 90 days for resolution above the current 330-day limit under the IBC to allow for a value-maximising resolution.
The working group noted that creditors tend to treat group entities as a single economic entity even when they were lending to distinct entities.
Experts have said that the recommendations may help in maximising value of assets in cases where companies are better resolved together.
“There are many cases where it is better to sell companies together than separately,” said Manjor Kumar, partner at law firm, Corporate Professionals, adding that the law does not provide for a group sale.