Insolvency & BankruptcyGroup Insolvency – Proposed Framework and Its Significance

Introduction

India’s business landscape is characterized by large groups of interconnected companies, including parent firms, subsidiaries, and affiliates with deeply intertwined financial and operational relationships. When a company within such a group faces insolvency, the distress often spreads throughout the network, making isolated resolutions inefficient and value-destructive.

Traditionally, the Insolvency and Bankruptcy Code, 2016 (IBC) has addressed only single-entity insolvencies, which in group scenarios has led to parallel proceedings, conflicting outcomes, and suboptimal asset recoveries. The growing recognition of these challenges, highlighted by notable judicial observations and recommendations from expert panels, has underscored the need for a new regulatory approach.

It is now widely anticipated that a formal “group insolvency” framework will be introduced through an amendment to the IBC to streamline resolutions for related companies. This proposed reform aims to facilitate joint proceedings and coordinated plans, thereby maximizing value for all stakeholders and aligning India’s insolvency regime with international best practices.

Background: The Rationale for Group Insolvency

• Prevalence of Business Groups: Many Indian conglomerates operate through complex structures of multiple subsidiaries, associates, and joint ventures. The financial health of one entity is often intrinsically linked to others within the group.

• Limitations of Single-Entity Insolvency: Under the current IBC regime, separate insolvency processes for related entities often run in parallel. This can lead to conflicting decisions, inefficient use of assets, and diluted recoveries for creditors.

• Global Trend: Leading jurisdictions like the European Union, Singapore, and the United Kingdom have already made significant strides in adopting group insolvency mechanisms to enable coordinated procedures for interconnected entities.

Key Features of the Proposed Insolvency Framework

• Statutory Framework: The proposal involves introducing a voluntary group insolvency structure, likely under a new chapter in the IBC. This would empower the Central Government to notify rules for joint proceedings and the coordination of insolvency among corporate group members.

• Definition and Eligibility: A “group” would be broadly defined to include holding companies, subsidiaries, and other interconnected entities as specified. Voluntary participation would be enabled for companies wishing to resolve distress collectively, provided that clear interlinkages and the potential for value enhancement can be demonstrated.

• Initiation of Group Proceedings: Group insolvency could be initiated by creditors of the group or by an insolvency professional on behalf of corporate debtors within a group. The application must satisfy the National Company Law Tribunal (NCLT) of common interests, ensuring synergy in a collective resolution.

• Consolidation and Coordination Orders: The NCLT would be empowered to pass consolidation or coordination orders for the simultaneous processing of Corporate Insolvency Resolution Processes (CIRPs), joint Committee of Creditors (CoC) meetings, and, in appropriate cases, the pooling of assets. This would prevent redundant efforts and inconsistent decisions.

• Appointment of a Group Resolution Professional: A single “group resolution professional” could be appointed to manage the entire group CIRP, subject to CoC and NCLT approval, facilitating consistent administration and information gathering.

• Submission of Joint Resolution Plans: The framework would allow for the submission of consolidated or coordinated resolution plans for the entire group, enabling strategic sales, better asset utilization, and maximized recoveries.

• Safeguards and Protections: The framework is expected to include safeguards to ensure that group proceedings are used only where genuine financial and operational linkages exist. It would also allow any dissenting entity or creditor to petition the NCLT for exclusion from the process if their interests are prejudiced.

Operational Mechanism and Process Flow

1. Group Application Initiation: An application is filed before the NCLT demonstrating the eligibility and benefits of a group insolvency resolution.
2. NCLT Examination: The Tribunal assesses the interconnectedness among the group companies and evaluates if a coordinated process would maximize value for creditors.
3. Consolidation or Coordination Orders: The NCLT may issue orders to consolidate the insolvency proceedings of group entities or coordinate timelines and actions among multiple CIRPs.
4. Appointment of Group Resolution Professional: A single resolution professional may be appointed to oversee the entire group insolvency process, ensuring unified management
5. Formation of Joint CoC: Creditors from group companies may form a joint or linked CoC to facilitate streamlined decision-making.
6. Submission of Consolidated Resolution Plans: Stakeholders submit coordinated resolution plans covering multiple group companies for strategic restructuring.
7. Approval by NCLT: The NCLT analyzes and approves the consolidated or coordinated resolution plans to ensure compliance and fairness.
8. Implementation of Resolution Plan: The approved plan is implemented, with proceeds distributed according to the plan and waterfall priorities across the group companies.
9. Dissent and Exclusion Provisions: Entities or creditors dissenting from the group process can seek exclusion or separate treatment before the NCLT to protect their interests

Significance of the Proposed Framework

• Value Maximization: Pooling assets and liabilities facilitates strategic resolutions that can realize higher value than isolated sales. Groups can be sold as going concerns, preserving operational synergies.

• Procedural Efficiency: A unified process would eliminate duplicate proceedings, conflicting court orders, and procedural waste, streamlining timelines significantly.

• Clarity for Creditors and Investors: Single-point decision-making would minimize delays and confusion for lenders with exposure to multiple entities in a group. It would also help investors better assess risk and value in conglomerate structures.

• Alignment with International Best Practices: This reform would bring India’s corporate insolvency regime on par with EU, UK, and Singapore standards, improving the ease of doing business and attracting foreign investment.

• Prevention of Value Erosion: Prompt and holistic action under a group framework can prevent asset-stripping and preferential transactions that may occur in siloed insolvency resolutions.

Challenges and Grey Areas

• Complexity of Implementation: Defining and demonstrating which entities are sufficiently “interconnected” to qualify as a group may be contentious.

• Protection of Dissenting Interests: Balancing the collective interest with the rights of minority creditors or healthier group companies that may seek exclusion could be challenging.

• Judicial Capacity: The NCLT/NCLAT’s heavy caseload may pose a challenge to coordinating and approving complex group plans in a timely manner.

• Cross-Border Issues: The interaction of India’s domestic group insolvency regime with international insolvency rules in cases involving foreign affiliates remains to be tested.

• Potential for Strategic Abuse: There are concerns that debtors could misuse the group process to delay resolution or shield assets from specific creditors.

Recent International Experience

• European Union: The EU’s Recast European Insolvency Regulation promotes cooperation among member states, allowing for group coordination proceedings to synchronize insolvency processes across different jurisdictions.

• Singapore: Singapore has adopted the UNCITRAL Model Law on Cross-Border Insolvency, which enables the recognition of foreign proceedings and facilitates coordinated restructuring of corporate groups.

• United Kingdom: The UK insolvency regime provides for “group administration,” empowering the joint handling of related companies to protect the overall value of the group through coordinated restructuring or liquidation.

The Way Forward

• Swift issuance of clear rules and guidelines for group insolvency implementation.
• Capacity building and specialized training for NCLT and NCLAT benches.
• Establishment of robust mechanisms to protect dissenting creditors and group entities.
• Enhanced integration with international insolvency frameworks like the UNCITRAL Model Law.
• Adoption of digital platforms for improved case management and stakeholder communication.
• Continuous monitoring and refinement of the framework based on practical challenges.
• Strong judicial oversight to ensure fairness, transparency, and timely resolutions.

AMLEGALS Remarks

The introduction of a formal group insolvency framework would mark a landmark evolution in Indian insolvency law, addressing the complexities of modern business groups. By facilitating coordination, maximizing asset values, and streamlining procedures, such an amendment promises to close critical gaps in the IBC regime.

While the potential benefits are enormous, the success of the framework will depend on addressing procedural, interpretational, and operational hurdles. Strong judicial oversight, robust rules, and stakeholder accountability will be critical. As India’s insolvency ecosystem matures, group insolvency stands to become a vital tool for safeguarding stakeholder interests and preserving business value in an interconnected corporate world.

— Team AMLEGALS

Please reach out to us at rohit.lalwani@amlegals.com in case of any query.