Mr. Shardul Shroff*
The Insolvency and Bankruptcy Board of India (IBBI) constituted a Working Group on Group Insolvency (WG) under the Chairmanship of Mr. U. K. Sinha (Former Chairman, Securities and Exchange Board of India) through an order dated January 17, 2019. The WG was required to submit a report recommending a complete regulatory framework to facilitate insolvency resolution and liquidation of corporate debtors (CD) in a corporate group (Framework).
With the introduction of the Insolvency and Bankruptcy Code, 2016 (Code), the consolidation of fragmented laws relating to reorganisation in distressed situations, insolvency resolution to reconstitute the company’s promoters, novate the loan agreements, settle dues of workmen and employees and pay the financial creditors (FCs) and operational creditors (OCs) and provides for liquidation relating to corporate persons.
The Code currently lists detailed provisions to deal with the insolvency of single standalone CD but it does not provide for a dedicated framework to synchronise insolvency proceedings of different group companies. Hence, the insolvency of different companies belonging to the same group but registered in different jurisdictions are dealt with through separate insolvency proceedings for each company. In the case of Videocon, Era Infrastructure, Lanco, Educomp, Amtek, Adell, Jaypee and Aircel, special issues were noticed due to the interconnection with other group companies. Some of the Adjudicating Authorities (AA) under the Code and the Hon’ble Supreme Court passed unique orders to ameliorate the issues being faced in group situations. This highlighted the need to examine the necessity of providing a group insolvency framework. The final recommendations of the WG are not yet complete.
In the meantime, cases pertaining to Videocon Industries Limited and 14 other group companies had been filed under separate applications by the State Bank of India (SBI) for itself as a FC and subsequently on behalf of all other secured creditors having common securities.
15 companies listed hereunder were proceeded against by the SBI under section 7 of the Code and in case of other few companies, OCs had filed insolvency petitions under section 9 of the Code. Particulars of these 15 companies, the status relating to admission, the dates of admission and the resolution professionals appointed are set out below.
|S. No.||Name of Videocon Group Company||Status before NCLT||Date of Order||Name of IRP / RP|
|2.||Electro World||Admitted||30.08.2018||Avil Menezes|
|3.||Value Industries||Admitted||30.08.2018||Dushyant Dave|
|4.||Evans Fraser||Admitted||30.08.2018||Avil Menezes|
|5.||CE India||Admitted||14.09.2018||Mahender Khandelwal|
|7.||Trend Electronics||Admitted||25.09.2018||Dushyant Dave|
|9.||Techno Kart||Admitted||25.09.2018||Divyesh Desai|
|10.||Century Appliances||Admitted||25.09.2018||Dushyant Dave|
|12.||Millennium Appliances||Admitted||31.08.2018||Avil Menezes|
|13.||SKY Appliances||Admitted||31.08.2018||Mahender Khandelwal|
|14.||PE Electronics||Admitted||31.08.2018||Divyesh Desai|
|15.||Techno Electronics||Admitted||31.08.2018||Divyesh Desai|
In unusual circumstances Mr. Venugopal Dhoot, the ex-director/promoter of the Videocon Industries Limited filed an application that all matters relating to CDs must be heard by one and the same court of Mumbai Bench of the National Company Law Tribunal (NCLT). Another application was filed by the SBI before the Principal Bench, NCLT, New Delhi seeking the same relief as was sought in Mr. Dhoot’s application for consolidation of corporate insolvency resolution processes (CIRPs) of all the CDs.
The Principal Bench disposed off both these applications by a common order on October 24, 2018 whereby the Hon’ble Principal Bench transferred all matters where CIRP under the Code had commenced (for the 15 CDs) to the NCLT Mumbai Bench. This transfer was based on the principle that it would serve the basic purpose of tagging of all matters to avoid conflicting orders, in connected matters.
The transfer was also justified on the ground that ‘there appears to be consensus amongst the counsels for all the parties, that all the petitions be placed before one Bench. Accordingly, we find that the lead case and majority of the matters are posted before the Bench headed by Hon’ble Justice MK Shrawat, Member, Judicial.’
The reason provided was serving the basic purpose of avoiding conflicting orders and facilitating the hearing, if the matters are posted before a single bench.
The request that all petitions be treated as part of one CIRP was not dealt with by the Principal Bench but was left open to be decided by the AA- NCLT, Mumbai.
After several hearings held in June 2019, the NCLT, Mumbai Bench in State Bank of India and another v. ;ideocon Industries Limited and others vide its order dated August 8, 2019 dealt with and disposed off the request to treat all the FCs driven petitions as part of one corporate insolvency resolution process as consolidated by a common order.
The SBI in Application No. 1306 of 2018 filed on October 30, 2018 had sought for an order of consolidation of the CIRP of the 15 companies referred above as each of these companies were promoted by the Dhoot family and formed part of the Videocon Group of Companies. 22 secured FCs of the Videocon Group were named in the application for consolidation as these had lent and advanced to some or several or all the 15 Videocon Group Companies.
It was also prayed that despite different insolvency commencement dates for each of the 15 CDs, by a common order, the NCLT ordered that September 25, 2018 may be considered as a common insolvency commencement date and that the maximum period for completing the CIRP be computed from that date onwards. The NCLT Mumbai did not alter the insolvency commencement days, but declared that the 180 days for CIRP of the consolidated corporate debtors will be counted from August 8, 2019.
Under the common order of August 8, 2019, from a total of 15 companies belonging to the Videocon Group, 13 companies had been consolidated as a group procedurally as well as substantively. Kail Limited and M/s. Trend Electronics were treated as single CDs and were not included in the group of 13 companies for which the consolidation order applied and a single resolution professional Mr. Khandelwal was appointed.
The need for consolidation was recognised since the businesses of most Videocon Group Companies were intertwined in a manner which made it a single economic unit e.g. a consortium of lenders have extended Rupee Term Loans to 13 group companies pursuant to a Rupee Term Loan Agreement where all 13 companies were co-obligators. This meant that all 13 companies were liable for the debts of one another. Isolated proceedings for each such CD did not yield any interest from resolution applicants as buyers.
The SBI, besides praying for substantial consolidation of proceedings into a single proceeding for the purpose of CIRP, should merge the assets and liabilities and guarantees inter se the Videocon Group Companies, and provide for a common resolution professional, committee of creditors and a resolution plan.
RECENT AMENDMENTS TO THE CODE: NEW MODES OF RESOLUTION
In the meantime, after the pronouncement of the order on August 8, 2019 the Central Government appointed August 16, 2019 as the effective date of coming into force of the Insolvency and Bankruptcy Code (Amendment) Act, 2019.
The definition of a resolution plan was amended by an explanation which was issued as a clarification. It was clarified that a resolution plan may include provisions of the restructuring of the CD including by way of merger, amalgamation and demerger.
Hitherto, the introduction of a transferee company as a recipient of demerged undertakings or an amalgamating company as recipient of amalgamated undertakings of the transferor company were not being permitted by the AA. Applications of merger of the loss making CD were not being permitted under the resolution plans with a new transferor company as the surviving enterprise or transferee company.
With this amendment, several new possibilities of newer modes of resolution will clearly emerge. This will also pose several problems on multiple opportunities and options of resolution being proposed by a resolution applicant. This will create complications in evaluation of different types of resolution plans as a single criteria cannot be proposed as a universal criteria for all different kinds of restructuring proposed by different resolution applicants.
There could be several other complications of consolidation of information memorandum in a single document with myriad possibilities of different kinds of plans emerging whereby the consolidated CD could be moved into separate transferee companies by order of the NCLT as the AA.
In its order of August 8, 2019, the AA-NCLT Mumbai extensively relied on American jurisprudence. Based on the American precedents, the AA was clear on its stance that consolidation must be done on a case to case basis. It was observed that every entity of the group is likely to have different debt to asset ratio and consolidation would invariably lead to redistribution of wealth among the creditors of various entities.
The AA however, held that consolidation must give fair treatment to all creditors and while consolidation may result in redistribution of wealth, such inequities must be heavily outweighed by practical consideration and expediency. The burden of an objector to the consolidation has to demonstrate the prejudice that will be posed if consolidation is granted and this objection must point out overwhelming inconvenience to persuade the court to reject the consolidation.
CRITERIA FOR CONSOLIDATION OF CORPORATE DEBTORS
The NCLT Mumbai, based on several illustrative factors that needed to be considered for consolidation of group companies, enumerated 14 different reasons or circumstances which would persuade an AA to consolidate several individual constituent CDs of a group into one single CD (consolidated) under a single process of CIRP with its attendant merger of assets and liabilities and guarantees, common resolution professional, common committee of creditors of the Group and a common resolution information memorandum and common resolution plan (with individual variants for parts of the treatment for standalone companies of the Group).
Such criteria for considering consolidation in the 13 Videocon companies were: (a) common control (b) common directors (c) common assets (d) common liabilities (e) inter-dependence (f) inter lacing of finance (g) pooling of resources (h) co-existence for survival (i) intricate link of subsidiaries (j) intertwined accounts (k) interlooping of debts (l) Singleness of economic units (m) common financial creditors (n) common group of corporate debtors.
The AA held that as long as such criteria can be demonstrated, the corporate insolvency resolution proceedings against the set of individual CDs of the group can be consolidated for the purpose of a consolidated corporate insolvency resolution proceeding for the group as a whole.
Procedural Propriety and Coordination: Conflicting Terrains
Since there is no substantive provision for group insolvency in the Code, as is currently in force, there is no form under the Code or in the National Company Law Tribunal Rules, 2016 (NCLT Rules) for filing a consolidation application.
Rule 4 of the NCLT Rules require that Forms annexed at Annexure A, where no form is prescribed to cover a contingency necessitates a form as may be approved by the Registrar for usage.
Rule 11 of the NCLT Rules provides for the inherent powers of NCLT and reads as follows:
`Nothing in these Rules shall be deemed to limit or otherwise affect the inherent powers of the Tribunal, to make such orders, as may be necessary for meeting the ends of justice or to prevent abuse of the process of the Tribunal.’
Rule 14 of the NCLT Rules further provides that:
‘The Tribunal may on sufficient cause being shown, exempt the parties from compliance with any requirement of these rules and may give such directions in matters of practice and procedure, as may be considered just and expedient on the application moved in this behalf to render substantial justice.’
While these are general regulations concerning NCLT Rules of procedure, there are separate special regulations concerning the insolvency resolution process for corporate persons, viz, the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 (CIRP Regulations) which have been notified on November 30, 2016 and further amended from time to time. It is a normal rule of interpretation that when there are special regulations for procedure for insolvency resolution, which are different from general rule of procedure, the special rules or regulations under the insolvency law, will prevail.
The special CIRP Regulations embody the procedure pursuant to regulation 2 to regulation 39 thereof. Regulation 39A to regulation 40 onwards deals with the provisions of liquidation costs and assessment of sale as a going concern. Regulation 40A deals with the model timelines for CIRP under the Code.
There is no provision in the CIRP Regulations for dealing with group insolvency and therefore, they are distinctly short and uncertain for the procedure to be adopted by the AA, the resolution professional (RP) and resolution applicant for a group insolvency.
Whether the AA, which is a creature of the Code can make its own rules and regulations for dealing with consolidation, is highly doubtful as a legal proposition. Section 239 of the Code provides that Central Government will prepare the form, the manner and fee for making an application before the AA for initiating corporate insolvency resolution process by FCs under section 7(2). Similarly, section 239(2)(e) provides the same in relation to OCs. Section 239(2)(f) provides for the procedures and forms for a CIRP by the corporate applicant. All these indicate that only the Central Government can make rules and the Tribunal, as the AA, is not competent to make either the forms or the manner and the fee for initiating CIRP by either the FC or the OC or the CD itself, when these are a consolidated group of a single promoter group. The AA would be transgressing into an area which is an exclusive domain of the Central Government of making Rules. Under Section 240 the IBBI is the competent authority to make regulations consistent with the Code and rules made thereunder and the AA cannot step in and take over IBBI’s power.
The CIRP Regulations are made in exercise of the powers under section 5, 7, 9, 14, 15, 17, 18, 21, 24, 25, 29, 30, 196 and 208 read with section 240 of the Code. Under all these Sections of the Code only enable the IBBI as the Authority empowered to make regulations under the Code.
Once again, as explained above, the AA and the Appellate Authority constituted for conducting the CIRP or the liquidation process are creatures of a statute and are not competent by law to create adhoc procedures not sanctioned under the Code. The AA or the Appellate Authority cannot usurp the rule/regulation making authority and power of either the Central Government or the IBBI to do so. The AA or the Appellate Authority are not authorised to do so within the powers conferred on an them under the Code.
The CIRP Regulations will have to be amended for dealing with group insolvency as there are no inherent powers under the Code nor a specific power to exempt anything in relation to the CIRP Regulations under the Code. Existing regulations will require amendments to deal with group insolvency.
There is no scope of introducing Tribunal made procedures (equivalent to a regulation) for determining their own process, for deciding the rules of the game concerning group insolvency both on a substantial basis or on a procedural basis. The unique manner in which the AA has extended the concept of individual CD, CIRP Regulations to group CDs consolidated by the AA is a leap of faith but not sanctioned by the Code or regulations made thereunder. The Code as law must have substantive provisions for dealing with group insolvency and the CIRP Regulations must also have substantive provisions and procedure for dealing with group insolvency. The complications arising from this judicial extension of CIRP based on individual CDs to group CDs consolidated can be demonstrated from the lack of procedure legislatively provided. The chaos that this can cause is that each AA in separate jurisdictions will prepare its own ad hoc process, which could be arbitrary or uncommon with other Tribunals destroying the comity of NCLTs and uncommon standards to test the procedure when the same is not legislatively provided by either the Central Government or the IBBI. No such freedom of making procedure is available without standard common regulations applicable to all AAs or NCLTs across India.
The WG for group insolvency, as constituted, is precisely for the purpose of avoiding adhocism when group insolvency is to be undertaken by the Tribunals.
PROPOSED FRAMEWORK FOR GROUP INSOLVENCY
In order to have a legally enforceable framework for incorporation by amendment to the Code and for modification of the regulations, the WG has to provide the outline for draft Bill, which will first apply to domestic companies and thereafter to cross-border domestic and/or foreign subsidiaries of Indian companies. It is a moot question whether there will be different phases in building up substantive consolidation at the first phase itself. Such an outline for group insolvency may first need to deal with only holding companies’ subsidiaries and associate companies and may not extend to companies broadly described as part of the group. The test for determining the group in cross-border transactions may pose difficulties for determining a single economic unit test especially when it could have multiple tax jurisdictions.
Some of the other issues for consolidation for the purposes of group insolvency may require procedural coordination mechanisms which would be applicable only for the purposes of group insolvency where insolvency applications under sections 7, 8 and 10 of the Code are filed.
Companies that have not defaulted and companies that are financial service providers, where the Code is not applicable, may not be covered under the procedural mechanism unless the same are integrally and inextricably linked. Besides the statutory amendments, the regulations to be amended by IBBI will have to provide for cooperation, communication and information between insolvency professionals (IPs) or, after first hearing appointing a single insolvency professional.
Similarly, requirements of a group committee of creditors (CoC) and a single AA for all members of the group will be required. A separate procedure for a joint application for initiation of a group insolvency of multiple companies in multiple jurisdictions will have to be drafted and included the regulations so as to enable a single AA to deal with all companies within the group at a single location rather than with multiple AA. This would encourage reduction of conflict of interest rules, sharing of costs among FCs of the entire group. The group creditors committee has to have legal sanction whilst not replacing the CoC of each company, so as to facilitate distribution among the creditors of individual CDs from the pool of total receipts for settlement of the group sale or reorganisation. There will have to be a change in the mandatory content of the resolution plan for a group, where the novations will be made to the individual securities and substitution of lenders in each company of the group where secured creditors are not being substituted or replaced. The role of the majority has to be prescribed in the group CoC where at the option of such majority of FCs a group coordination committee is set up. A statutory form of an agreement coupled with provisions which enable declaration of facts pertaining to creditor details of the entire group and their priorities inter se will have to be prepared.
The powers, duties and responsibilities of the group coordinators will have to be stipulated. They would have to propose an expression of interest and an invitation to submit a consolidated resolution plan for synchronised resolution of the group by way of invitation of a common expression of interest, the draft resolution plan of a group, the certified balance sheets of each of the constituents of the group as of the commencement date of the resolution plan, the segregated payments of the constituents from the group payment by the resolution applicant, in the event of a sale of the group. For the sake of clarity of the group CoC, particulars of the sacrifices sought for each of the constituent members of the group will have to be provided in the common draft resolution plan.
There would have to be a provision whereby a company may opt out of the group coordination proceedings by vote of a majority of its CoC, which are constituents of the group creditors committee.
The jurisdiction of the AA may also be chosen under the statutory agreements under the applicable regulations or new provisions inserted therein.
Since dealing with a group is far more complicated and requires far more coordination, the Parliament will have to consider more time that the current 330 days applicable to a single CD undergoing a resolution proceeding.
The new amendments to the Code, would have to also enable IBBI to cover regulations applicable in relation to group insolvencies right from the stage of commencement of group insolvency proceedings both for the CIRP phase and the insolvency resolution provisions. If Rules under the Code have to be changed, these must be undertaken by the Central Government.
Even in relation to remedies against perverse behaviours either by the constituents of the group or by several of the group members, principles for avoidance of certain transactions and imposition of liability for wrongful and fraudulent trading would be required to capture group transactions that have been value destructive. A statutory agreement form will be required under the regulations which will have to provide for the consent of the FCs constituted as a group, for inter se adjustment of securities or modification of securities or relinquishment of securities from the individual constituents of the group committee of creditors and the provisions applicable when a fraud is discovered in a constituent group company.
Just as the inter-creditor agreements facilitate single company resolution, in case of a group insolvency the creditors must facilitate an economic case for group insolvency as part of the Code and the regulations and the manner of group distribution and the changes in the security, pursuant to sanction of a resolution plan of the group. This should be facilitated by amending the Code and amending the regulations. Essentially the security of a secured creditor will extend to the money realised from a sale or other form of resolution plan. The regulations for a group resolution plan will have to provide for satisfaction or modification of the charges when new lenders are introduced or when they continue as creditors.
Even the moratorium provisions under section 14 will have to be amended to enable a group moratorium being declared. The factors judicially examined in the Videocon case are not approved legislatively as these can only be considered as suggestions for the amendment of the Code for evaluation of whether a group amenable to group insolvency exists in fact. Interconnectedness of transactions and various group companies operating as a single economic unit has to be used to justify the introduction of a codified framework for resolution of group companies.
Procedural coordination at a group level, enabled by law, but implemented as decisions of the CoC and on the basis of cooperation among creditors, IPs and the Adjudicating/Appellate Authority and courts would be obligatory.
Substantive consolidation of group companies, which is essentially treating all group companies consolidated by the AA as one for the purpose of resolution.
The amendments to the Code will have to define the term ‘group’, leaving some free play in the joints for the AA to determine whether any entity outside the definition forms part of the group in the commercial sense. There has to be a legislative sanction for the law applicable to group insolvency both in respect of resolution plan and in relation to insolvency procedures applicable for a consolidated group insolvency.
Gaps in the Procedure in the Absence of Amendment of the Law
The Videocon order of August 8, 2019 does not incorporate the rules of accountancy, and Accounting Standards for consolidation of distressed CDs of a group and the computation of loss for the purposes of taking benefit in matters concerning Minimum Alternate TAX (MAT) as a group versus MAT in the context of a single assessee CD, the constitution of multiple boards of each CD under the Code, the individual restructuring of standalone accounts, the consolidated restructuring of consolidated accounts, the fractured treatment of continuity of employees vis-a-vis each constituents of the group, the procedure of allocation of fresh capital structures of individual constituent corporate debtors, the appointment of Key Managerial Personnel (KMPs) for each CD as persons to be held responsible for individual CDs for the nonperformance of part or whole of the resolution plan and several other procedures are absent and cannot be made up by the AA or the Appellate Authority, based on situations or circumstances in the adjudicating process. These have to be part of the Code and the regulations as otherwise these would be unenforceable and not benchmarked across the several NCLTs constituted in different parts of India.
However, in the Videocon order, the NCLT has not delved into what constitutes a ‘group’ or how should it be defined. This was facilitated by the promoter Mr. Dhoot’s application, which specified the Videocon Group. The NCLT has laid down a set of tests (not exhaustive) to determine the financial and operational interconnectedness of a set of companies. This is a unique feature of group insolvency, that each case may present a new set of challenges with an ever expanding definition of the term ‘group’. As such, defining a ‘group’ while leaving residual powers to the NCLT to expand its definition may not be a good idea, to begin with.
The NCLT in the Videocon order has effectively done, under the extant provisions of the Code, what the legal amendments to the Code and the regulations needs to do. The Videocon order questions the very need for amendments to the Code for enabling group insolvency law and procedure. The NCLT through its order has achieved both the above mentioned objectives of a group insolvency procedure: (i) procedural coordination by appointing a single NCLT, common RP and CoC, and (ii) substantive consolidation by merging the assets, liabilities, guarantees of 13 group entities but with total uncertainty on what next as enforceable law under the Code and regulations for group insolvency. It is unclear how the proposed amendments will enable group insolvency proceedings, given that the NCLT has found a way to commence a group insolvency under the law as its exists today (albeit with great uncertainty on enforceability).
The American Bankruptcy Code also does not expressly authorise substantive consolidation, but it recognises that a Chapter 11 plan may provide for the ‘consolidation of the debtor with one or more persons‘ as a means of implementation. A majority of courts have concluded that bankruptcy courts have the power to substantively consolidate debtor entities under section 105(a) of the Bankruptcy Code, which provides that a court ‘may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions‘ of the Bankruptcy Code.
Under Section 60(5) of the Code as well, the AA is vested with the power to dispose of ‘any question of priorities or any question of law or facts, arising out of or in relation to the insolvency resolution or liquidation proceedings of the corporate debtor or corporate person.’ The NCLT in its order has also observed that ‘the extent to which assets of the corporate entities are found to be hopelessly commingled must necessarily be decided on a case–by–case basis.’
The NCLT order establishes the absence of any disabling provisions under the Code for group insolvency proceedings. However, any amendment to the Code will not necessarily change status quo for domestic group insolvency proceedings, which treatment of CIRP to a group prima facie appears to be ultra vires the Code, and unconstitutional as arbitrary.
Thus, this enforceable law of group insolvency has a long way to go if it is to be validly adopted as a uniform law and procedure under the Code and regulations applicable throughout the territory of India.
1 MA 1306/2018 (and 8 other MAs) in CP No. 02/2018 and 14 other Company Petitions
*( Mr. Shardul Shroff is the Chairman of Shardul Amarchand Mangaldas & Co., Advocates & Solicitors.)