TOWARDS ENTERPRISE RE-ORGANISATION: ACHIEVING FINALITY IN CROSS-BORDER INSOLVENCY IN INDIA?

Introduction

While India’s attempt towards realigning the domestic bankruptcy regime through the formation of the Insolvency & Bankruptcy Code (IBC), 2016, was hailed as a much-needed reform, provisioning the reciprocity requirement u/s. 234 as a stop-gap measure for cross-border insolvency was frowned upon. Despite the hurdles identified in Jet Airways and Videocon cases, the legislative regime of IBC has been unable to recognize group-based regulation of corporate debtors. The World Bank ranks India 20^th on its Related Party Transactions Index, suggesting the pervasive business practices among group entities to regularly engage in cross collateralization and inter-corporate loans. Such a corporate façade disregards the corporate veil by consolidating its associate and subsidiary verticals collectively for the default by the holding company. This article adds to the existing scholarship by making a reference to the judicial developments in insolvency resolution.

Recognizing Enterprise Reorganization – Judicial Activism?

While the Insolvency Law Committee categorized the issue of group resolution of insolvency as being “too complex to be introduced”, the judiciary tackled the bull by the horns through judicial innovation. As part of the “dirty dozen” accounts referred by the Reserve Bank of India, the liquidation order by the NCLT, Hyderabad in Lanco Infratech Ltd. is considered a  “hurried decision” as the insolvent subsidiaries were not made part of the corporate insolvency resolution process (CIRP), resulting in a lack of response by the resolution applicants. Similarly, had Amtek Auto been resolved along with its two insolvent entities, the value realisation for creditors of the group collectively would have been larger than independent resolution. Considering the larger interest of allottees in Sachet Infrastructure Pvt. Ltd., the National Company Law Appellate Tribunal (NCLAT), set aside the order of NCLT, New Delhi, and ordered for procedural coordination amongst 5 subsidiaries of the corporate debtor with a single resolution professional for purposes of CIRP. Similarly, even the Supreme Court in Bikram Chatterji ordered for property attachment of the 40 group companies of the Amrapali Group. NCLT, Mumbai, in Venugopal Dhoot Case, in the absence of an existing framework for enterprise reorganization, took recourse to its equity jurisdiction by relying on judicial precedents from the USA and UK and ordered for consolidation of 13 out of 15 group entities of the, based upon the commonality of factors. In the most recent order by NCLT Mumbai in Videocon Industries, the Court ordered for consolidation of foreign oil and gas businesses of the Videocon Group based upon the test determined by itself in Venugopal Dhoot. While the above list of cases evidence the journey of the judiciary from hesitation towards total consolidation of corporate entities, the latest order in Videocon Industries lays down the ground for further development of cross-border insolvency in India.

Coordination versus Consolidation – An Ever-Evolving Tussle?

Relatively older economic legislation like the Competition Act, 2002 and Micro, Small and Medium Enterprises Development Act, 2005 categorically discern the “enterprise approach” in the adjudication of claims. However, the IBC does not envisage a framework to synchronise enterprise insolvency resolution. While accounting standards have shifted from the cryptic entity to enterprise-based reporting through consolidated financial statements, the same is required in the insolvency regime for better resolution. Considered as multi-dimensional, this approach involves “looking upwards”, towards controlling entities, or “looking downwards”, towards subsidiaries and associates, or “looking laterally”, towards sister entities having shared control. When the assets of the stressed corporate group are scattered across inter-connected entities or lending facilities are availed to one or more of the entities while considering them as part of the same group, it may not be feasible to achieve a successful rehabilitation without synchronization. The process of enterprise reorganization can largely be divided into two forms, being in constant conflict with each other, namely procedural coordination mechanism and substantive consolidation mechanism.

While coordination does not involve the pooling of the corporate balance sheets, the insolvency is resolved through a common process. It has the effect of not only reducing administrative and corporate costs associated with the multiplicity of judicial proceedings on substantially similar issues but also results in eliminating information asymmetry by provisioning for a common adjudicating authority, a common resolution professional, a common creditors committee, a common resolution plan and even declaration of a common moratorium. It provides judicial certainty by avoiding inconsistent adjudication, thereby maximizing investor and stakeholder confidence. 

Consolidation, on the other hand, is a largely extraordinary remedy, disregarding the corporate veil by treating the group as a single economic enterprise and may result in differential treatment of the same class of creditors. Due to the dove-tailed nature of inter-corporate structures, the inter-company balances also get eliminated and is better suited for the creditor-in-possession model. While only insolvent entities of the group can be resolved together through coordination, there is no such restriction in consolidation, thereby its utilization is limited only in cases of abusive use of the corporate façade. Statistics suggest that the average time-period taken by CIRPs is breaching the statutory threshold of 330 days on a consistent basis and the consolidation approach can significantly reduce judicial time. Moreover, focussing on the enterprise value of the corporate group as a whole can attract better bids for insolvency resolution.

Working Group Recommendations – Revisiting State Sovereignty?

While provisioning for dedicated bankruptcy courts, well-trained insolvency professionals and seamless interaction between bankruptcy courts of different jurisdictions is a far cry, the Insolvency & Bankruptcy Board of India constituted Working Group (WG) was presented with an opportunity to change the domestic landscape of cross-border insolvency by suggesting a viable framework for implementation of enterprise reorganization. The WG, taking inspiration from the EU Insolvency Regulation, 2017 (EUIR), in its Report, recommended implementing the envisaged framework in a phased manner with primacy to coordination over consolidation by making relevant amendments to IBC. Taking reference from jurisprudence available in mature solvency frameworks for foreign nations, the WG recommended that the framework should be applicable only on companies defined as “holding, associate and subsidiary” under the Companies Act, 2013 and additionally on entities so intrinsically linked to the corporate group in terms of business understanding. For example, EUIR 7 includes subsidiary undertaking and US Federal Rules of Bankruptcy Procedure includes “affiliated companies” within the definition of group companies. The WG by limiting the application towards domestic entities and not considering the off-shore subsidiaries follows a downtrodden territorialist approach where local assets are meant for local creditors, regardless of “internationalization of proceedings”. While the IBC follows the “creditor-in-possession model”, the WG adopted the globally recognized “debtor-in-possession” approach by suggesting a blanket exclusion of solvent entities of the corporate group for purposes of the insolvency estate. With the focus of recommendations grounded on “maximising the value of assets or lowering the costs of proceedings”, the implementation of the coordination process is based upon resolution professional being the group coordinator-for purposes of co-operation and information sharing between resolution professionals, the committee of creditors, resolution applicants and the courts with a single joint application. Although large portions of rules pertaining to perverse behavior are provided under wrongful and fraudulent trading provisions, the WG recommends extending the average period of the conclusion of CIRP until 420 days.  Despite the WG not providing any grounds for implementation of consolidation mechanism, the NCLT through the “commonality of factors test” has made significant progress in this arena, suggesting the need to revisit the recommendations.

Conclusion

Eighteen years since the Mitra Committee Report on Bankruptcy Law acknowledged issues of cross-border insolvency for the first time, there has been no significant progress in their codification. Despite the pieces of evidence of overarching assistance by the courts in Jet Airways and Videocon Industries, the WG has failed to acknowledge the “modified universalism” approach, let alone considering the UNCITRAL Model Law on Enterprise Insolvency, 2019. The WG recommendations are a classic illustration of the evolution of legal reforms revolving around doctrinal research and accidents of litigation without adopting the “living law”. The above-mentioned jurisprudence attempts to highlight that evolution of IBC can be prospered through judicial activism; however, non-codification of the rules on enterprise reorganization can result in greater judicial creativity and interpretation by the tribunals. Despite the globalization of markets necessitating the unification of legal frameworks governing commercial transactions, the WG evidences that it is far from easy in practice. 

[Urmil Bhavesh Shah is a Fourth-Year Student at Auro University, Surat. He can be reached at urmilshah27@gmail.com.]