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Group Insolvency: Relevance of Substantive Consolidation in Indian Context

– Vinod Kothari and Sikha Bansal[1] | resolution@vinodkothari.com

Introduction

Insolvency law has always to be aligned to economic realities; when it comes to solving the problem of corporate insolvencies, an economy cannot disregard the prevalent corporate structures. The design which corporates adopt to conduct business must, in fact, be one of the most critical factors while designing the insolvency laws.  Thus, if group assets, contracts, technological assets, investments or intellectual or other business rights remain scattered across a complicated group of intertwined entities, an insolvency law framework that remains constrained by the bounds of “legal entity” is unlikely to achieve the objective of ensuring preservation and, in case of liquidation, equitable distribution of corporate value for the benefit of stakeholders.

Propagation of group structures in India

Therefore, the key question to start is: do Indian businesses have complex group structures, involving layers of entities, whether legally structured as subsidiaries or not? An OECD report, prepared  with significant inputs from SEBI[2], citing data collected from 4100 listed companies as of December 2020, says that there are on an average 50 subsidiaries for listed companies forming part of NIFTY-50, a number which has tripled over the last 15 years. It goes further to say that there are 15 listed companies which have more than 100 subsidiaries, whereas there are some which have over 200. Further, out of the 100 largest listed companies by market capitalization, approximately 40 India listed companies had three or more layers of subsidiaries/step-down subsidiaries, surpassed only by Singapore and Malaysia among OECD countries.

If the numbers stated in the above survey are surprising, it must be submitted that these numbers do not incorporate (a) number of layers on the top of the listed entity, that is, the chain of holding companies or companies; (b) associates, as quite often, the shareholding may be split across several group entities with none of them having sufficient holding to be termed as holding company; (c) the chain of companies above or below a listed company where the chain is snapped by use of a chain-breaker, that is, an entity which itself is not a subsidiary of the listed entity, but owns or is owned by a vertical chain of entities. The plausible economic reasons for existence of group structures are: efficiencies in operations, reduced dependence on external finances, and economies of scale. And as such, one would often see overlaps in asset use (e.g. asset of one entity being shared across group entities, or used as security against borrowings of entities), liabilities (group entities being joint obligors, third party security providers), common stakeholders (shareholders, directors, lenders, etc.) across group entities. However, such complex group structures have the potential to house complex web of transactions, thereby increasing the opacity of such structures and chances of wrongdoings, misconduct and lawlessness. Holding entities are most commonly employed to raise finance for group holdings, using pledge of operating companies’ shares, and use such borrowings to finance the operating companies. It is also commonplace practice to have a group’s brand or intellectual property owned by a promoter group entity. As there were many cases where group transactions were involved and/or put to question by the courts during insolvency proceedings[3].

The complete article has been published in the “Annual Publication 2023: IBC – Evolution, Learnings and Innovation” and can be accessed on the link here, from Page 281 onwards.

[1] With research support and assistance, gratefully acknowledged, by Neha Malu

[2] https://www.oecd.org/corporate/ca/Company-Groups-in-India-2022.pdf

[3] Yadubir Singh Sajwan & Ors. Vs. M/s. Som Resorts Private Limited [Company Petition No. (IB)-67(ND)/2022], ArcelorMittal India Pvt. Ltd. v. Satish Kumar Gupta [Civil Appeal nos.9402-9405 OF 2018] etc.

Recent trends in IBC

Resolution Division

(resolution@vinodkothari.com)

The field of Insolvency in India has of late seen constant change in order to adapt the ever moving global scenario. Being one of the topics that has been trending ever since its inception and with the possible introduction of several new concepts including subjects like pre pack insolvency and some recent amendments due to the pandemic, a compilation on the following topics in our presentation providing a brief glance through on the same has been made-

  1. Amendments due to COVID 19
  2. Separate Insolvency process for MSME’s
  3. Expected introduction of pre pack insolvency framework
  4. Assignment of NRRA
  5. Group Insolvency
  6. Developments in Going Concern Sale

http://vinodkothari.com/wp-content/uploads/2021/01/Recent-trends-in-IBC.pdf

 

 

Recent Reforms in Insolvency and Bankruptcy Code

-Sikha Bansal & Megha Mittal

(resolution@vinodkothari.com

The past year has seen several reforms and amendments in the insolvency framework, be it enforcement of provisions for individual insolvency, or inclusion of FSPs under the insolvency regime. Additionally, Committees have been actively working on two extremely relevant aspects which presently the Code does not provide for- Group Insolvency and Cross Border Insolvency.

In our presentation (link given below) we have tried to collate the recent amendments and the workings of the Committee reports so as to provide a one-stop reference for  reforms as on Mar’20- see here

 

 

VIDEOCON RULING: SETTING A BENCHMARK FOR GROUP INSOLVENCY

Richa Saraf

(richa@vinodkothari.com)

It is common business practice for group entities to regularly engage in related party transactions such as cross collateralisation, guarantee comforts, tunnelling or significant influence arrangements. While such structures largely respect the separate legal status of the group companies, practice suggests such inter-linkages in business, operations and management often raise significant challenges when any one or more entity in the group become insolvent[1]. In such cases, for maximisation of value to the stakeholders and to enhance the prospects of resolution, creditors may seek for substantive consolidation.

Read more

Group Insolvency: Moving from “Entity” to “Enterprise”

-Sikha Bansal (resolution@vinodkothari.com)

 

Recently, the Working Group led by Shri U.K. Sinha, submitted its Report on group insolvency, recommending a complete framework to facilitate insolvency resolution and liquidation of corporate debtors in a “group”. The Report was submitted by the working group on 23.09.2019.

See our presentation here on various aspects of group insolvency proceedings as suggested by the Working Group, and includes discussion on procedural coordination versus substantive consolidation along with case laws and case studies.