Group Insolvency vis-a-vis Videocon Ruling

In today’s cutthroat competition among the various companies in the economy, one can make a way for itself through expansion of the business by incorporating subsidiary companies. In simple words, undeniably a corporate group is an amalgamation of parent and subsidiaries. The principle of ‘Separate Legal Entity’ laid down in the landmark case of Salmon v. Salmon nonetheless is applicable even in this regards. Therefore, going with this approach whenever there is a default on the part of any company, there goes a separate Corporate Insolvency Resolution Process against them by their respective creditors even though it is a part of a group. Under Common Law, it is preferred the consolidation of all the defaulted entities of a group together, as the group insolvency has three major objectives, namely; value maximisation, procedural and cost efficiency and lastly, the stakeholders’ interests.

Single Entity Approach

In the cases of corporate groups, one must consider the ‘Doctrine of Single Entity’. According to the doctrine, there is a presumption under Competition and Anti-Trust Laws, that a corporate group acts as a single entity in a market, irrespective of its separate corporate existence. Delving, in the Single Entity Doctrine it can be inferred that this doctrine is a multi-dimensional concept. One of such dimension is the Defensive approach of this doctrine entitles the group to include both the holding and the subsidiary and hence, all their actions would be subjected to doctrine of single entity considering them one as a whole. It must be understood that, subsidiary companies although have their own separate legal entity however, are subjected to the common control of the parent company. In other words, a corporate group comprises of holding as well as its subsidiary companies, although working as a separate entity but have a common control. Therefore, instead of a separate entity approach, the approach of single enterprise should be considered. One of the three objectives is to maximise the value of the assets in order to recover. In case of separate entity, the assets of all the subsidiary companies would scatter among them, and subsequently, the main objective to maximise the value of the assets would be defeated.

UNCITRAL Law on Group Insolvency

In the 54th session of UNCITRAL, the Working Group V proposed the group insolvency model. This model aimed to facilitate a smooth administration to initiate insolvency proceedings involving a corporate group. In the year 2019, the UNCITRAL, approved the new model providing a framework for initiating corporate insolvency of enterprise as a whole across various jurisdictions. The main aim of this model is to facilitate ‘group insolvency solution’ as to maximise and maintain the assets’ value. According to them, this will aid a sense of co-operation between the authorities of respective jurisdiction. There is a possibility that as per the factual matrix a company can be treated as a separate entity and the insolvency proceedings of the same will enable them to reorganise domestically. However, there are various circumstances where it is more feasible to consider the enterprise as a whole and in these situations, this new model would be an appropriate solution.

With the approval of this new model there is a new path paved for group insolvency proceedings. This framework enables members of a corporate group to come together in a ‘planning proceeding.’ In this proceeding, they further engage in separate insolvency initiation and subsequently appoint a representative of the group to enable and implement a group insolvency solution.

UNCITRAL by adopting this new model for group insolvency has paved a way for a scope of group insolvency proceedings. Although, it will develop and be successful at its own pace, however, even if some jurisdictions adopt or follow this approach, there will be smoothness in administration of group insolvency proceedings.

Status under Indian Law

The Insolvency & Bankruptcy Code, 2016 does not have a wide scope of group insolvency, however the judiciary is constantly keeping up to fill this void. The Supreme Court in the case of Arcelor Mittal case observed that, the principle of disregarding the corporate veil in certain cases would be applicable to group companies as well as to consider them as one economic entity. The Court further noted that, the veil might be pierced in case there is a possibility of an undue advantage by separate legal entity principle.

In Edelweiss Asset Reconstruction case, the NCLAT held that since there were five companies under the same corporate group, there was a requirement to initiate ‘group insolvency proceedings’ instead of initiating them separately. Further, in the case of Bikram Chatterjee v. UoI, the Supreme Court determined the nature of the transactions of the defaulting group companies and further held that the proceedings must be dealt with the whole corporate group. In the matter of UNITECH, the Supreme Court ordered recently, that owing to the factual circumstances of the case, the moratorium shall be against both UNITECH as well as its subsidiary companies. Hence, from this list of cases we can infer the role of judiciary in paving a way to opt for group insolvency proceedings whenever demanded by the circumstances.

Therefore, although there is no authentic and proper legal framework for the initiation of group insolvency in India. However, the judiciary through its pronouncements and interpretation is paving a way for a new hope of ‘group insolvency proceedings.’

Videocon Judgment: A Road to Group Insolvency

The NCLT, Mumbai recently recognised the concept of group insolvency in the case of State Bank of India v. Videocon Industries Ltd. and held that the insolvency resolution process of all the defaulting companies of the Videocon Group must be considered solely as a single entity.

The NCLT in this case considered the ‘check list’ approach laid down by the US jurisdiction. The tribunal observed that while determining a common ‘consolidation’ there are certain key factors one must keep a check on. The factors include, common-control, common assets and liabilities, inter-linkages, extent of inter-dependence among the companies, etc. The tribunal however strictly said, the list of these key factors is not exhaustive in nature.

Further, NCLT on the basis of the list of factors classified the consolidation process into categories. According to the tribunal, whether there can be a consolidated insolvency proceedings or not is a matter of case -to- case basis. In cases where the default companies are entwined to such an extent that it is impossible to maximise the value of assets if individual corporate insolvency proceedings is initiated. However, in cases where there exist a possibility that even after initiating separate proceedings there are chances to obtain maximum value from the assets of each subsidiary company.

The bench finally concluded that, “if an entity is self-serving, self-dependent and self-sustainable, a view can be taken for not granting consolidation”. In addition, considering this, the tribunal granted a consolidated insolvency proceedings of 13 companies altogether and kept the remaining separate.

Analysis

The chairman of the debtor approached the court in order to eliminate his exposure as a personal guarantor. However, it would have been better where instead of safeguarding personal guarantor’s interest, the application addressed the issue of benefiting the creditors. The tribunal in the Videocon case beautifully considered and stated the laws of other countries and then drew an application with respect to them in this case. The tribunal did not fail to explicitly mention that the matter of group insolvency totally depends on the factual matrix and is not a general principle. However, as there was an involvement of subsidiary companies abroad in this case, the NCLT failed to recognise the laws of those countries where the subsidiaries operated. Also, the judgment did not delve into the concept of cross-border insolvency for the same which can prove to be a bit challenging while imposing IBC provisions abroad.

Further, most of the times, in cases of group insolvency there is a deception that the stakeholders are dealing with the corporate group instead of its subsidiary. Therefore, the check- list approach applied by the tribunal somehow detects this fraud and tries to provide a solution to the dilemma of consolidated insolvency.

Therefore, the tribunal did a commendable job while deciding this case. The court correctly pointed out that the request of group insolvency should be an exception and not a general rule as it may ends up being inimical to some in terms of maximisation of the value of assets in total.


Author - Anuja Jha, National Law University, Nagpur.

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