## India’s Move Towards Voluntary Group Insolvency: A Game Changer for Corporate Restructuring?
The Indian government is set to introduce a revolutionary change in its insolvency framework with the proposed introduction of ‘voluntary’ group insolvency. This innovative approach, expected to be implemented during the winter session of Parliament in December, aims to maximize asset value and keep corporate insolvency resolution costs low for interconnected companies.
Understanding Voluntary Group Insolvency
Voluntary group insolvency refers to a process where a group of related companies, often sharing a corporate structure, voluntarily enters insolvency proceedings. This typically happens when the group as a whole faces financial challenges and struggles to meet its obligations. The framework enables financial creditors across multiple group entities to collaborate on resolving the entire group’s financial distress.
The Need for Voluntary Group Insolvency
The primary goal of group insolvency is to restructure or wind up a group’s affairs in a way that maximizes returns for creditors. Group-structured businesses are intricately linked, relying on each other structurally, financially, and operationally. This interdependence necessitates an integrated approach during restructuring or liquidation, aiming to maximize value for all stakeholders.
Insolvency lawyers believe that implementing group insolvency will empower bankruptcy courts to pierce the corporate veil, holding group companies accountable as a single economic unit. This approach promises a faster and more cost-effective resolution process for group companies.
Previous Group Insolvency Cases in India
The first case to utilize the IBC for group insolvency was the State Bank of India (SBI) vs Videocon Industries. In 2021, SBI filed an application with the National Company Law Tribunal’s (NCLT) Mumbai bench, seeking the substantive consolidation of fifteen Videocon entities into a single proceeding for resolution. This case served as a precedent for subsequent group insolvency cases.
Another notable case involved Edelweiss Asset Reconstruction Co. Ltd vs Sachet Infrastructure Pvt. Ltd., where group insolvency was initiated to ensure relief for homebuyers of the insolvent firm. The National Company Law Appellate Tribunal (NCLAT) ordered a simultaneous corporate insolvency resolution process for a group of five companies, appointing a common resolution professional to develop and complete a residential real estate project.
In another instance, Axis Bank Ltd vs Lavasa Corp Ltd saw the NCLT consolidate the Lavasa group insolvencies, preventing potential losses from fragmented resolutions. The NCLT acknowledged that the subsidiaries’ insolvency was heavily reliant on the parent company’s resolution outcome.
Expert Opinions on Voluntary Group Insolvency
Yogendra Aldak, a partner at Lakshmikumaran and Sridharan, believes that group insolvency will streamline the resolution process, reduce costs, and enable creditors to secure true value for interconnected companies. This, in turn, would make the process more efficient, cost-effective, and procedurally coordinated. Aldak emphasizes that the group insolvency would be voluntary and ordered by the NCLTs only if stakeholders and the group would benefit from a combined resolution, potentially leading to increased asset value.
Daizy Chawla, managing partner at S&A Law Offices, suggests that group insolvency is particularly valuable in engineering, procurement, and construction (EPC) companies with multiple projects implemented through special purpose vehicles (SPVs). A resolution applicant, in this case, would be more interested in gaining control over all SPVs rather than just the single EPC company.
Challenges to Implementing Voluntary Group Insolvency
Aldak highlights potential challenges, including the composition of a common committee of creditors, which could lead to coordination issues, conflicts of interest, or interference with operating companies within the group. Additionally, concerns regarding the extension of liability in group proceedings and tribunals enforcing orders outside their jurisdiction might create confusion among stakeholders.
An anonymous insolvency expert raises concerns about the pace of implementation of such proposals in India, despite the insolvency courts’ efforts to bridge gaps in the IBC.
The Road Ahead for Voluntary Group Insolvency
The proposed introduction of voluntary group insolvency holds immense potential to transform India’s corporate restructuring landscape. This move could significantly enhance the efficiency, cost-effectiveness, and fairness of insolvency proceedings for interconnected companies. However, addressing the challenges and ensuring a smooth implementation process will be critical to realizing the full potential of this groundbreaking initiative.