Clarity is on the cards for conglomerates heading for bankruptcy, with the government working on a new legal regime to decide how and which group companies should be selected for the rescue act.
Central ministries are discussing a bill that will amend the Insolvency and Bankruptcy Code (IBC) to expand the resolution rules from individual entities to groups of enterprises, a person aware of the matter said.
Group insolvency is not absolutely new under IBC, the person said. “There are a few instances of group insolvency process undertaken by tribunals under existing IBC provisions. However, the proposed amendments to IBC will bring clarity and an overarching regime for the benefit of stakeholders including creditors, investors, resolution professionals and the judiciary,” the person said on condition of anonymity.
In the case of Videocon Industries Ltd, the company law court had ordered the resolution of over a dozen group companies under IBC’s existing provisions.
The proposed regime will allow selection of group entities with significant interlinkages for bankruptcy action, the person said. Besides, financially healthy enterprises within a group that have not defaulted on payment obligations may be kept outside group insolvency proceedings.
“It (the proposed regime) would facilitate clubbing of enterprises within a group that has forward or backward integration, common assets or vital material or service supply arrangements, for coordinated insolvency proceedings,” said a second person aware of the matter, also on condition of anonymity. If an enterprise within a group is independent in operations, it could be kept out of group insolvency proceedings, said this person.
Queries sent to a spokesperson for the corporate affairs ministry on Wednesday remained unanswered until press time.
Given the significance of the proposed amendments and the nuances involved, the government does not want to hurry with the changes, the first person cited above said. The proposed regime has to strike a balance between coordinated bankruptcy action against several companies together, and honouring the limited liability of individual entities.
With the bill not having made it to Parliament in the winter session concluding on Friday, it is now expected only next year.
The group insolvency framework under IBC is a long-felt need enabling value maximization of the group entities and avoiding multiple insolvency proceedings, said Ashok Haldia, an expert in accounting and auditing. “The framework may provide for procedural and substantive consolidation of group entities so identified based on criteria of control, significant ownership, backward and forward linkages, etc. The framework may give clear guidance on what constitutes a group applicable to all entities that would fall within the definition of corporate debtor for the purposes of IBC,” Haldia said.
So far, of the over 7,050 cases admitted to the National Company Law Tribunal (NCLT), over 800 cases have seen resolution under IBC, while 2,294 cases went into liquidation. Many of these are legacy cases. However, the bankruptcy code has led to the settlement of a large number of payment defaults prior to their admission in tribunals. According to the Insolvency and Bankruptcy Board of India (IBBI), till August, over 26,500 applications to NCLT involving default of ₹9.3 trillion have been withdrawn.
Improving the outcomes of debt resolution—salvaging the business as quickly as possible and reducing the haircut for creditors—has been a key goal of the government. IBBI has been trying to address this by quickening the admission of cases in bankruptcy tribunals, and expediting the process of stitching together a revival plan.
The NCLT was assigned in June 2016 to handle both Companies Act-related disputes and IBC cases. The IBC came into force towards the end of 2016, and the cases under the Board for Industrial and Financial Reconstruction (BIFR) were shifted to the NCLT after that.
While IBC has achieved significant progress over the erstwhile regime under the Sick Industrial Companies Act, many legacy cases that were transferred from the erstwhile judicial forum, the BIFR to the NCLT that replaced it, have affected the overall statistics of IBC outcomes.
In these legacy cases, the companies had little assets for preparing a recovery plan, leading to their liquidation orders or high haircuts for lenders in many cases.