A working group of experts have come out with a report on the group insolvency law. In what could be the first glimpse of the same, the report tries to lay down the basic character of the law by defining the concept of corporate groups, perverse behaviour and restrictions put in place for group entities during the insolvency procedure, recommending the timeline and elucidating procedural co-ordination.
The report suggests that for the purpose of the group insolvency, a corporate group should largely include holding, subsidiary and associate companies, as defined under the Companies Act, 2013. However, it recommends giving some discretionary power to the adjudicating authority to include companies that are so intrinsically linked as to form part of a 'group' in commercial understanding, but are not covered by the definition of the corporate group above.
The report talks about procedural co-ordination or consolidation of the insolvency processes of different group companies at any stage of the insolvency proceeding. The consolidation can start at the time of filing of applications for initiation of insolvency proceedings, formation of CoC, invitation of resolution process and even at the time of liquidation.
The report suggests a single application for initiation of insolvency proceedings against multiple companies from the same corporate group. It also favours appointment of single resolution professional, designation of single adjudicating authority and formation of group creditors' committee.
However, the report is not in favour of forcing all group companies under the insolvency to go for any of 'procedural co-ordinations' such as appointing single resolution planner or group creditors' committee. These should only be available to stakeholders. But the report insists on mandatory sharing of information and co-operation among insolvency professionals, Committee of Creditors and adjudicating authorities dealing with insolvency proceedings of group companies.
The working group that has drafted the report also recommends that the timeframe for proceedings of any company that has opened group coordination proceedings may be extended by an additional period of up to 90 days on an application to the Adjudicating Authority, such that the overall timeframe does not exceed 420 days (including time taken in litigation).
This approach, according to the working group, would help maximise the value of the assets of the corporate group by allowing adequate time to enable coordination proceedings to be conducted.
The report also envisages special situations where the adjudicating authority may find that the group structure is being used to exploit one or more group entities by the parent or other group companies to commit frauds and divert funds.
In such circumstances, the report suggests, the adjudication authority can bar certain related-party transactions, hold the parent company and its personnel liable if they are found guilty of improper conduct towards the debtor or its creditors, such as commission of fraud, diversion of funds, wrongful trading and mismanagement of the debtor as well as give priority to operational creditors over related parties.