Mint Explainer: How can voluntary group insolvency smoothen IBC proceedings?

Voluntary group insolvency refers to a process where a group of related companies, often within the same corporate structure, voluntarily enters insolvency proceedings. This can occur when the group as a whole is unable to meet its financial obligations. 

It also provides a framework for the financial creditors across multiple group entities to work together on the resolution of the entire group. 

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Mint takes a look at old group insolvency cases under the Insolvency and Bankruptcy Code (IBC) to examine what it could mean for Indian companies.

Why is there a need for voluntary group insolvency?

The aim is to restructure or wind up a group’s affairs in a way that maximizes returns for creditors. Group-structured business are interrelated and rely on one another structurally, financially, and operationally. This calls for an integrated approach during the restructuring or liquidation process, with the goal of maximizing value. According to insolvency lawyers, the implementation of the group insolvency option will enable the bankruptcy courts to pierce the corporate veil and hold group companies accountable as a single economic unit. In addition, it will also make the resolution process quicker and less expensive for group companies.

Which companies have gone through group insolvency?

The first case to be taken up under the IBC for group insolvency was State Bank of India (SBI) vs Videocon Industries. In 2021, SBI filed an application with the National Company Law Tribunal's (NCLT) Mumbai bench, requesting the substantive consolidation of fifteen Videocon entities into a single proceeding for the resolution process. The case then set a precedent for other group insolvency cases. 

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Similarly, in the case of Edelweiss Asset Reconstruction Co. Ltd vs Sachet Infrastructure Pvt. Ltd, group insolvency was initiated to ensure relief to the homebuyers of the insolvent firm. The National Company Law Appellate Tribunal (NCLAT) directed that a simultaneous corporate insolvency resolution process be started against a group of five companies through a common resolution professional to develop and complete a residential real estate project. 

In another instance, in Axis Bank Ltd vs Lavasa Corp Ltd, the NCLT consolidated the Lavasa group insolvencies. This was done to prevent potential losses from fractured resolutions. The NCLT also acknowledging that the subsidiaries' insolvency was largely dependent on the outcome of their parent's insolvency.

What are legal experts saying?

Yogendra Aldak, partner at Lakshmikumaran and Sridharan said: “Group insolvency would streamline the resolution process, reduce costs, and enable the creditors to secure true value for interconnected companies, ultimately making the process more efficient and cost-effective with improved procedural coordination. Furthermore, the group insolvency would be voluntary and would only be ordered by the NCLTs if stakeholders and group would benefit from a combined resolution potentially raising asset value." 

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On the other hand, Daizy Chawla, managing partner, S&A Law Offices, suggests that in any engineering, procurement, and construction (EPC) company where there are different projects being implemented through special purpose vehicles (SPVs), its always viable to have group Insolvency as resolution applicant will be more interested in getting control over all SPV’s instead of the single EPC company.

What are the challenges?

Aldak pointed out that challenges include the composition of a common committee of creditors leading to issues of coordination, conflict of interest, or interference with any company operating in the group. Additionally, issues such as extension of liability in group proceedings and tribunals enforcing orders outside their jurisdiction may create further confusion among stakeholders. 

Another insolvency expert, on the condition of anonymity, said even as the insolvency courts are trying to bridge the gaps in the IBC, there are concerns over implementation of such proposals at a faster pace in India.

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