IBBI proposes coordinated insolvency resolution for interconnected entities
Delhi, Feb 5, 2025
IBBI has noted that the current IBC process treats each entity as a standalone unit, overlooking the intricate web of interdependencies often present in modern business ecosystems
The Insolvency and Bankruptcy Board of India (IBBI), in a discussion paper, has sought a series of amendments to IBC regulations, including allowing the invitation of resolution plans concurrently for both the company under insolvency as a whole and for its specific businesses or assets.
“This proposal removes the requirement that resolution professionals can only seek asset-specific plans after attempts to invite resolution plans for the entire corporate debtor have failed,” the insolvency regulator said.
IBBI has noted that the current IBC process treats each entity as a standalone unit, overlooking the intricate web of interdependencies often present in modern business ecosystems. It said that the increasing prevalence of complex corporate structures with intertwined operations and finances in sectors such as real estate, power generation, etc., necessitates a more nuanced approach to insolvency resolution.
“The introduction of a regulated mechanism for coordination of CIRPs of interconnected entities is a push towards the much-desired but delayed group insolvency framework. This amendment, if it sees the light of day, will introduce a single RP for such group entities and will enable the consolidated acquisition of assets in the Indian stressed assets market,” said Sukrit Kapoor, partner, King Stubb & Kasiva, Advocates and Attorneys.
Recent insolvency cases, such as Videocon Industries Ltd and SREI Infrastructure Finance Ltd, have underscored the need for a more sophisticated approach to interconnected entities. The current framework, IBBI said, misses crucial opportunities to capitalise on synergies and mutual dependencies within corporate groups.
In 2019, a consortium of banks led by the State Bank of India had asked the National Company Law Tribunal (NCLT), Mumbai bench, to allow substantial consolidation of a group of 15 companies under the Videocon Group. NCLT held that while there is no single yardstick on the basis of which a motion for consolidation can or cannot be approved, some checks and parameters can be put in place.
“Though the NCLT Mumbai's judgment in the Videocon Industries case was a positive step toward introducing consolidation of CIRP, the absence of a statutory mechanism has made implementation difficult. Thus, in the long run, such a proposal would be beneficial for enhancing the effectiveness of the resolution process,” said Piyush Agrawal, partner, AQUILAW.
IBBI has suggested joint hearings, common resolution professionals, information-sharing protocols, and coordinated timelines for the coordination of insolvency processes across interconnected entities. It was observed that the absence of a formal mechanism for coordinating CIRPs across interconnected entities leads to inefficiencies, escalated costs, and potential conflict, IBBI said.
IBBI has proposed amending the corporate insolvency resolution process (CIRP) regulations to make it mandatory for the resolution professional to present all resolution plans received to the Committee of Creditors (CoC), regardless of their compliance status. However, the resolution professional would be required to provide a detailed compliance report to the CoC, highlighting any areas of non-compliance with IBC provisions.
Some experts feel that the move shows that the initial reliance on resolution professionals under the IBC framework seems to be diminishing, with the trend shifting towards greater reliance on the CoC to drive the process with each amendment. “Granting power to CoC to review each expenditure on goods and services will result in the CoC micro-managing and over-monitoring the operation of the corporate debtor and may render the RP quite powerless. The balance of power between RP and CoC should be maintained while bringing changes and amendments to the Code,” said Pranava Charan, associate partner, IndiaLaw LLP.
The discussion paper has also noted that the provision of moratorium is being applied incorrectly in some cases and suggested measures such as the mandatory regular review of significant operational expenses, especially with respect to leased properties. IBBI noted that in many cases, significant operational expenses, including current dues for leased properties, are not being paid during the CIRP period, leading to an unreasonable accumulation of costs.
To enhance the attractiveness of interim financing for companies undergoing insolvency, IBBI has proposed amending the CIRP regulations to empower the Committee of Creditors to decide on inviting interim finance providers to attend CoC meetings as observers, with no voting rights. “This will enhance transparency, allow better risk assessment, and foster greater participation from interim financiers, ultimately improving the resolution process’s efficiency and effectiveness,” said Ketan Mukhija, senior partner, Burgeon Law.
Interim finance ensures that the corporate debtor continues as a going concern during the resolution period.
[The Business Standard]
