Group Insolvency Mechanism under the IBC Process

What’s in Today’s Article?

• Why in News?
• About the New Law to Appoint CEC and ECs
• Background in which the New Law to Appoint CEC and ECs Introduced
• Why was the New Law to Appoint CEC and ECs Challenged?

Why in News?

• The Reserve Bank of India (RBI) governor envisaged a Group Insolvency Mechanism for better recovery of dues of creditors under the Insolvency and Bankruptcy Code (IBC) process.

What is the Insolvency and Bankruptcy Code (IBC)?

• Insolvency vs Bankruptcy: While insolvency results from an inability to pay debts due to a lack of assets, bankruptcy occurs when an application is presented to an authority declaring insolvency and requesting to be declared bankrupt, which will last until discharge.
• About the IBC 2016:
  • It is the bankruptcy law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy.
  • It is a one stop solution for resolving insolvencies which previously was a long process that did not offer an economically viable arrangement.
  • It aims to protect the interests of small investors and make the process of doing business less cumbersome.

What is the process followed under the IBC?

• When a corporate debtor (CD) or a company which has taken loans to run its business, defaults on its loan repayment, either the creditor or the debtor can apply for the initiation of a CIRP.
  • CIRP stands for Corporate Insolvency Resolution Process (CIRP), which comes under Section 6 of the IBC.
• Earlier, the minimum amount of default after which the creditor or debtor could apply for insolvency was ₹1 lakh.
  • But, considering the stress on companies amid the pandemic, the government increased the minimum amount to ₹1 crore.
• To apply for insolvency, one has to approach a stipulated adjudicating authority (AA) under the IBC - the various benches of the National Company Law Tribunal (NCLT) across India are the designated AAs.
• The Tribunal has 14 days to admit or reject the application or has to provide a reason if the admission is delayed.
  • The CIRP or resolution process begins once an application is admitted by the AA.
  • The amended mandatory deadline for the completion of the resolution process is 330 days.

What is Group Insolvency?

• Group Insolvency is a framework where if multiple entities of a single corporate group go insolvent, their resolutions can be consolidated in one court so that -
  • Firstly, the group can be restructured as a whole and
  • Secondly, its combined assets can be utilised in the best interest of both the group corporate and the debtor
• Globally, there are two diverse facets of Group Insolvency. Some jurisdictions have adopted either procedural coordination or substantive consolidation.
  • Substantive consolidation pertains to the consolidation of assets, liabilities, and operations of multiple entities within a group, disregarding their separate legal entity status.
  • On the other hand, under procedural coordination, the approach is limited to aligning procedural aspects like filing requirements, timelines, coordination and not mingling the entities per se.
• In the Indian context, in the absence of a specified framework, the group insolvency mechanism had been evolving under the guidance of the Courts.

Need for the Group Insolvency Mechanism under the IBC Process in India

• The criticisms of the IBC are on two fronts - the time taken for resolution and the extent of haircuts vis-à-vis the admitted claims.
• As of Sept 2023, 67% of the ongoing CIRP cases had already crossed the total timeline of 270 days including possible extension period of 90 days.
• The average time taken for admission of a case during FY 2020-21 and FY 2021-22 stood at 468 days and 650 days respectively.
  • Such a long degree of delays will substantially erode the value of the assets.
• There are a multitude of factors playing out here, namely,
  • The evolving jurisprudence related to the Code;
  • Litigatory tactics adopted by some corporate debtors;
  • Lack of effective coordination among creditors;
  • Bottlenecks in the judicial infrastructure.
• On several occasions, the AA have raised concerns regarding the conduct of the Committee of creditors (CoC - decides whether the defaulting company is viable enough to be restructured and given a fresh start/ liquidated) in the insolvency proceedings. This includes -
  • Lack of participation in the CoC meetings,
  • Lack of engagement or effective coordination among creditors,
  • Disproportionate prioritising of creditors' individual interests above their collective interests when drafting resolution plans, which can be damaging to the plan itself.

Q1) What is the Insolvency and Bankruptcy Board of India (IBBI)?

The IBBI is the regulator for overseeing insolvency proceedings and entities like Insolvency Professional Agencies (IPA), etc., in India. It was established on 1 October 2016 and given statutory powers through the Insolvency and Bankruptcy Code 2016.

Q2) What is the National Company Law Tribunal (NCLT)?

The NCLT is a quasi-judicial body in India that adjudicates issues relating to Indian companies. The tribunal was established in 2016 under the Companies Act 2013 and is based on the recommendation of the V. Balakrishna Eradi committee.

Source: RBI’s Das envisages framework for Group Insolvency Mechanism under IBC | IE