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  • Yadu Krishna

A Letter to Legislators of the Incumbent Group Insolvency Regime: Defining Corporate Group and Lessons from Cox and Kings

[Yadu is a student at Symbiosis Law School, Pune.]


Group insolvency is defined under Article 2(f) of the UNCITRAL Model Laws on Enterprise Group Insolvency (MLEGI) as a proposal or set of proposals developed in a planning proceeding for the reorganization, sale, or liquidation of assets and operations of one or more enterprise group members with the goal of protecting, preserving, realizing, or enhancing their overall combined value. The concept has garnered wide acceptance in the last few years within the insolvency jurisprudence of countries such as the UK, the USA, and Germany and also within international instruments such as the UNICTRAL Legislative Guide and the EU Regulations. The introduction of such a framework has been in the air for quite some time in India, with recent updates coming up regarding the central government being amidst discussions of a bill that seeks to amend the Insolvency and Bankruptcy Code 2016 (IBC) to incorporate provisions for insolvency resolution of group entities.


The need for such an enactment comes from complex corporate insolvencies, like the Videocon resolution case and Edelweiss resolution case, where the court mandated consolidating insolvency proceedings to avoid conflicts, prompting Insolvency and Bankruptcy Board of India to form a working group on group insolvency (CBIRC II Working Group). However, the report presented by the working group faced criticism for being fraught with several issues, including a vague and non-inclusive definition of “corporate group”, potentially leading to unnecessary litigation.


The post aims to analyse the definition of corporate group under the CBIRC II Working Group Report and the challenges that follow if such a position is taken by the legislators. Second, it delves into the clarification of corporate group as provided in the Cox and Kings judgement and what inspiration the legislation can draw from it. It concludes by taking inferences from recent developments in the Securities and Exchange Board of India (SEBI) and international jurisdictions and advocating for a nuanced approach that provides for limiting the definition while providing the much-required breathing space.


‘Corporate Group’ under CBIRC II


The working group report defines corporate group to “include holding, subsidiary, and associate companies as defined under the Companies Act 2013”. Also, by considering situations where this definition is inapplicable, it was recommended that an application be made to the adjudicating authority, which shall be empowered to include other companies to form a part of a ‘group’ that is so intrinsically linked such that there will be an overall value maximisation in the resolution scheme. The working group underscores its definition as being based on the existence of ‘control’ and ‘significant ownership’, both of which are to be defined under the framework. While the definition of ‘control’ is to be extracted from the Companies Act 2013, ‘significant ownership’ is defined as the ability to exercise 26% or more of voting power which finds its roots in the Competition Act 2002 and the SEBI (Substantial Acquisition of Shares and Takeovers) Regulations 2011.


Challenges That Will Follow


First, the working group, while noting the importance of having an inclusive definition of ‘group’ under the framework, went on to limit its application specifically to holding, subsidiary, and associate companies as under the Companies Act 2013. On the other hand, the MLEGI defines an enterprise group as two or more enterprises with interconnected control or ownership and goes on to define ‘control’ as the capacity to determine the operating and financial policies of an enterprise which in essence gives breathing space to include principal and subsidiary models as well as cross ownerships i.e., vertical and horizontal integrations among companies within its meaning.


Second, the definition is ambiguous and open-ended since it allows interested parties to approach the adjudicating authority to determine whether they are intrinsically linked to qualify as a ‘group’. This can lead to increased litigation seeking inclusion in a corporate group, which runs counter to the object of the working group which aimed at a mechanism where the stakeholders could independently assess whether the framework apply to them without attracting litigation to determine its applicability. Dominant entities within a group might take advantage of the flexible definition to protect themselves from insolvency while putting a burden on weaker affiliates or subsidiaries. The courts have previously seen litigations over the ambiguities of certain definitions in IBC, such as in Innoventive Industries v. ICICI Bank, where the court deliberated on the wide interpretation of the term ‘default’ under the IBC or in State Tax Officer v. Rainbow Papers Limited, where the definition of ‘secured creditors’ was construed to include government authorities within its ambit.


Also, the definition provides that the adjudicating authorities may include other companies under the definition if they are intrinsically linked to form a ‘group’ in commercial understanding. Commercial understanding as mentioned herein, is nowhere defined under Indian law and can be understood as pre-determined terms or information between parties, explicit or implied, upon which the entities are associated. In essence, it means the trade parlance or popular understanding as provided in case like Indo International Industries v. Commissioner of Sales Tax, State of Madras v. Harshkant S Mehta, etc. Such an understanding of what constitutes commercial understanding is variable and can be subject to ambiguity, leading to unnecessary litigation. The adjudicating authority will also have to bear the burden of interpreting the term ‘commercial understanding’ on a case-by-case basis, in addition to deciding if a company that does not fall under the definition is to be included in the group.


Cox and Kings – Lessons to Learn


Hon’ble Justice Chandrachud, in his elaborate judgement, that determined whether non-signatory parties could be bound by an arbitration agreement, also scrutinised the meaning of corporate group. Here, the court defined group companies as an agglomeration of privately held and publicly traded firms, each a separate legal entity, collectively under the control of a common authority, often a family. They are linked by trust-based relationships centred on a shared persona, ethnicity, or community. Remarkably, here the court laid down that the determination of whether two companies would constitute a group depends on the concerted efforts of the companies to act in pursuance of a common endeavour or enterprise.


Determining the intention of a corporate entity to be a part of a common endeavour or enterprise stands as a better test than that of “being intrinsically linked as per commercial understanding” as provided under the working group report. It will help in determining whether there was a common representation to the creditor against whom a debt and default has incurred, acting as a logical explanation for being pulled into the corporate insolvency resolution process and helping in better utilisation of resources.


Also, by moving beyond solely ownership structures focused on mere control, the judgement focused on intertwined operations, collaboration, objective evidence of intention, and functional integration to capture groups with diffused control or deeper integration masked by a single holding company, which will help in handling both situations where multiple affiliates within a corporate group are facing insolvency as well as the insolvency of a subsidiary company within a group.


Conclusion


The CBIRC II Report, by limiting the definition of group application specifically to holding, subsidiary, and associate companies and allowing the adjudicating authority to determine whether entities are intrinsically linked to qualify as a ‘group’, has expanded its scope where such expansion is unwarranted and narrowed down its meaning in areas where flexibility should be allowed. This is made even more complicated by the test of commercial understanding. By taking lessons from the judgement of Cox and Kings, it is noted that a flexible definition focusing on the intention to be a part of a common endeavour is the need of the moment.


Recently, the SEBI through its communication to increase scrutiny of investments by offshore funds in domestic entities, expanded the meaning of corporate group to include subsidiaries, affiliate companies, and related parties. Also, in jurisdictions such as that of Australia, as seen in Mount Edon Gold Mines (Aust) Ltd v. Burmine Ltd, courts have noted the problem with employing narrow a concept of control to define groups. In USA, by moving away from rigid system of control, Rule 1015 of the US Federal Rules of Bankruptcy Procedure, has extended the applicability of the framework to affiliated companies. Germany has also employed the centre of main interests approach, which involves considering a group within domestic territory based on control and common management affiliations among companies.


In the landmark case of Swiss Ribbons v. UOI, the Supreme Court held that the IBC is a beneficial legislation that is aimed at putting the company back on its feet rather than being mere recovery legislation for the creditors. Group insolvency helps bolster such efforts to recoup the company. Therefore, it is crucial for the framework overseeing this to remain steadfast in its initial steps, specifically while defining corporate groups. These lessons will pave the way for a more robust and effective group insolvency framework.

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