Govt panel not in favour of group insolvency for financial service providers

A government appointed panel has recommended keeping financial service providers out of the group insolvency framework, a report on which has been submitted by the panel recently.

“The Committee did not envisage inclusion of financial service providers within this framework and considered it suitable to limit the applicability of the present framework to corporate debtors under Part II of the Code, excluding financial service providers notified under Section 227,” the panel says in its report.

The panel recommends a broad and inclusive definition of ‘group’ should be provided in the Code so as to include a large number of corporate debtors within the ambit of the group insolvency framework. The definition of ‘group’ may be based on the criteria of control and significant ownership.

The panel suggests that a group insolvency framework that is voluntary, flexible and enabling in nature should be provided under the Code. Such a framework may be introduced in phases. In the first phase, only provisions governing domestic group insolvency may be enacted.

It recommends that the group insolvency framework under the Code should only apply to corporate debtors in respect of whom a corporate insolvency resolution process or liquidation process is ongoing. “The law shall not apply to solvent members of the group,” it reiterates.

Here are the list of some important recommendations:

1.Filing of joint applications for initiation of corporate insolvency resolution proceedings against multiple corporate debtors belonging to the same group may be permitted. Such applications may be filed with an Adjudicating Authority that has territorial jurisdiction over any one of the corporate debtors in respect of whom such joint application is being filed.

2.Although filing jointly may be permitted, the application form for each corporate debtor should be separate.

3.All proceedings related to corporate debtors belonging to a group may take place under the same Adjudicating Authority. To give this effect, all pending applications and proceedings under the Code in respect of a group member may be transferred to the NCLT that is the first to admit an application for triggering an insolvency resolution process in respect of any corporate debtor belonging to the group. All new applications in respect of any group member should also be filed in such NCLT.

5. A common insolvency professional may be appointed as the resolution professional or liquidator of corporate debtors that belong to the same group.

6. An insolvency professional should refuse taking such appointment if she believes that there are conflicts of interest which may affect her functions. She may approach the Adjudicating Authority for suitable directions if conflicts arise after her appointment.

7.A group CoC may be formed with adequate representation from CoCs of all group members. This may be at discretion of the CoCs and its constitution and formation may be subject to negotiation amongst parties.

8.The group CoC (outside of a group coordination proceeding) may only provide procedural assistance and should not be tasked with taking decisions that affect the substantive rights and obligations of the parties, which right shall continue to be available to the CoCs of the relevant group members.

9. The CoCs and insolvency professionals appointed in respect of corporate debtors belonging to the same group should mandatorily be required to cooperate, coordinate and share information with each other.

10. The law should enable group coordination proceedings for corporate debtors belonging to the same group and undergoing a corporate insolvency resolution or liquidation process under the Code. A group coordination proceeding may be opened on application made by two or more CoCs of corporate debtors belonging to a group.

11.If the corporate debtor is in liquidation, the application may be made by the liquidator. Such applications will be made to the Adjudicating Authority. The Adjudicating Authority may open the group coordination proceedings and appoint a group coordinator (as proposed in the application and subject to eligibility criteria). The proceedings will run alongside the separate insolvency or liquidation proceedings of the corporate debtors.

12. Participation of a corporate debtor in the group coordination proceeding should be voluntary. The CoCs may have flexibility to opt-in to the group coordination proceedings until 30 days after its opening. Any opt-ins after such time may be permitted with the approval of the participating CoCs and liquidators. For such approval, each CoC would have to vote in favour of such opt in by at least 50% of each of their voting shares. The participating group members may opt out of the group coordination proceedings at any time until a group strategy has been approved by their respective CoC.

13. The group coordinator should constitute a group CoC consisting of suitable representatives from CoCs of all participating group members. The group CoC (in group coordination proceeding) may perform functions delegated to it by separate CoCs. However, the power to approve a resolution plan shall not be permitted to be delegated to the group CoC.

14. The group coordinator will conduct the group coordination proceedings and develop a group strategy. A group strategy may provide various combinations of measures that synchronise the insolvency resolution or liquidation proceedings of the participating corporate debtors. Such measures may be different for different companies included in the strategy. The group coordinator will also assist the resolution professionals, liquidators and CoCs of the corporate debtors so as to enable effective coordination amongst them.

15. A group strategy should require the approval of all participating CoCs by 66% of each of their voting shares respectively. Where a corporate debtor participating in a group coordination proceeding is undergoing liquidation, the liquidator should decide whether to approve the group strategy for the corporate debtor it represents. Once approved, the group strategy shall be filed with the Adjudicating Authority and shall be binding on all parties to the group strategy. (Box 10)

16. A group coordination proceeding shall terminate if the group coordinator applies for a termination order, which may be on the grounds that – (a) the group strategy has been approved and fully implemented; (b) the CoCs and liquidators have approved such termination by requisite majority; (c) the CoCs and liquidators have failed to approve a group strategy and the group coordinator is of the opinion that it is not feasible for participating group members to agree on a group strategy.

17. The costs of conducting group coordination proceedings should form part of the insolvency resolution or liquidation process costs of the participating group members. Further, where group coordination proceedings are opened, an additional 90 days may be added to the time period for completion of the insolvency resolution process for the participating corporate debtors. (Box 10)

18. Specific provisions to deal with perverse behaviour may not be required as provisions dealing with avoidance actions and fraudulent or wrongful trading under the Code may be sufficient. Detailed provisions targeting perverse behaviour in group insolvency scenarios should be legislated based on practice developed under the Code in due course. (Para 6)

19. Effective capacity building measures and increase in use of technology during implementation will bolster the efficiency of the group insolvency framework.

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