IBBI Floats Plan For Coordinated Resolution, But Experts Say More Clarity Needed

The Insolvency and Bankruptcy Board of India has floated a discussion paper that speaks about coordinated insolvency resolution for interconnected entities.

Essentially, it says that the insolvency process, in its current form, treats each entity as a standalone unit, overlooking the intricate web of inter-dependencies often present in modern business ecosystems.

To overcome this obstacle, the IBBI has recently proposed to introduce a mechanism for coordination of the corporate insolvency resolution process of interconnected entities, which will include provisions for joint hearings, appointment of a common resolution professional, information sharing protocols, and coordinated timelines.

As per the proposal, the interconnectedness may be based on the existence of control or significant ownership between the entities.

Experts have stated that though the move may bolster a quicker resolution of interconnected entities, the discussion paper does not offer specifics that are required to bring such a change in practice. "The discussion paper is scanty on the intent behind the amendment and doesn't offer much detail," said Karishma Dodeja, partner at Trilegal.

In the proposed framework, while the processes will be coordinated, they are still envisaged as separate CIRPs which may not always lead to a joint resolution, said Siddharth Srivastava, partner at Khaitan & Co.

Though the paper talks about insolvency resolution for interconnected entities, it doesn't provide for consolidation of assets and resolution as a whole, which is the essence of a group insolvency process.

Srivastava said that it is pertinent that any amendments for introduction of group insolvency must include consolidation of assets and combination of creditors' committees of the interconnected entities to achieve one common resolution.

In group insolvency, creditors' voting share could be affected as voting would have to be as a collective across the entire group.

"This could introduce complications such as a substantial creditor of a single entity not having the same weight in terms of voting when compared to the creditors share at a consolidated/group level," said Aditi Deshpande, partner at JSA Advocates & Solicitors.

Deshpande added that another complexity that may arise in such a situation is in the valuation of tangible assets as opposed to intangible assets. "Collateralisation of tangible assets is always easier than that of intangible assets leading to disparity in asset types leading to complications of over-leveraging and conflicts among creditors," she said.

However, experts have pointed out that in its present form, which by any reasonable estimate is a very raw form, there will merely be procedural coordination in terms of the corporate insolvency resolution processes of these entities being run simultaneously and not a substantive consolidation.

The discussion paper envisages procedural "coordination" of insolvency resolution process of "interconnected entities". This appears to be different from the substantive consolidated corporate insolvency resolution process ordered by the NCLT in the Videocon case, Dodeja noted.

Srivastava seconded this thought and said that structural amendments are required to be made in the Insolvency and Bankruptcy Code, 2016 itself to provide statutory recognition for group insolvencies.